Week of Aug 11 2024

Market Wrap

Weekly Benchmarks - @Koyfin

Weekly Factors vs. S&P 500 - @Koyfin

Weekly Performance - @Koyfin

Sentiment

The market sentiment reflects a complex interplay of economic indicators, policy expectations, and technical factors. The recent volatility spike, triggered by weak U.S. employment data, has led to a reassessment of the economic outlook and Federal Reserve policy expectations. While some analysts view this as a temporary setback in a continuing bull market, others see it as a potential harbinger of more significant economic challenges. The consensus view suggests that the U.S. economy, while showing signs of slowing, is not yet heading towards a recession. The recent jobs report, which initially sparked concerns, is now being interpreted by many as an anomaly rather than a trend. This interpretation is supported by subsequent data, including jobless claims, which indicate ongoing labor market resilience. However, there's a notable divergence in opinions regarding the Fed's next moves, with some expecting rate cuts as early as September, while others believe the Fed will maintain its cautious stance.

Technical indicators are sending mixed signals. The VIX spike and subsequent moderation suggest a potential return to lower volatility, but many analysts warn that choppy conditions may persist in the near term. Key technical levels for the S&P 500 are being closely watched, with support and resistance zones identified around recent highs and lows. The market's ability to hold above certain thresholds, particularly in the face of upcoming economic data releases, is seen as crucial for maintaining the bullish trend.

Left tail risks primarily revolve around a more severe economic slowdown or recession than currently anticipated, potentially triggered by persistently high inflation or a credit event. The right tail risks include a faster-than-expected economic rebound, possibly driven by technological advancements or unexpected fiscal stimulus.

In the equity market, there's a notable shift from the previous focus on large-cap tech stocks to a broader market perspective. Many strategists are advocating for a balanced approach, favoring quality cyclical stocks while maintaining some defensive positions. The fixed-income market is seeing significant repositioning, with many trend-following strategies having flipped from short to long positions in bonds and short-term interest rates.

Overall, while the immediate market reaction to recent data has been volatile, the longer-term outlook remains cautiously optimistic. However, this optimism is tempered by an acknowledgment of increased uncertainty and the potential for further market adjustments as economic data and policy decisions unfold in the coming weeks and months — Claude 3 Opus (Sources: Yardeni Research, Bank of America, Goldman Sachs, Morgan Stanley, LSEG, Nomura, Oppenheimer)

In the time between the Japanese market close and the VIX open (on August 5), market participants had enough time to imagine volatility seeping into other crowded trades, especially in the US technology sector [so] VIX quickly took the baton from Japanese volatility — SocGen

Dealers were short a bunch of VIX upside to clients, and when the market moved into the short strikes on those calls, the doom spiral was activated. It’s rational to assume a number of PnL events in played out recent days after their legacy short VIX calls position went wrong-way — Nomura

There has been significant retrenchment in equity allocations in recent weeks, but allocations remain well above the post-2015 average, a meaningful threshold that captures the new equity culture over the past decade due to zero commission trading and access to leverage — JPMorgan

Week Ahead

In the US, all eyes will be on inflation data and speeches by several Fed officials. The CPI report is expected to show a slight deceleration in the annual inflation rate to 2.9% and a slowdown in the core rate to 3.2%, marking the lowest levels since March and April of 2021, respectively. Compared to June, both the headline and core CPI are anticipated to have risen by 0.2%, following a 0.1% fall and a 0.1% rise, respectively, in the previous period. Meanwhile, the PPI likely increased at a slower pace of 0.1%, after a 0.2% advance in June.

At the same time, retail sales are expected to rise by 0.3%, rebounding from a flat reading in June. Industrial production is also expected to rise by 0.1%, slowing from a surprisingly strong 0.6% increase in June. Other key data releases to keep an eye on include housing starts, building permits, preliminary figures for the Michigan consumer sentiment, consumer inflation expectations, the NFIB Business Optimism Index, export and import prices, the NY Empire State Manufacturing Index, and the Philadelphia Fed Manufacturing Index.

