Week of Dec 22 2024

Market Wrap

Weekly Benchmarks - @Koyfin

Weekly Factors vs. S&P 500 - @Koyfin

Weekly Performance - @Koyfin

Outlook

The market stands at a critical technical and fundamental crossroads, with tension between strong economic data and deteriorating market internals. The Fed's hawkish December stance—with upward revisions to their inflation outlook and fewer expected 2025 cuts—has created notable dissonance between policy expectations and market positioning. This is especially evident in the bond market, where yields have risen 100bps in three months despite easing financial conditions, suggesting "Bond Vigilantes" are actively resisting monetary and fiscal accommodation. Market structure shows worrying deterioration beneath the surface: the value-to-growth ratio has hit a 23-year low after an 8% three-week decline (among the worst stretches since the 1940s), while over 7.75% of S&P 500 stocks are hitting new 52-week lows despite the index near all-time highs. Historical analysis indicates such breadth divergences typically precede 6-9 months of pressure before meaningful mean reversion.

Wednesday's VIX spike to 27.6 triggered a tactical buy signal (one standard deviation above mean), with previous 2024 setups resolving higher within 4-6 weeks. Key technicals under watch include the 10-year Treasury yield's 4.40-4.55% range and the percentage of stocks above their 50-day moving average (now below 50%). The yield curve has steepened to +26bps (2s10s), its widest level this cycle, reflecting stronger growth and rising term premium.

The fundamental question is whether current conditions reflect benign sector rotation or early warning signs of broader market stress. While defensive sectors and commodities show significant technical weakness, the financial sector has avoided new lows—potentially signaling that current breadth weakness is tactical rather than systemic. However, the mix of extreme sentiment, concentrated leadership, and hawkish Fed guidance points to increased risk of mean reversion in early 2025.

The left tail risk lies in potential market stress from sharply rising real rates, especially given extreme bullish sentiment (exceeded only in 1995 and 1999) and concentrated leadership pre-FOMC. The combination of hawkish Fed guidance, weakening breadth, and technical resistance could spark a meaningful correction. The right tail scenario sees a "goldilocks" outcome: continued disinflation with robust growth, allowing Fed easing while maintaining economic momentum. This could broaden market participation beyond mega-cap tech leadership.

Key near-term catalysts include Consumer Confidence (Monday), Durable Goods/New Home Sales (Tuesday), and year-end rebalancing flows. While December historically favors small-cap and value stocks (93% win rate), current dynamics favor large-cap growth. January brings crucial tests of the economic resilience narrative through the ISM Manufacturing report (Jan 3) and Q4 earnings season.

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Calendar (UTC-4)

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Macro Dashboard

Forward Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 4-qtr Estimate	⚪️	263.39	263.39	243.98	January 1, 2024
Forward 4-qtr PE	⚪️	23.1	23.1	20.16	January 1, 2024
Nominal Earnings Yield	⚪️	4.33	4.33	5.19	January 1, 2024

Volatility & Correlations

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔵	13.7	9.86	3.84	38.95%
SPX GEX Flip	⚪️	6,037.5	6,037.5	0	0%
SPX Skew Adjusted GEX	🔴	-19,725,024,376	892,346,632	-20,617,371,008	-2,310.47%
Equity Put/Call Ratio	🔴	0.54	0.58	-0.04	-6.9%
SPX/SPXW Put/Call Ratio	🔴	1.31	1.38	-0.07	-5.07%
VIX Put/Call Ratio	🔵	1.21	0.29	0.92	317.24%

Cross-Asset Volatility — CBOE

Cross-Asset Correlation — CBOE

S&P 500 Futures

March E-mini S&P 500 futures settled at 6001.75 Friday, up 67.75, or 1.14%. Overall volume was a heavy 2,386,403, with March seeing 2,340,873 traded. Total open interest finished at a one month high of 2,640,418, gaining 23,768, or 0.91%. March open interest gained 14,307 (0.68%), to 2,117,321.

Option volumes were highest for the Dec EW4 6100 call (15,387) and the Dec E4B 4950 put (42,822). For Jan options, the 100 calls had the high volume with 3,842 done, and the most active put was the 4650 strike with 7,652 contracts traded. Option open interest is greatest for the Jan EW3 100 calls at 24,670, and the Dec E4B 4950 puts at 44,063.

As measured by the 30-day at-the-money, implied volatility ended the session sharply lower, down by 3.04% to finish the day at 13.82%. Adding 0.42% to a one week high, historical volatility (as measured by the 30-day) finished at 13.18%.

Higher TF (W → D) NEUTRAL - Last week's FOMC meeting triggered both the year's largest bearish week and the biggest post-Fed selloff in S&P 500 history. However, such violent liquidations often create conditions for their counterpart: a short squeeze especially after a failed breakout at a key structural level—in this case, the higher timeframe control point, 5928.50. Friday's squeeze had enough momentum to push prices back into the bull channel that controlled 2024's “third leg up” (highlighted on chart 2). Profit taking and responsive sellers ultimately settled the week at the Q4 2024 breakout point of 6000, which aligns with our base case of price action signaling a trend pause vis-à-vis a transition of the bull channel into a trading range.

Lower TF (3H → M30) NEUTRAL - Lower timeframe analysis reveals how price action respected structural levels during recovery from Wednesday's historic FOMC decline. Thursday's post-spike bear channel failed after a climactic third push down, marked by the engulfing bull bar circled on chart 2. This reversal evolved into a Trend from Open on Friday, confirming continued short-covering. The rally's strength is evident on the 3H trend bar, which retraced the entire lower distribution on the weekly profile (see chart 1). The key question now: will buyers hold the recaptured bull channel, facilitate a new HL and upside continuation, or do the diverging M30 bull and bear channels signal the low and high of a developing trading range?

ATM IV30 13.82% v HV 13.18% IV-HV +0.64%
Bulls will seek to rebuild acceptance above the 50d MA thru trend continuation within the recaptured (M30) channel. Upside: FOMC breakout point, 6115 (+1.89%) is within +1σ (W) 6133.50 (+2.20%).
Bears will seek to offer below WVAL 5970 on a closing basis. Downside: 3H FVG 5913.25 (-1.47%) is within -1σ (W) 5875 (-2.11%). WLO 5866 (-2.66%) is just beyond.

Last Week: 6001.75 MAR25 -2.16%
~~Bulls will seek to recapture DTF 1TFU and establish acceptance > 6085.75 WVAL. Upside: MM target 6129.25 (+1.22%) is~~ ~~within~~ ~~+1σ (W) 6155 (+1.64%).~~
Bears will seek to extend DTF 1TFD and offer below WLO 6039.75 on a closing basis. Downside: Control Point 6000.25 (-0.91%) is within -1σ (W) 5959.00 (-1.59%).

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