Market Wrap
Outlook
The Federal Reserve's decision to cut rates by 50 basis points on September 18, 2024, marked a significant shift in monetary policy, surprising many analysts who had expected a more cautious 25 basis point reduction. This move was characterized as a "recalibration" by Fed Chair Powell, aimed at getting ahead of potential economic headwinds while maintaining a strong labor market. The decision reflects the Fed's growing confidence in the inflation trajectory and a desire to elongate the current economic cycle. Market reaction to the rate cut was initially positive, with equities rallying to new all-time highs. However, the enthusiasm was tempered by mixed messages from the Fed, creating some confusion about the true state of the economy. While Powell emphasized economic strength, the aggressive rate cut suggested underlying concerns about potential weaknesses. This dichotomy has led to diverging views on the path forward, with some analysts viewing the move as preemptive and others seeing it as a sign of hidden economic fragility. The bond market has experienced a steepening yield curve, with long-term rates rising as short-term rates fell, reflecting expectations of continued economic growth coupled with easier monetary policy. This environment has led to a reevaluation of investment strategies, with many investors increasing their exposure to equities and higher-yielding fixed income assets.
Earnings reports following the Fed decision have been largely positive, with the S&P 500 showing strong year-over-year growth. Technology, Financials, and Health Care sectors have been standout performers, suggesting that the rate cut is supporting broad-based economic activity. The forward earnings estimates and P/E ratios indicate continued optimism about corporate profitability, though some analysts caution that valuations may be stretched.
Looking ahead, key catalysts include upcoming economic data releases, particularly those related to employment and inflation. The market will be closely watching for signs that validate the Fed's decision or suggest a need for further policy adjustments.
The left-tail risks primarily center around the possibility of a recession despite the Fed's efforts. There are concerns that the rate cut might be too little, too late if economic weaknesses are more entrenched than currently perceived. Additionally, there's worry about potential asset bubbles forming due to overly accommodative policy. On the right-tail side, there's potential for a stronger-than-expected economic rebound, possibly leading to inflationary pressures and forcing the Fed to reverse course more quickly than anticipated.
From a technical perspective, analysts are monitoring several key thresholds. For equities, the S&P 500's ability to maintain levels above its 50-day and 200-day moving averages is seen as crucial for continued bullish sentiment. In the fixed income space, the 10-year Treasury yield's behavior around the 4% level is being closely watched. For currencies, the dollar's performance against major peers, particularly the yen, is considered a barometer for global risk appetite.
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Forward Earnings
| Metric | UpDn | This Week | Prior Week | Baseline | Baseline TF |
|---|---|---|---|---|---|
Forward 4-qtr Estimate | 🔴 | 258.76 | 259.8 | 243.98 | January 1, 2024 |
Forward 4-qtr PE | 🔵 | 22.1 | 21.6 | 20.16 | January 1, 2024 |
Nominal Earnings Yield | 🔴 | 4.54 | 4.62 | 5.19 | January 1, 2024 |
Volatility & Correlations
| Metric | UpDn | This Week | Prior Week | Net CHG | % CHG |
|---|---|---|---|---|---|
SPX Implied Volatility | 🔴 | 11.77 | 13.03 | -1.26 | -9.67% |
SPX GEX Flip | 🔵 | 5,632.5 | 5,577.5 | 55 | 0.9899999999999999% |
SPX Skew Adjusted GEX | 🔴 | 4,141,211,141 | 6,259,551,879 | -2,118,340,738 | -33.84% |
SPX/SPXW Put/Call Ratio | 🔴 | 1.38 | 1.39 | -0.01 | -0.72% |
OEX Put/Call Ratio | 🔴 | 0.4 | 0.45 | -0.05 | -11.11% |
VIX Put/Call Ratio | 🔵 | 0.86 | 0.75 | 0.11 | 14.67% |
Futures
E-mini S&P 500 futures were sharply higher Friday with the Dec contract finishing the session at 5762.00, losing 16.00. Combined volume was a heavy 2,201,061, with the Dec contract seeing 1,435,607 done.
The Sep E4B 4825 put saw the most traded with 65,000 contracts done. In Oct options, the most active call was the 5775 strike with 3,320 changing hands, and the 4500 put leads with volume of 3,428.
As measured by the 30-day at-the-money, implied volatility ended the session moderately lower, down by 0.17% to finish at a one week low of 12.05%. Historical volatility (30-day) closed the day at 13.85%, adding 0.0688%.
Bull v Bear
This Week: 30d ATM IV 12.05% v 30d HV 13.85% -1.80%Bulls will seek to breakout above Friday’s high and establish price acceptance above 5800. Upside: 5850 strike (~5800 SPX) is within +1σ (W) 5873 (+1.93%).Bears will seek to recapture DTF 1TFD and offer below 5700 on a closing basis. Downside: WLO 5669.50 (-1.61%) is within -1σ (W) 5655.00 (-1.86%).
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Last Week: 5762.00 DEC24 +1.18%Bulls will seek to reclaim WTF 1TFU targeting the unmitigated 4H FVG protecting new highs. Upside: new ATH SEP24 5721.25 (+1.61%) is now within +1σ (W) 5741 (+1.95%).Bears will seek to recapture DTF 1TFD and offer below 5581.50 on a closing basis. Downside: Offer below 4H SEP24 5521.75 FVG is justbeyond-1σ (W) 5523.00 (-1.88%).
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Indicators
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