Week of Jul 28 2024

Market Wrap

Weekly Benchmarks - @Koyfin

Weekly Factors vs. S&P 500 - @Koyfin

Weekly Performance - @Koyfin

Sentiment

The week’s research presents a complex and divergent market outlook, indicating a market at an inflection point with both bullish and bearish signals across various asset classes and timeframes. The S&P 500's quick move below its 50-day moving average has historically led to positive returns over six months. The recovery in cyclical stocks and the surge in small caps (Russell 2000) hint at robust performance ahead. Despite a significant drop, the Nasdaq often rebounds, offering medium-term entry points. However, these optimistic signals are countered by cautionary indicators. Prolonged risk-on behavior among investors, nearing levels unseen since 2021, typically precedes underperformance. Economic red flags, such as rising unemployment claims, suggest potential headwinds for the economy and stock market.

Sector-specific analyses highlight divergent views. Regional bank stocks have spiked, but historical data suggests caution due to potential short-term declines. International markets, especially in Germany and the UK, show weakening price action in seasonally weak periods, adding global economic complexity. In commodities, the falling Copper/Gold ratio hints at weakness in oil and energy stocks but strength in precious metals. Extreme optimism in gold relative to corn may signal opportunities in grain markets, further emphasizing asset class disparities.

Tail risks include potential economic slowdowns or recessions, as indicated by employment data and cyclical sector performance (left tail). Upside risks (right tail) could arise from continued risk-on behavior driven by technological advancements (e.g., AI) or unexpectedly strong economic data.

Technical thresholds to watch include the S&P 500's 50-day moving average, Russell 2000 vs. large caps, and the Copper/Gold ratio. Observations range from short-term (2-4 weeks for Nasdaq recovery) to medium-term (3-6 months for S&P 500 performance post-reversal) to longer-term (12 months for cyclical stock performance) — Claude 3 Opus (Sources: Yardeni Research, Bank of America, Goldman Sachs, LSEG, Nomura, Oppenheimer)

The environment changes completely in August as flows are the least bullish of any month. If a rising tide of inflows is disproportionately bullish for the mega-cap, a turn of the flows tide should be bearish for leadership and, in turn, the market more generally. The most important dynamic here is that passive inflows will stop as buyers run out of ammo — Goldman Sachs

rVol picked up dramatically and triggered a substantial de-allocation flow from vol-control cohorts: a whopping -$56.5 billion over the past two days and -$21 billion from the CTA trend. The good news is that these mechanical unwind flows looked closer to completion by the weekend, leaving positioning cleaner into next week’s huge slate of macro catalysts and mega-cap earnings — Nomura

The concentration risk in the index weighting is scary at this juncture: the top five names now comprise nearly 30% of S&P market cap and the top 10 nearly 40%. That’s uncharted territory. But the counterpoint is that these aren’t just great companies, they’re the greatest companies in the history of companies. Their products and services are synonymous with daily life — Bank of America

Week Ahead

In the United States, the Fed is expected to keep the fed funds rate steady at 5.25%-5.50% for an eighth consecutive meeting. However, all eyes will be on any indication of the central bank's plans for September, with a rate cut already factored in. The US economy likely added 185K jobs this month, down from 206K in June, while the unemployment rate probably remained at 2021 highs of 4.1% and wage growth at 0.3%.

Additionally, the ISM PMI is expected to show the manufacturing sector remained in contraction for a third month. Other key indicators to follow include the JOLTS report, ADP employment figures, Challenger job cuts, final S&P Global Manufacturing PMI, the S&P/Case-Shiller home price index, the FHFA house prices, CB Consumer Confidence, Dallas Fed Manufacturing Index, Dallas Fed Services Index, pending home sales, nonfarm productivity, unit labor costs, and factory orders.

Traders will also be paying close attention to the quarterly refunding announcement to assess the federal government's borrowing requirements and upcoming strategies for note and bond sales.

