Week of Oct 27 2024

Market Wrap

Weekly Benchmarks - @Koyfin

Weekly Factors vs. S&P 500 - @Koyfin

Weekly Performance - @Koyfin

Outlook

The market narrative is currently centered around three key themes: earnings resilience amid rising yields, mounting election uncertainty, and evolving market structure dynamics. Q3 earnings season has started strongly with 79% of reporting companies beating estimates and aggregate earnings surprising to the upside by 6.1%. However, this strength is occurring against a backdrop of rapidly rising Treasury yields, with the 10-year reaching 4.26% and showing the largest implied election "event risk" in four decades according to the MOVE index. The breakdown of traditional correlations, particularly in gold markets where prices are pushing to new highs despite real rate relationships breaking down, further exemplifies growing uncertainty about traditional market relationships.

Market structure indicators present an interesting tension between current positioning and potential catalysts. Dealers are currently in a neutral gamma position, creating a path-dependent environment where moves could be amplified in either direction. The tactical range being watched is between 5750-5850, with dealer selling pressure expected below 5800. Systematic funds are approaching peak leverage levels and are expected to add exposure as volatility declines, particularly next week as August volatility exits calculation windows. This technical setup suggests potential for amplified moves, especially given that global stock funds have seen $521 billion in inflows year-to-date, with money market funds holding a record $6.5 trillion in "dry powder."

Left tail risks include a disorderly rise in bond yields coinciding with election uncertainty, potential earnings disappointment from mega-cap tech names reporting next week, and escalation of geopolitical tensions. Right tail risks include stronger-than-expected tech earnings, systematic fund buying pressure supporting markets, and potential deployment of money market assets into equities supporting a year-end rally. The VIX currently embeds 3.5 points of geopolitical risk premium, suggesting it could fall to 14.5 if Middle East tensions dissipate.

Upcoming catalysts include earnings reports from five Magnificent Seven companies (Apple, Microsoft, Alphabet, Amazon, and Meta), critical economic data including US GDP, consumer confidence, JOLTS, and non-farm payrolls, and ongoing developments in both Middle East tensions and election polling. The confluence of these events, combined with the current market structure setup and elevated bond market volatility, suggests the potential for significant market moves in either direction over the coming weeks.

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Forward Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 4-qtr Estimate	🔴	265.03	265.72	243.98	January 1, 2024
Forward 4-qtr PE	🔴	21.9	22	20.16	January 1, 2024
Nominal Earnings Yield	🔵	4.57	4.55	5.19	January 1, 2024

Volatility & Correlations

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔵	15.9	13.79	2.11	15.3%
SPX GEX Flip	🔴	5,817.5	5,822.5	-5	-0.09%
SPX Skew Adjusted GEX	🔴	-1,387,570,991	4,326,620,384	-5,714,191,375	-132.07%
SPX/SPXW Put/Call Ratio	🔴	1.38	1.43	-0.05	-3.5%
OEX Put/Call Ratio	🔴	0.75	1.67	-0.92	-55.09%
VIX Put/Call Ratio	🔴	0.67	1.03	-0.36	-34.95%

Cross-Asset Volatility — CBOE

Cross-Asset Correlation — CBOE

Futures

Dec E-mini S&P 500 futures settled at 5846.00 Friday, dropping by 3.00, in mostly lower trade. Combined volume was 1,369,934, with the Dec contract seeing 1,368,245 done. Across all maturities, open interest fell by 10,244 (0.47%), with Dec dropping by 11,429, or 0.53%, to 2,147,311.

Option trading centered around the Oct E4A 5890 calls with 6,006 changing hands and the Oct E5B 4900 puts with volume of 38,513. In Dec options, the most actively traded call was the 6100 strike with 3,679 changing hands, and the 5500 put leads with volume of 1,831. Calls with the highest open interest are the Dec 6000 strike (24,551), and for the puts are the Nov EW3 4525 strike (63,839).

E-mini S&P 500 implied volatility ended the session up as the 30-day at-the-money added 0.41% to close the day at 15.89%, a one week high. Historical volatility (30-day) ended the day at 9.64%, higher by 0.0081%. The volatility spread (30-day, IV-HV) closed the session at a one month high of 6.25%, having rose by 0.4010%

Higher TF (W → D) BULLISH - Overlapping daily bars in the week prior foreshadowed momentum tapering, which played out this week as the October bull channel was broken, resulting in a sweep of the monthly value area and brief probe back into the August range. Nevertheless, the heretofore lagging October VPOC rose to the upper region of the distribution. So the question now is whether WLO 5801 (-0.77%) proves to be a new HL; it remains weak pending a new ATH and the case can be made that the price action of the pullback is broadening. If so a retest of the rising 50d MA 5743.50 is within the coming week’s scope. Meanwhile, HFT buyers remain in control above WLO.2 HL 5724 (-2.09%).

Lower TF (4H → M30) NEUTRAL - The lower timeframe has confirmed a 4-week trading range between 5724 → 5927.25 (ATH). Last week’s pullback retested below and closed above the 5825.75 midpoint; thus market structure within this context still leans constructive. The bullish outer structure is juxtaposed against bearish inside structure between 5822.50 → 5900.75 coupled with dealer GEX having turned negative at the margin. Friday’s sharp downward RTH reversal appears to be forming a bear flag. If so, it puts WLO 5801 (-0.77%) well within reach of a measured move down. Regardless, odds favor sellers recapturing DTF 1TFD based on the weak position of close.

Bull v Bear

This Week: 30d ATM IV 15.89% v HV 9.64% +6.25%
Bulls will seek to reclaim price acceptance above 5900 on a closing basis. Upside: > Weak ATH 5927.25 is within +1σ (W) 5988 (+2.63%).
Bears will seek to cause a measured move that offers below WLO on a closing basis. Downside: 50d MA 5743.50 (-1.75%) and BOS < 5724 are within -1σ (W) 5710 (-2.33%).

Last Week: 5846.00 DEC24 -1.09%
~~Bulls will seek to extend WTF 1TFU and ideally above 5900 on a closing basis. Upside: 150% MM (above 2w HVN) 5989 is~~ ~~within~~ ~~+1σ (W) 6003.50 (+2.45%).~~
Bears will seek to cause a negative GEX transition below 5880 and reverse back inside TR 5830 → 5724. Downside: TR LO 5724 is beyond -1σ (W) 5784 (-2.07%).

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