Weekly Alpha Review - June 6, 2025
My Journal
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“The signal catches up to the SPX” - Machina Quanta
ADMIN UPDATE: this week I introduced “automatic live refresh” into the entropic model for the site. This gives you an updated model run using live option pricing that refreshes every five minutes - it’s essentially always running for you. This was your biggest request for the platform, so thank you again readers for providing feedback and giving me things to work on! Having finished this I am now thinking the next build for you. Some ideas/requests/experiments to increase alpha for you:
2nd iteration of entropy with a shorter time frame that can be used to fine tune the timing of entries,
Attempt a ‘live’ GEX model,
Dashboard of various metrics.
When I produce less research and am less active in the chats, it’s either there is nothing going on in markets or, more likely, I am building your next feature. This is where your subscription goes towards.
Entropic Model
As usual I do some ‘accounting’ to try to match entropy to price action. The rapid decrease in entropy from May 22-27 is now difficult to interpret as those changes in model output historically have led to sharper selloffs. Instead, we had 2 relatively small red days in SPX following that. So what gives?! Those 2 days of selling aren’t really interesting and almost not worth hedging for - of course it’s easy to say this after the fact. We are in the business of predicting future direction with probabilities.
Following that we saw another pullback happen last week 2 days after a ‘signal’ but again BTD action in the indices ensued (as you typically see in high GEX environment). What is now interesting is that the divergence is increasing. I was half joking in chat that I was expecting a few sequences to take place. 1. Red to green day. We got that Thursday. That was followed by: 2. first round of puts close and we go up (fakeout). I’m impressed (and suspect) we’ve made new highs of it. The current state leaves essentially no protection for a pullback and inevitably traders will chase puts on the way down as usually happens.
GEX
Have a look below. Gamma exposure (and consequently dealer net long positioning as part of their hedging) is making lower highs while the index is making higher highs. These setups make for fragile market structures as you know.
Seasonality
Seasonally we are still in one of the strongest quarters in the presidential cycle until June 30th. Next quarter, less so. Just keeping this here for your reference.
We are nearing June H2 and seasonally there’s less support so I’m keeping that in mind.
SKEW
SKEW (the implied volatility of out-of-the-money strikes over the next 30 days out) interestingly decreased again on Friday with the gap up and it looks to me that left-tail hedging is being exercised consistently the past few weeks.
Volatility
It will be noteworthy if VVIX (future vol) makes a higher close at some point here or does a red → green day. Those days are worth paying attention to.
Technicals
Based on the magnitude of the decrease in VIX term structure from many weeks back I hypothesized that it could lead to a move up as high as ~6050. We’re getting awfully close. This would be somewhat in-line with June 2020. As well, this is all very hand-wavy but also backed by the fact that vol control funds buy up the index based on decreasing realized vol - that is their entire mandate.
June 2020 (below)
QQQ/SPY
High beta tech showing some signs of rolling over (QQQ/SPY) as SPX reaches new local highs. Noteworthy for pullbacks.
IWM/DIA
Small caps seem to be breaking out against more defensive components (like DIA, Dow Jones). Russell 2000 is a growing composition increasingly unprofitable businesses so when money starts going in this direction it means we are closer to the end than the beginning I think. That being said I took take a stab at some IWM calls for that reason.
Overall
Overall, I’m seeing increasing market fragmentation but that doesn’t stop the market from grinding higher. We are looking for pullbacks as they happen to reduce drawdowns and I think we are going to see that happen sooner than later.
Help others by sharing this publication if you find this information useful. See you in the chat.
Disclaimer
This Substack serves as a personal journal for my own reference and is not intended as financial or investment advice. The content is purely informational and reflects my personal observations, not recommendations.
I am not a registered financial advisor, and nothing here should be considered professional guidance. Investing, especially in securities and options, involves substantial risk, and past performance does not guarantee future results.
By reading this Substack, you acknowledge that all trading decisions are solely your responsibility, and I am not liable for any financial outcomes resulting from your actions.