Week of Jul 21 2024

Market Wrap

Weekly Benchmarks - @Koyfin

Weekly Factors vs. S&P 500 - @Koyfin

Weekly Performance - @Koyfin

Sentiment

The financial markets are experiencing significant shifts in sentiment and positioning. The recent rally, driven by strong performances in small-caps and broader market participation, has reached historically significant levels, sparking debate about its sustainability and potential for near-term corrections. Bullish sentiment is fueled by expectations of Federal Reserve rate cuts, possibly starting as early as September, supported by recent inflation data and dovish comments from Fed officials. This optimism has led to rotations into previously underperforming sectors, particularly benefiting small-caps and value stocks.

However, concerns persist. Some analysts warn that the market may be overly optimistic about rate cuts. The rapid rise in small-caps and extreme positioning in technology and AI stocks raise worries about potential overextension. Additionally, geopolitical risks, especially US-China tensions, add to the uncertainty. Institutional investors have been aggressively de-risking, leading to a significant decrease in net leverage among equity funds. Increased demand for downside protection in the options market suggests growing caution.

Analysts are closely watching technical thresholds, such as the S&P 500 around the 5500 level and the Russell 2000's recent outperformance. The Dollar Index (DXY) is also being monitored around the 104 level, a critical support zone. Macro tail risks include the potential for a hard landing if inflation remains persistent, forcing the Fed to keep rates high, and the possibility of a stronger-than-expected economic rebound, potentially extending the bull market.

As earnings season progresses, with 30% of S&P 500 market cap reporting next week, market reactions to corporate earnings and guidance will be crucial. The upcoming Federal Reserve meeting at the end of July will also be closely watched for any shifts in policy language. In conclusion, while the market has shown impressive strength, caution is advised. The interplay between economic data, Fed policy, corporate earnings, and geopolitical factors will likely drive market dynamics in the coming weeks. Investors should remain vigilant and prepared for potential volatility — Claude 3 Opus (Sources: Yardeni Research, Bank of America, Goldman Sachs, LSEG, Nomura, Oppenheimer)

Large-over-small, big-tech-over-all reached existential extremes this year as the AI rally crescendoed. The last time we saw anything like the current relative performance extremes was at the top of the dot-com bubble. But risk rotation not risk retreat is the Q3 zeitgeist. No one is rotating from stocks to bonds nor from US shares to the rest of the world. Not yet, anyway - Bank of America

A simple decline in EPS optimism could materially undermine some of the high fliers. The ebb and flow of analyst optimism on earnings closely correlates with the short-term performance of tech, so the recent downturn in optimism reverses a key tailwind for the sector. The biggest risk to equities is a bad outlook for any two of these names: Alphabet, Meta, Microsoft, or Nvidia - SocGen

Investors are bullishly assigning 100% probability of a Fed cut in September, 75% probability of Trump winning the US election and 68% probability of a soft landing. Thanks to the massive haul for US shares, global equities enjoyed their 5th largest inflow on record ($47b). Our prudent view remains: sell the first rate cut. Sep 18th and Nov 5th are your buy the rumor, sell the fact dates - Bank of America

Week Ahead

In the US, the Q2 advance estimate for GDP growth is expected to show that the economy expanded by 2%, faster than the 1.4% growth seen in Q1, driven by a rise in consumer spending. The June PCE price index is also due, with forecasts pointing to a small uptick of 0.1% in the general index, following a flat reading in May. Personal spending is also expected to rise at a slightly faster rate of 0.3%, while income growth probably slowed to 0.4% from 0.5%.

In addition, S&P Global PMIs will provide a preliminary estimate of economic activity in July. Other key indicators to follow include existing and new home sales, the Richmond Fed Manufacturing Index, the Chicago Fed National Activity Index, durable goods orders, and the final estimate for the Michigan consumer sentiment.

On the earnings front, several major companies are due to report their quarterly results, including Microsoft, Alphabet, Tesla, Verizon, Visa, Coca-Cola, Texas Instruments, Danaher, GE, Philip Morris, Comcast, UPS, Lockheed Martin, IBM, AT&T, Union Pacific, Honeywell, and Exxon Mobil — Trading Economics

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Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 4-qtr Estimate	🔴	260.3	261.17	243.98	January 1, 2024
Forward 4-qtr PE	🔴	21.2	21.5	20.16	January 1, 2024
Nominal Earnings Yield	🔵	4.71	4.63	5.19	January 1, 2024

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔵	12.98	9.92	3.06	30.85%
SPX GEX Flip	🔵	5,587.5	5,562.5	25	0.46%
SPX Skew Adjusted GEX	🔴	-6,792,070,179	-4,072,435,602	-2,719,634,577	-66.78%
Equity Put/Call Ratio	🔵	0.6	0.57	0.03	5.26%
VIX Put/Call Ratio	🔴	0.33	0.46	-0.13	-28.26%
SPX/W Put/Call Ratio	🔵	1.32	1.26	0.06	4.76%

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 low of 5553.75 Friday, down by 40.75. Overall, a heavy 2,110,194 contracts were traded, with 2,106,581 done in Sep. Across all maturities, open interest gained 362 (0.0174%) to 2,077,084. Sep rose 123, or 0.0060%, finishing at 2,058,036.

Option trading centered around the July E4A 5650 calls with 21,087 changing hands and the July E4A 4750 puts with volume of 91,762. For Sep options, the 5800 calls had the highest volume with 12,346 traded, and the most active put was the 5400 strike with 6,292 contracts done. Options with the largest open interest are the Sep 5500 call with 35,778, and the July E4A 4750 put with 93,351.

As measured by the 30-day at-the-money, implied volatility ended moderately higher, up 0.59% to close the day at a one month high of 13.27%. Up by 0.35% to a one month high, historical volatility (as measured by the 30-day) finished the session at 8.64%. The volatility spread (30-day, IV-HV) finished at a one month high of 4.63%, having added 0.24%.

Higher TF (W → D) BULLISH - 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 question is whether the now back-tested June range, 5205.5→ 5588, holds or fails. Loss of the 5502.75 HL risks retracement to the rising 50d MA 5450 (-1.89%), coincidental to the coming week’s -1σ expected range. If offered, a higher timeframe trend pause will be signaled. That said, prior month DTF FVGs have now been mitigated, and recapturing 5588 would conversely print an ideal Higher Low.

Lower TF (4H → M30) NEUTRAL - The lower timeframe structure reflects a conclusive breakdown below July’s value area (despite it remaining above the June range). The key question on this timeframe is whether price remains accepted back within the June range. If so, the risk of sweeping the June range increases considerably, despite the low odds of doing so in a single leg (down). The loss of 5620 (+1.20%) has re-established control by lower timeframe sellers, and has facilitated a transition back into a negative gamma regime, resulting in elevated vol and amplified directional moves.

Bull v Bear

This Week: 30d ATM IV 13.27% v 30d HV 8.64% +4.63%
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%).

Last Week: 5553.75 SEP24 -1.98%
~~Bulls will seek to establish price acceptance > WVAH 5670 and extend WTF 1TFU. Upside: +150% PO 5746.75 is~~ ~~within~~ ~~+1σ (W) 5748.50 (+1.49%).~~
Bears will seek to offer below 5630 → 5620 on a closing basis. Downside: Negative GEX transition < 5600 (-1.14%) is within -1σ (W) 5583.00 (-1.44%).

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