Week of Mar 12 2023

Market Wrap

EOW 10 - Benchmarks

SPX (D) - Trailing 12mo and +/- 1σ Expected Weekly Range (+/- 3.7% 3718.8 → 4004.6)

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

Narratives

This story is remarkable and it quickly morphed into an industry wide concern about unrealized losses that are a result of the rising interest rate environment. The amazing detail is that the primary securities at the heart of this crisis are Treasurys and Agency MBS, which are widely considered two of the safest assets on the planet. The culprit is poor timing on the purchases and ineffectively managing the interest rate risk. For years, we have warned about the market’s broken pricing mechanism as a result of overzealous central bank policies used to control markets and suppress volatility. It appears that after 13 years of static zero interest rate policy and near-ZIRP policy, SVB and a number of its banking brethren forgot how to manage basic interest rate risk during a tightening cycle. The bank’s investment missteps combined with its relatively concentrated fluid depositor base experiencing a financing slowdown was the recipe for disaster — Mike O’Rourke, JonesTrading

Taken with the contagion risk in the financial sector, we anticipate the bar for CPI to inspire a 50bps move is nearly prohibitively high. A higher unemployment rate driven by increased labor force participation is precisely the outcome the Fed is pursuing to moderate wage pressures and continue to take the upside off consumer price inflation - BMO

We expect next week’s CPI report to confirm that core price inflation continued to gather momentum on a MoM basis in February after reaching last year’s low of 0.3% in November. We forecast a third consecutive acceleration for the core CPI series to 0.5% MoM in February, which would lift its three-month annualized pace to 5.2% from 4.6% in January - Goldman Sachs

Fed tightening always breaks something, somewhere - the Fed may have to choose between financial stability and inflation. Two-year yields tumbled ~45bps over two sessions into the SVB collapse, unleashing an ominous bull steepener. It’s not the inversion you should fear; it’s the re-steepening - and the last two times this happened was in 2001 and 2008 - BofA

Week Ahead

The upcoming week will be crucial for market participants and policymakers, as the release of the US inflation report is likely to dictate the future path for interest rates. Investors will be also looking for any signs of contagion in the financial sector from the fallout of Silicon Valley Bank. The annual inflation is seen easing to 6% while the monthly rate will likely hit 0.4%. Also, the core consumer prices likely grew 0.4% over the previous month, resulting in the annual rate easing to 5.5% from 5.6%. On the inflation front, it will be also interesting to follow producer price index, exports and imports prices, and inflation expectations for March. Investors will be also paying close attention to retail sales, with forecasts pointing to a modest 0.2% month-on-month gain in February, suggesting tighter financial conditions dragged consumer spending. Other important releases are preliminary reading for the University of Michigan's consumer sentiment, industrial production and housing data including building permits, housing starts and NAHB Housing Market Index. Finally, a slew of earnings results will provide more clues about the economy's health. Adobe Systems, Pinduoduo, Dollar General, and FedEx are the most prominent companies to report - 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	🔵	221.55	221.44	230.43	September 30, 2022
Forward 12-mo PE	🔴	17.4	18.2	15.5	September 30, 2022
Nominal Earnings Yield	🔵	5.74	5.47	6.43	September 30, 2022

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔵	22.19	17.23	4.96	28.79%
SPX GEX Flip	⚪️	3,997.5	4,032.5	-35	-0.87%
SPX Skew Adjusted GEX	🔴	-15,355,140,939	1,161,315,943	-16,516,456,882	-1,422.22%
Total Put/Call Ratio (CBOE)	🔵	1.23	0.91	0.32	35.16%
Equity Put/Call Ratio (CBOE)	🔵	1.11	0.59	0.52	88.14%
VIX Put/Call Ratio (CBOE)	🔵	0.42	0.35	0.07	20%

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 finished the day at a one month low of 3862.75 Friday, down 57.25 or 1.46%. Overall volume came in at a one month high of 5,103,497, with the March contract seeing a heavy 3,285,811 traded. Combined open interest finished the session at a one month high of 2,334,373, adding 146,669 (6.70%). March open interest dropped 224,758, or 11.61%, to 1,711,944.

Option trading centered around the March E2A 3950 calls with 9,193 changing hands and the March 3800 puts with volume of 45,306. Options with the most open interest are the March EW3 2100 call with 37,644, and the March 3600 put with 37,730.

