Week of Feb 26 2003

Market Wrap

EOW 08 - Benchmarks

SPX (D) - Trailing 12mo and +/- 1σ Expected Weekly Range (+/- 3.3% 3839.0 → 4101.1)

VX Surface - RVOL Spreads - VVIX / VIX Ratio - Trailing 12mo

Narratives

We continue to believe the US financial markets are still processing the adjustment that a regime change is occurring. After nine months of markets perennially expecting a dovish pivot from the Fed, the resilience of inflation and the economy is reinforcing the need for higher for longer rates. The transition from a benign inflation environment fostered by low-cost, China-based manufacturing to an environment in which price stability comes at a cost is one that will take time. There is a case to be made that the US could be on the cusp of the first multi-year period where the Fed funds rate is 5% or higher since the 1990s — Mike O’Rourke, JonesTrading

It doesn’t look like the economy as a whole is falling off a cliff, even if it isn’t quite running at full speed. That’s a pretty stunning result given that policy is ostensibly more than 200bps above neutral. It’s certainly rational to question whether neutral actually is 2.5% in nominal terms - Bloomberg

The market’s pricing for cuts in the two years after the terminal rate is reached has decreased from 220bps just two months ago to 180bps. While our baseline still looks for a 5.25% terminal rate at the May meeting, we do flag a notable upside risk for a higher terminal rate at 5.75% by the July meeting - TD

Robust earnings growth cannot peaceably coexist with costs outpacing sales. On a forward-looking basis, the rate of cost growth relative to top-line growth for the Nasdaq 100 is accelerating and yet, consensus expects a sharp rebound in EPS growth through the back half of this year - Morgan Stanley

Week Ahead

In the US, investors will closely monitor appearances from several Fed officials for clues on the size of the next interest rate hike and the level of the terminal fed funds rate. Fresh price data released on Friday came in higher than expected. On the data front, important economic releases include ISM PMIs for both manufacturing and services, durable goods orders, pending home sales, goods trade balance, S&P/Case-Shiller housing index and FHFA House Price Index, CB consumer confidence, regional PMIs from Dallas, Richmond and Chicago and final S&P Global PMIs - TradingEconomics

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Economic (UTC-5)

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Earnings

Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 12-mo Estimate	🔴	221.71	222.36	230.43	September 30, 2022
Forward 12-mo PE	🔴	17.9	18.3	15.5	September 30, 2022
Nominal Earnings Yield	🔵	5.58	5.45	6.43	September 30, 2022

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔵	19.92	17.6	2.32	13.18%
SPX GEX Flip	⚪️	4,042.5	4,097.5	-55	-1.34%
SPX Skew Adjusted GEX	🔴	-8,251,187,925	-2,776,567,326	-5,474,620,599	-197.17%
Total Put/Call Ratio (CBOE)	🔵	1.11	1.03	0.08	7.77%
Equity Put/Call Ratio (CBOE)	🔵	0.82	0.67	0.15	22.39%
VIX Put/Call Ratio (CBOE)	🔴	0.35	0.57	-0.22	-38.6%

SPX Net Skew-Adjusted Gamma by Strike - @tradevolatility

SPX Net Skew-Adjusted Gamma Change - @tradevolatility

VIX Net Skew-Adjusted Gamma by Strike - @tradevolatility

VIX Net Skew-Adjusted Gamma Change - @tradevolatility

Futures

March E-mini S&P 500 futures ended at a one month low of 3975.75 Friday, lower by 43.00 or 1.07%. Overall, 2,071,767 contracts were traded, with 2,063,242 done in March. Across all maturities, open interest gained 192, or 0.0092%, with March dropping by 78 (0.0038%) to 2,053,503.

Option trading centered around the Feb E4A 4100 calls with 10,941 changing hands and the Feb EW 3350 puts with volume of 16,950. Largest volumes in March option trading were seen in the 4050 calls (4,433) and the 3950 puts (8,496). Options with the largest open interest are the March EW3 2100 call with 31,594, and the March 3600 put with 36,683.

Implied Volatility finished the day sharply down with the 30-day at-the-money losing 7.46%, to close the session at a one week low of 16.69%. Adding 0.29%, historical volatility (as measured by the 30-day) ended at 16.50%.

