Week of Jan 15 2023

Market Wrap

EOW 02 - Benchmarks

SPX (D) - Trailing 12mo and +/- 1σ Expected Weekly Range (+/- 2.8% 3887.0 → 4111.0)

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

Narratives

As the market now pivots again from macro CPI / inflation / wage data for a bit and into the micro earnings world, a reminder that last year’s real silent shocker was that despite the impulse tightening from the Fed expected to impact top-line growth negatively, US corporate earnings actually went higher over the year, due to inflation and pricing power in cramming-down these price increases, which consumers by and large were able to digest with higher wages and excess savings. Now, we find ourselves celebrating the long awaited disinflation which eases the ‘macro FCI tightening’ dynamic from central banks, as both supply- and demand- side inflation abate — especially versus the insane YoY comps of last year, meaning that the multiple compression destruction of 2022 is over. However, the micro reality is that said disinflation will now actually begin to unwind much of that corporate earnings pricing power gain into instead a directional EPS loss / trajectory shift lower, as inflation now finally rolls over, despite it being ‘assumed’ into many of those Street analyst numbers. This is how the equities bears can still ‘hold the line,’ and why it’s unlikely that we can get that rage ‘melt-up’ from here, as valuation justification remains such an overhead cap - Charlie McElligott, Nomura

The ERP (Risk Premium) is still way too low in the context of a challenging environment for earnings. When a recession arrives, the ERP always rises significantly from whatever level you are starting at. In other words, if you think a mild recession is coming, you cannot assume the market has priced it given the ERP is at its lowest level since the run up to the GFC - Morgan Stanley

Only during the 1920s, the 1950/60s and since the late 1990s were equity/bond correlations consistently negative as inflation was generally anchored. Since the COVID-19 crisis, 12-month rolling correlations have turned positive and are above the levels reached around the US ‘taper tantrum’ in May 2013 - Goldman Sachs

Robust labor demand is a double-edged sword: While durable employment may provide an economic backstop, it can also exacerbate the sticky labor costs that are a key component of our negative operating leverage outlook for equities, making Street consensus 2023 EPS estimates look increasingly unrealistic - Barclays

Week Ahead

As January proceeds, investors look for more insights into the health of the world's largest economy and the direction of the Federal Reserve's interest rate hikes. The Bureau of Labor Statistics producer prices index will fuel the debate on whether inflation peaked or could still surprise on the upside. Producer prices are likely to decline 0.1% month-on-month, resulting in a slowdown of the annual inflation rate from 7.4% to 6.8%, the lowest reading since May 2021. The core producer inflation, on the other hand, must have risen 0.1% over the previous month, prompting the annual rate to ease from 6.2% to 5.9%. The upcoming week also features the retail sales report from the Commerce Department, with forecasts pointing to a 0.5% month-on-month decline and suggesting that tighter financial conditions continued to dent consumer spending. Building permits, housing starts, and existing home sales will offer further clues about the real estate market. Other releases include industrial production and the Philadelphia Fed Manufacturing Index. A slew of earnings reports will also provide info on corporate America's performance against stubbornly high inflation and rising interest rates. Goldman Sachs, Morgan Stanley, Charles Schwab, Kinder Morgan, PNC, ProLogis, Netflix, P&G, and Truist Financial count amongst the most watched Q4 reports - 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	🔴	227.67	228.38	230.43	September 30, 2022
Forward 12-mo PE	🔵	17.5	17	15.5	September 30, 2022
Nominal Earnings Yield	🔴	5.69	5.86	6.43	September 30, 2022

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
Implied Volatility	🔴	16.5	20.1	-3.6	-17.91%
Call Skew	⚪️	-2.2	-2.1	-0.1	-4.76%
GEX Flip	⚪️	3,957.5	3,892.5	65	1.67%
Total GEX	🔵	9,957,199,179	913,902,546	9,043,296,633	989.51%
Skew Adjusted GEX	🔵	1,954,598,199	179,399,070	1,775,199,129	989.51%
Put/Call Ratio	⚪️	1.87	1.87	0	0%

Gamma by Strike - @tradevolatility

Gamma Change - @tradevolatility

SPX Skew - @tradevolatility

Open Interest for SPX - @tradevolatility

Futures

For the fourth consecutive session, E-mini S&P 500 futures ended higher, with the March contract settling Friday at 4018.25, gaining 14.75. Combined volume was a light 1,458,496, with March seeing 1,456,784 traded. Across all maturities, open interest increased by 2,511, or 0.12%, to 2,047,982. March rose by 2,381 (0.12%), finishing at 2,033,951.