Finally, the earnings season will continue with reports from megacaps such as Microsoft, Apple, Amazon, and Meta, alongside McDonald's, P&G, Merck, Toyota, AMD, Caterpillar, Pfizer, S&P Global, Stryker, Airbus, Mastercard, T-Mobile, Qualcomm, HSBC, Boeing, Intel, Exxon Mobil, Chevron, and Linde — Trading Economics

‣

Calendar (UTC-4)

‣

Macro Dashboard

Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 4-qtr Estimate	🔴	259.84	260.3	243.98	January 1, 2024
Forward 4-qtr PE	🔴	20.8	21.2	20.16	January 1, 2024
Nominal Earnings Yield	🔵	4.81	4.71	5.19	January 1, 2024

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔵	14.06	12.98	1.08	8.32%
SPX GEX Flip	🔴	5,537.5	5,587.5	-50	-0.89%
SPX Skew Adjusted GEX	🔵	-5,822,826,593	-6,792,070,179	969,243,586	14.27%
Equity Put/Call Ratio	🔵	0.73	0.6	0.13	21.67%
VIX Put/Call Ratio	🔵	0.63	0.33	0.3	90.91%
SPX/W Put/Call Ratio	🔵	1.43	1.32	0.11	8.33%

Skew-Adjusted Gamma by Strike - @tradevolatility

Skew-Adjusted GEX Trend - @tradevolatility

Implied Volatility Trend - @tradevolatility

Put/Call OI Trend - @tradevolatility

Futures

E-mini S&P 500 futures were higher Friday with the Sep contract finishing the session at 5499.00, adding 57.75, or 1.06%. Overall, 1,981,941 contracts were traded, with 1,977,698 done in Sep. Across all maturities, open interest fell 12,017, or 0.59%, to end the session with 2,015,830 outstanding. The Sep maturity lost 0.68% (12,017) to finish at 1,992,813.

Option trading centered around the Sep 5850 calls with 10,012 done and the July E5B 4550 puts with volume of 90,820. Calls with the largest open interest are the Sep 5500 strike (34,363), and for the puts are the July E5B 4550 strike (91,630).

E-mini S&P 500 implied volatility ended the session sharply lower as the 30-day at-the-money decreased 1.62% to finish the day at 13.90%. The 30-day historical volatility finished the day gaining 0.43% to a one month high of 11.78%. As it narrowed by 2.05% to a one month low, the spread between the 30-day constant maturity implied and the 30-day historical volatilities closed the session at 2.11%.

Higher TF (W → D) NEUTRAL - Higher timeframe bullish structure remains intact above the April correction low, 4963.50 (-10.63%), now cleared by the rising 200d MA 5030 (-9.43%). The key inflection point is now the 50d MA and highly concentrated 5500 strike. Recapturing and holding > 5588 will signal the conclusion of the correction and establish WLO 5432.50 (-1.21%) as a new interim low relative to the April correction low. The higher timeframe trend has paused amid the WTF 1TFD structure, and offering below the June midpoint 5396.75 risks a deeper retest to → 5502.50 Higher Low (-5.34%).

Lower TF (4H → M30) BEARISH - The lower timeframe structure reflects a conclusive breakdown below July’s value area that’s retraced 50% of June’s range (a closely observed pivot point). Notice that short-covering rallies were sold precisely at prominent M30 FVGs. Therefore the key question on this timeframe is the durability of WLO (-1.21%), which arguably lacks excess. Bulls must re-establish DTF 1TFU > 5533.25 as well as price acceptance > 5588 (+1.62%) to facilitate transition back into positive GEX. Failing that, vol will remain relatively elevated and directional moves will continue to be amplified.

Bull v Bear

This Week: 30d ATM IV 13.90% v 30d HV 11.78% +2.12%
Bulls will seek to recapture DTF 1TFU on a closing basis. Upside: Positive GEX transition > 5577 → 5588 is within +1σ (W) 5606.50 (+1.95%).
Bears will seek to offer below the (poor) WLO 5432.50 and extend 1TFD on a closing basis. Downside: TR HI 5208.50 →5398.50 is within -1σ (W) 5395 (-1.88%).

Last Week: 5499.00 SEP24 -0.98%
~~Bulls will seek to recapture DTF 1TFU on a closing basis. Upside: Positive GEX transition > 5630 → 5650 is~~ ~~within~~ ~~+1σ (W) 5663 (+1.97%).~~
Bears will seek to offer below WLO and extend 1TFD on a closing basis. Downside: 50d MA 5449 is coincidental with -1σ (W) 5448 (-1.90%).

Indicators

‣

Markets

‣

Positioning

‣

Sentiment

‣

Volatility

‣

Breadth

‣

Disclaimer

‣

Sources