Larger TF (PRE-COVID HI → Present) NEUTRAL - During week 8, there was an extension of the WTF 1TFD which confirmed a pause in the intermediate-term trend and a possible breakout failure above the 2022 Supply Line. However, breadth (Pane 3) did not indicate panic selling, and price action continues to respond to key technical levels, which suggests shorter timeframe participants continue to dominate flow. Our larger timeframe bias remains range-bound and therefore neutral between 4000-4200, from which the next directional move will eventually emerge. For now, sellers have swept the Q1 value area and remain in control below QPOC 4017.25 (+1.04%). The QTF 1TFU ending price is 3814.50 (-4.06%) and is within -2σ of the expected weekly range.

Intermediate TF (2022 → Present ) BEARISH - Technical price action continues to dominate the Intermediate Timeframe (ITF), as expected due to the rising prevalence of 0DTE options volume. The loss of the 4064.50 Ice Line, highlighted last week, created the possibility of backtesting 4000 and the January Value Area. The Weekly Low (WLO) exactly coincided with the widely observed 200-day moving average at 3947 (-0.72%). If the low proves to be interim, then a plethora of poor structure above will serve as consolidation and repair targets. Conversely, a loss of the 200-day moving average would increase the chances of monthly 1TFU cessation, both of which would further confirm a bearish change of condition on the Intermediate Timeframe.

Short TF (Trailing 12-weeks) BEARISH - The Weekly VWAP confirmed declining value amidst notable intraday swings. The Weekly Low (WLO) coincided not only with the 200-day moving average, but also with the Quarterly Value Area Low at 3949.25. Should the WLO prove to be interim, it would increase the likelihood of developing a short-term trading range that would likely retest last week's closing VWAP at 4005.50 (+0.75%). Failing that, the LVN below creates the potential for a quick drop down to 3900, which is within -1σ 3877.50 (-2.47%) of the expected weekly range.

4t TPO ETH v RTH (W7 → W8) BEARISH - The 45-degree angled profile that formed after Friday's C-Period LO indicated a decline in effort versus reward on the part of sellers. Although the ensuing short-covering was orderly, the full traversal of the session value area was suggestive of an interim low. A quick cessation of the daily 1TFD (> 3984.00) in the coming week will create scope for retesting the 50-day moving average just above. The Gamma Exposure (GEX) remains negative below 4042.50 (+1.68%), and will continue to foster greater ease of movement in both directions.

Bull v Bear

This Week (30d ATM 16.69% v 22.37% p)
Bulls will seek to restore daily 1TFU > 3984 and ideally recapture > 4000 (+0.61%) on a closing basis. Upside: WPOC 4014.50 (+0.98%); WVAH 4035.25 (+1.50%); Ice Line 4056.75 (+2.04%) are within +1σ (W) +2.60%. WTF 1FTD ending price is +2.85% and 4100 (+3.13%) are further above.
Bears will seek to maintain price acceptance < 4005 and ideally WVAL 3977.50 on a closing basis. Downside: 200d MA & WLO 3947.50 (-0.71%); 3900 (-1.91%) are within -1σ (W) 3993 -2.39%. The 20% Correction Level 3847.00 (-3.24%) and JAN LO 3814.50 (-4.06%) are further below.

Last Week (3975.75 MAR23 -2.81%)
~~Bulls will seek to recapture 4100 and ideally the January HI 4109.25 (+0.54%) on a closing basis. Upside: WPOC 4131.50 (+1.08%); WVAH 4156.25 (+1.68%); WHI 4186.50 (+2.46%) are ≤ +1σ (W) +2.41%.~~
Bears will seek to maintain price acceptance < 4100 and ideally < WLO 4055.75 (-0.78%) on a closing basis. Downside: JAN Breakout 4035.25 (-1.28%); Q422 POC 4000 (-2.14%); 50d MA 3990 (-2.39%) are ≤ -1σ (W) 3993 (-2.39%).

Indicators

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Markets

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Positioning

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Sentiment

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Volatility

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Disclaimer

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Sources