Week of Dec 24 2023

Market Wrap

Weekly Benchmarks - @Koyfin

Weekly Factors vs. S&P 500 - @Koyfin

Weekly Performance - @Koyfin

Narratives

Volatility selling increases systemic tail risk. Again, due to the high gamma of 0DTE options, an exogenous shock which moves the market in a short period of time can lead to not only large losses to short sellers, but also leave them with unwanted delta positions. The potential forced unwinding of positions would have to take place in a market environment where market liquidity is still impaired from the pandemic. This could result in subsequent market moves that are far bigger than the initial exogenous shock, a situation akin to the 2018 ‘Volmageddon’ — Marko Kolanovic, JPMorgan

Contrary to popular belief; we estimate just 5-6% of the 0DTE option flow is retail. Instead we believe the ODTE market is dominated by algorithmic and high frequency traders. There are regulatory arbitrage opportunities in 0DTEs, and they also serve a purpose for hedging short-term risk - JPMorgan

It’s worth noting that in addition to exacerbating drawdowns, they can insulate markets too. That can feel fortuitous, but these instruments’ growing influence is cause for concern from the perspective of anyone who believes markets don’t need to be any more of a casino than they already are - Nomura

2023 saw ChatGPT arrive and trigger a frenzy of FOMO that even a surge in bond yields above 5% failed to stop. 2024 begins with the US tech sector accounting for as much of the US broad market index as it did for a few months of madness in the summer of 2000, now trading at 27x vs. the rest of the market - SocGen

Week Ahead

After a strong rally in the first half of December, US equities have consolidated their gains this past week and are poised at key levels. For the S&P500, that level is the all-time high from December 2021 (4,797 on the cash index). Equally weighted S&P500 has also rallied sharply in recent weeks and is trading at or just above its highs from early February and late July.

The key question now is: Will these indices break higher in the New Year? And if so, which sectors will lead the market? Will it be tech/growth stocks or will other sectors take the lead? It is worth noting that since the rates market started pricing in Fed rate cuts for 2024 from mid-November, expensive mega-cap stocks have underperformed the rest of the market. As a result, the equally-weighted S&P500 (along with other indices like the Russell 2000, which represents mid-caps) has outperformed the S&P500 and the NASDAQ100. Will this trend continue in the coming weeks and into January?

Next week, macro data and events will be relatively light. However, there are several key US data points scheduled for early January, including ISM Manufacturing on Wednesday 3rd, ADP employment on Thursday 4th, and ISM Services & nonfarm payrolls on Friday 5th. (Source: Longview Economics)

‣

Calendar (UTC-4)

‣

Macro Dashboard

Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 4-qtr Estimate	🔵	243.38	235.77	228.39	January 1, 2023
Forward 4-qtr PE	🔴	19.5	19.96	17.2	January 1, 2023
Nominal Earnings Yield	🔵	5.13	5.01	5.86	January 1, 2023

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔵	11.03	9.95	1.08	10.85%
SPX GEX Flip	🔵	4,702.5	4,612.5	90	1.95%
SPX Skew Adjusted GEX	🔵	-1,627,097,276	-4,529,739,754	2,902,642,478	64.08%
Equity Put/Call Ratio (CBOE)	🔴	0.5	0.53	-0.03	-5.66%
VIX Put/Call Ratio (CBOE)	🔵	0.51	0.22	0.29	131.82%
SPX/W Put/Call Ratio (CBOE)	🔴	1.31	1.48	-0.17	-11.49%

Skew-Adjusted Gamma by Strike - @tradevolatility

Skew-Adjusted GEX Trend - @tradevolatility

Implied Volatility Trend - @tradevolatility

Put/Call OI Trend - @tradevolatility

Futures

March E-mini S&P 500 futures settled at 4805.25 Friday, adding 8.50, in higher trade across the board. Across all maturities, the session saw a light 1,327,673 contracts change hands, with March volume coming in at 1,326,697. Combined open interest fell by 9,462, or 0.44%, with March losing 9,444 (0.44%) to 2,124,979.

Option volumes were highest for the Dec E4B 5025 call (8,000) and the Dec E4C 3800 put (40,800). In Dec options, the most actively traded call was the 100 strike with 2,975 done, and the 3900 put leads with volume of 8,700. Option open interest is largest for the Jan EW1 4820 calls at 60,342, and the March 4000 puts at 47,136.

Implied Volatility ended the day down with the 30-day at-the-money off 0.40%, to settle at 10.84%. Historical volatility (30-day) settled at 10.04%, off by 0.67%. The 30-day volatility spread (IV-HV) increased by 0.27% to close the session at a one month high of 0.80%.

Higher TF (W → D) BULLISH - Price acceptance continues to build in the upper distribution of December’s profile. Notice that the market found support this week precisely at the base of this distribution, which protects the first of two large structural gaps (above circled). Back-adjusted ESH24 futures remain poised to recapture Q222 LH 4860.25, the final LH protecting ATH 5028.25. We continue to carry forward backing & filling risk, but higher timeframe buyers remain in control above the December midpoint 4739 (-1.38%).

Lower TF (3H → M30) BULLISH - Wednesday’s much discussed liquidation is contextualized as a breakout failure below WVAL 4763 and subsequent value area sweepback upon recapture. Breakout failures, once confirmed by either HL (bullish) or LH (bearish) secondary test, are ideal entry points for retargeting a high-probability value area sweep. Weekly, Monthly timeframes remain synchronized in a structurally bullish configuration along with continuation of the vol-suppressing positive GEX regime > 4755.

Bull v Bear

This Week (30d ATM IV 10.84% v 30d HV 10.04%)
Bulls will seek to extend upside and price acceptance > WHI on a closing basis. Upside: Futures adjusted SPX ATH 4850(+0.93%) is within +1σ (W) 4879 (+1.53%).
Bears will seek to cause cessation of DTF 1TFU and ideally establish price acceptance < WVAL 4770.50. Downside: GEX Flip 4755 (-1.05%) is within -1σ (W) 4733 (-1.50%).

Last Week (4805.25 MAR24 +0.78%)
Bulls will seek to extend upside and price acceptance > WHI on a closing basis. Upside: Futures adjusted SPX ATH 4872 (+2.18%) is just beyond +1σ (W) 4837.50 (+1.46%).
~~Bears will seek to cause cessation of DTF 1TFU and recapture the WMID 4722 (-0.96%) on a closing basis. Downside: GEX Flip 4666 (-2.14%) is~~ ~~beyond~~ ~~-1σ (W) 4700 (-1.43%).~~

Indicators

‣

Markets

‣

Positioning

‣

Sentiment

‣

Volatility

‣

Breadth

‣

Disclaimer

‣

Sources