On the corporate front, the earnings season is coming to an end, but companies such as Home Depot, Cisco Systems, Walmart, Applied Materials, and Deere & Company are still set to release their quarterly reports — Trading Economics

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Macro Dashboard

Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 4-qtr Estimate	🔴	258.77	259.51	243.98	January 1, 2024
Forward 4-qtr PE	🔴	20.6	21	20.16	January 1, 2024
Nominal Earnings Yield	🔵	4.85	4.76	5.19	January 1, 2024

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔴	16.55	19.04	-2.49	-13.08%
SPX GEX Flip	🔵	5,457.5	5,346.54	110.96	2.08%
SPX Skew Adjusted GEX	🔵	-13,375,303,985	-23,122,010,162	9,746,706,177	42.15%
SPX/SPXW Put/Call Ratio	🔴	1.38	1.96	-0.58	-29.59%
OEX Put/Call Ratio	🔴	1.85	8.75	-6.9	-78.86%
VIX Put/Call Ratio	🔵	0.86	0.76	0.1	13.16%

Skew-Adjusted Gamma by Strike - @tradevolatility

Skew-Adjusted GEX Trend - @tradevolatility

Implied Volatility Trend - @tradevolatility

Put/Call OI Trend - @tradevolatility

Futures

Sep E-mini S&P 500 futures settled at a one week high of 5370.25 Friday, adding 22.00. Combined volume was 1,417,634, with the Sep maturity seeing 1,412,017 traded. Overall open interest fell 5,383 (0.27%) to 2,007,521. Sep dropped 7,659, or 0.39%, finishing at 1,968,509.

Option trading centered around the August E2A 5600 calls with 5,181 done and the August E2B 4300 puts with volume of 22,072. Highest volumes in Sep option trading were seen in the 5650 calls (3,639) and the 4800 puts (2,409). Options with the most open interest are the August EW3 100 call with 21,626, and the August E2A 4400 put with 83,800.

As measured by the 30-day at-the-money, implied volatility finished sharply lower, down 2.35% to end the day at a one week low of 16.26%. Historical volatility (30-day) closed the day at 18.51%, up 0.0392%, to a twelve year high. The 30-day volatility spread (IV-HV) fell 2.3941% to finish at a one month low of -2.24%.

Higher TF (W → D) NEUTRAL - The bullish structure remains intact above the April low 5028.25 (-6.37%), now cleared by the recently tested 200-day MA at 5200 (-3.19%). However, the -8.75% closing basis correction remains below the 50-day MA and the concentrated 5500 strike (+2.42%). When volatility increases, we zoom out to higher timeframe value areas for context. The market has retraced the entire Q224 value area, the oft-resulting consequence of a breakout failure. Conversely, over-extension led to a powerful rejection below August’s VAL and a responsive bid that retraced back up to the MVAH. That’s volatility.

Lower TF (4H → M30) BEARISH - Lower timeframe sellers remain in control within the June range with the looming 5429.25 midpoint above, coincidental with +1σ (D), likely to be responsive. Maintaining price acceptance above the 5182 → 5359.25 (2.96%) swing structure would indicate a successful breakout and increase the odds of retesting the correction cycle BOS 5433 (+1.17%). Conversely, rejection back into this range risks the W32 pullback low of 5182 (-3.51%), a pivot that responsive buyers need to hold in order to confirm the first Higher Low (HL) of the correction cycle.

Bull v Bear

This Week: 30d ATM IV 16.26% v 30d HV 18.51% +2.25%
Bulls will seek to maintain price acceptance above 5359.25 and cause cessation of WTF 1TFD on a closing basis. Upside: 5433 BOS (+1.17%); 50d MA is coincidental to +1σ (W) 5502.00 (+2.45%).
Bears will seek to recapture DTF 1TFD and close back within the 2-day TR 5182 → 5359.25. Downside: 5238.50 WVAL is beyond -1σ (W) 5245 (-2.33%). 200d MA 5200 is within -2σ (W) 5122.00 (-4.62%)

Last Week: 5370.25 SEP24 -0.20%
~~Bulls will seek to recapture and establish acceptance above the structural break at 5433 on a closing basis. Upside: 50d MA 5511 (+2.51%) is~~ ~~within~~ ~~+1σ (W) 5527.00 (+2.81%).~~
Bears will seek to offer below the WLO 5331.75 and extend 1TFD on a closing basis. Downside: HL 5205.50 (-3.17%) is beyond -1σ (W) 5233 (-2.66%), but within -2σ (W) 5091.50 (-5.29%)

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