Option trading centered around the Jan E3B 4150 calls with 10,742 done and the Jan E3C 3330 puts with volume of 50,650. For Jan options, the 4050 calls were the most active with 8,916 done, and the high volume put was the 3450 strike with 10,245 contracts traded. Calls with the greatest open interest are the Jan EW3 100 strike (23,752), and for the puts are the Jan E3C 3330 strike (50,755).

E-mini S&P 500 implied volatility ended moderately down as the 30-day at-the-money lost 1.32% to finish the day at 16.05%, a one month low. Up by 0.0494%, historical volatility (as measured by the 30-day) settled at 18.20%.

Larger TF (PRE-COVID HI → Present) BEARISH - The recapture of the OCT HI 3955.75 (-1.56%) and Q4 VPOC 3994 (-0.48%) on a closing basis bolsters scope for continuing the sweep up scenario to Q4 VAH 4090 (+1.79% and within +2σ). Notice the approximate convergence of the LTF (2022) Supply Line and Q4 VAH; quarterly VA sweeps are the larger time frame fractal of the ongoing auction process - and reflect the continuous cycling from efficiency → inefficiency → efficiency. YTF and QTF remain synchronized 1TFD.

Intermediate TF (2022 → Present ) NEUTRAL - The ITF bull flag scenario was strengthened by recapturing the ITF Supply Line (above red), and moreover the 2022 VPOC 3992 (-0.65%) on a closing basis. Next we monitor for continuation as the auction likely advances to retest the LTF Supply Line. USD decline (coupled with containment of 2y rates) continue to support the Risk-on regime; but DXY is now approaching its MAY LOs. Meanwhile, price has advanced considerably above the 1TFU MTF cessation point: -5.07% WLO.1 & DEC LO vs. DEC HI 4141.50 +3.07% (within +2σ W).

Short TF (Trailing 6-weeks) BULLISH - W2 featured +100% range extension from the prior week (triangle) breakout. WTF 1TFU cessation threshold is marginally beyond -1.5σ (W); short-term bias remains bullish in light of the positive GEX regime now established. The GEX Flip Point 3957.50 (-1.51%) coincides with WVAL, weekly PB LO, and -1σ (W). That said, the risk reward for initiative buyers is arguably eroding: SOT; RSI (5d) >80; and declining Wave Volume (buying force, Pane 2).

TPO ETH v RTH (W3-23) BULLISH - The most favorable observation is the closing spike formation > 4011.50, indicative of unfinished business above. Friday’s RTH action, a triple distribution trend day, was considerably bullish given the preceding overnight weakness. Backtesting Friday’s 4000 breakout (and repairing weak structure) versus spike acceptance > WHI will provide an early tell of continuation conviction at the opening of the shortened holiday week ahead.

Bull v Bear

This Week (30d ATM 16.05% v 19.76% p)
Bulls will seek to maintain bid above 4000, and ideally extend range > WHI 4024.25. Upside: Q4 VAH 4090 (+1.79%); 4100 (+2.03%) are within +1σ (W); the DEC HI 4141.50 (+3.07%) is within +2σ (W) and would signal extension of MTF 1TFU.
Bears will seek to offer below 3973.50(-1.11%), and ideally flip GEX back to negative below 3957.50 (-1.51%). Downside: WVAL 3846.25 (-1.79%); 3900 (-2.94%); WLO 3891.50 (-3.15%) are within -2σ (W). WVPOC.1 3832 and $PUT Wall 3825 are below -2σ (W) expected.

Last Week (4018.25 MAR23 +2.56%)
Bulls will seek to maintain bid above 3900, and ideally above the 50d MA 3915. Upside: OCT HI 3959.50 (+1.12%); 200d MA ~4000 (+2.16%) are within +1σ (W); the Dec 14 2022 Open Gap 4012.00 (+2.46%) is marginally above.
Bears will seek to offer below 3900, and ideally create cause for a breakout failure < 3874 WVAH (-1.06%). Downside: WVAL 3832.25 (-2.13%); WLO 3814.15 (-2.58%) are within -1σ (W); POOR LO WLO.1 3804.50 (-2.83%) is marginally below.

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