E-mini S&P 500 implied volatility closed moderately up as the 30-day at-the-money rose by 1.19% to end at 21.56%, a one week high. Up by 0.46% to a one month high, historical volatility (as measured by the 30-day) ended the day at 17.38%.

Larger TF (COVID LO → Present) NEUTRAL - Week 10 featured an outside reversal bar that began with a backtest and rejection above prior 2-week highs and Q1VAH - DEC HI 4102.75 before sellers regained control. The WLO exactly coincides with the widely observed 2022 Supply Line. The LTF will renew its focus on this bull/bear pivot. Increased volatility and event risk will likely ensue in the coming week. The LTF trend remains paused, but acceptance below the Supply Line creates scope for retesting the OCT Breakout 3820.00 (-2%), the YTD LO 3814.50 (-2.13%), and likely cessation of the QTF 1TFU configuration and resumption of the LTF downtrend.

Intermediate TF (Trailing 12-mo ) NEUTRAL - Buyers were unable to recapture the 2H22 Demand Line; the strong rejection more than likely confirms the MAR HI 4082.50 (+4.75%), and MTF 1TFD ending price. Sellers have regained control across all timeframes (below quarterly) and moreover below the trailing 12-mo VPOC 3967.25 (+1.79%). Price acceptance > JAN VAL / WLO.1 3925 (+0.71%) creates scope to retest / recapture the 200d MA 3948 (+1.3%). Failing that, odds increase for printing lower YTD lows. The MTF 1TFD ending price is 4082.50 (+4.75%), but remains within +2σ of the expected weekly range.

Short TF (Trailing 12-weeks) BEARISH - The MAR → JUN roll gap (-0.89%) is considerable: MAR23 3862.75 - JUN23 3897.50 and odds favor this being filled. The first indication of recovery will be restoration of acceptance back into the prior week range > WLO.1 3925 (+0.71%) with the 200d MA 3948 (+1.3%) above. Conversely, downside continuation and acceptance below the NOV Pullback LO Axis 3912.50 (+0.38%) risks extending < WLO 3881.00 (-0.42%) and loss of the 20% Correction Level 3847.00 (-1.3%). Weekly and Daily Timeframe configurations are both 1TFD. WTF 1TFD ending price is 4082.50 (+4.75%).

4t TPO ETH v RTH (W8 → W10) BEARISH - The GEX regime has flipped back decidedly negative below 3997.50 (+2.57%). Poor structure has been left behind (on Thursday) and will be carried forward for repair - possibly quickly should sentiment turn positive. Last week we highlighted the structure that created vulnerability on both sides, and this played out fully with an outside week print. The SVB failure (and risk containment) will likely dominate the opening headlines but the narrative will shift and/or expand on Tuesday’s CPI release, which is arguably more pertinent to the ever fluid "Fed path".

Bull v Bear

This Week (30d ATM 21.56% v 17.02% p)
Bulls will seek to re-establish acceptance back into the prior week range > WLO.1 3925.00 (+0.71%). Upside: Recapture 200d MA 3948.00 (+1.3%); OCT HI 3955.75 (+1.49%); WVPOC 3989.75 (+2.37%); 4000 (+2.63%) are within +1σ (W) 4016 +3.04%.
Bears will seek to extend the downside and establish price acceptance < WLO 3881 (-0.42%). Downside: < 20% Correction Level 3847.00 (-1.3%); OCT Breakout 3820 (-1.99%); YTD LO 3814.50 (-2.13%); DEC LO 3788.50 (-2.8%) are within -1σ (W) 3786.00 -2.80%.

Last Week (3862.75 MAR23 -3.91%)
Bulls will seek to re-establish weekly 1TFU > 4053 and ideally recapture the monthly AVWAP 4070.25 (+0.51%) on a closing basis. Upside: GAP Close 4095.00 (+1.12%); JAN HI 4109.75(+1.48%); Q1 VAH 4123.50 (+1.82%) are within +1σ (W) 4139 +2.20%.
Bears will seek to defend the ITF Supply Line immediately overhead at ~4070, and ideally retarget Friday’s poor LO and gap < 3998 (-1.28%). Downside: 50d MA 3996 (-1.33%); WTF AVWAP 3994.25 (-1.37%); prior WVAL 3977.50 (-1.78%) are within -1σ (W) 3964 -2.12%.

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