Week of Aug 18 2024

Market Wrap

Weekly Benchmarks - @Koyfin

Weekly Factors vs. S&P 500 - @Koyfin

Weekly Performance - @Koyfin

Sentiment

There's a general consensus that the U.S. economy is navigating a delicate balance between disinflation and growth concerns. The recent July CPI data showed inflation continuing to moderate, with core CPI at 3.17% year-over-year, marking a new low since April 2021. This trend supports the "Immaculate Disinflation" narrative, suggesting that the economy is successfully bringing down inflation without significant negative impacts on growth or employment. However, the recent weakness in equity markets has led to increased interest in hedging strategies, with recommendations to focus on put options for stocks and ETFs with high sensitivity to U.S. growth but relatively low options prices. Despite these concerns, there's a strong undercurrent of optimism regarding consumer strength. Alan Brazil's report argues that recession risk is overstated due to three key factors: the impact of immigration on consumption, substantial excess savings, and significant growth in household wealth. This view suggests that consumers have multiple pillars of support that could sustain economic growth even in the face of headwinds.

Looking ahead, several catalysts are on the horizon. The market is closely watching upcoming economic data releases, particularly those related to employment and inflation. The September FOMC meeting is also a key event, with expectations of a potential 25 basis point rate cut. The U.S. presidential election later in the year is another significant factor that could influence market dynamics. Regarding tail risks, the left tail risk centers on a more severe economic slowdown or recession than currently anticipated, potentially triggered by persistent inflation or a sharp rise in unemployment. The right tail risk involves a scenario where inflation continues to moderate faster than expected, allowing for earlier and more aggressive Fed rate cuts, coupled with resilient economic growth.

From a technical perspective, market observers are closely watching the (SPX) 5300 level is seen as a critical support, with a break below potentially signaling a shift to a more bearish outlook. On the upside, surpassing recent highs could pave the way for a year-end rally. In terms of market positioning, there's been a significant shift in recent weeks. Aggregate equity positioning has plunged from elevated levels in mid-July to below average or underweight levels. This sharp reduction in positioning is one of the steepest in recent years, suggesting that many investors have already de-risked their portfolios — Claude 3 Opus (Sources: Yardeni Research, Bank of America, Goldman Sachs, Morgan Stanley, LSEG, Nomura, Oppenheimer)

They’ll have to cut by at least 200bps this cycle, and not necessarily because the economy demands it. Treasury needs at least 2ppt of rate cuts just to keep America’s debt servicing burden from spiraling. Interest payments are up by $900 billion in the past 12 months and will be $1.2 trillion even if they cut by 200bps — Bank of America

Some strategies were likely sitting upside-down in some severe MTM moves, but we don’t believe the short vol universe at the wholesale level was anywhere close to being forced to trade out of it and unwind their strategies, which simply then meant ‘business as usual’ with the resumption of vol-selling flows thereafter — Nomura

It’s important to note that the epochal active-to-passive shift is playing out unabated in the background. The split on that $352 billion figure is $604 billion to ETFs and $252 billion from mutual funds. Since Lehman, passive equity funds have seen some $5 trillion of inflows, while active funds have watched $2.5 trillion exit — Bank of America

Week Ahead

Looking ahead to next week, the outlook remains slightly bullish despite potential consolidation. Fed Chair Powell's speech at Jackson Hole on Friday is expected to set the tone for Fed policy over coming months and likely to be dovish, and ostensibly supporting further gains. However, overbought conditions and geopolitical risks could lead to some profit-taking.

Key events to watch include economic data releases such as Leading Indicators and FOMC Minutes, as well as earnings reports from companies like Estee Lauder, Lowe's, and Target. Recent economic data has been supportive, with benign inflation figures, strong consumer spending, and lower jobless claims. This has led to a decrease in expectations for a September Fed rate cut, though markets still anticipate 75-100 basis points of cuts for the rest of the year.

Bond yields have seen minimal changes, with the 2-year Treasury yield slightly up and the 10-year yield slightly down. While the overall outlook is positive, investors should remain cautious of potential challenges such as mean reversion or an underwhelming message from Powell that could trigger profit-taking — Trading Economics

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Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 4-qtr Estimate	🔴	258.31	258.77	243.98	January 1, 2024
Forward 4-qtr PE	🔵	21.5	20.6	20.16	January 1, 2024
Nominal Earnings Yield	🔴	4.66	4.85	5.19	January 1, 2024

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔴	11.92	16.55	-4.63	-27.98%
SPX GEX Flip	🔵	5,497.5	5,457.5	40	0.73%
SPX Skew Adjusted GEX	🔵	3,444,621,418	-13,375,303,985	16,819,925,403	125.75%
SPX/SPXW Put/Call Ratio	🔵	1.41	1.38	0.03	2.17%
OEX Put/Call Ratio	🔵	2.11	1.85	0.26	14.05%
VIX Put/Call Ratio	🔴	0.54	0.86	-0.32	-37.21%

Skew-Adjusted Gamma by Strike - @tradevolatility

Skew-Adjusted GEX Trend - @tradevolatility

Implied Volatility Trend - @tradevolatility

Put/Call OI Trend - @tradevolatility

Futures

For the fourth consecutive session, E-mini S&P 500 futures finished higher, with the Sep contract settling Friday at 5578.25, higher by 10.75. Across all maturities, volume was a light 1,186,558, with the Sep maturity seeing 1,183,498 done. Total open interest rose by 3,063, or 0.15%, to end the session with 2,063,289 outstanding. The Sep maturity added 0.10% (3,063) to finish at 2,018,751.

Option trading centered around the August E3A 5750 calls with 5,390 changing hands and the August E3B 4650 puts with volume of 38,930. In Sep options, the highest volume call was in the 5600 strike with 2,594 done, and the 5400 put leads with volume of 4,007. Calls with the largest open interest are the Dec 5800 strike (20,709), and for the puts are the August E3A 4550 strike (91,976).

E-mini S&P 500 implied volatility finished the day lower as the 30-day at-the-money decreased 0.33% to close the session at 11.84%, a one week low. Historical volatility (30-day) closed at 19.66%, up by 0.0093%, to a twelve year high. The 30-day volatility spread (IV-HV) narrowed by 0.3405% to finish the day at a twelve year low of -7.82%.

Higher TF (W → D) NEUTRAL - The bullish structure remains intact above the April low 5028.25 (-9.86%), now cleared by the recently tested but still rising 200-day MA at 5200 (-6.36%). Wave-one of the correction swept the Q224 value area, whereas the wave-two relief rally traded through the structural midpoint (5375) with continuation sufficient to close near prominent resistance: 5588 → 5600. That said, the monthly timeframe remains in a 1TFD configuration; and we are reminded that sharp pullbacks in headline indices followed by V-shaped (wave-two) relief rallies often retest their initial lows during correction cycles.

Lower TF (4H → M30) BULLISH - Lower timeframe buyers successfully restored WTF 1TFU and recaptured the 50d MA 5514 with follow-through that can’t be ignored. Stronger resistance becomes increasingly likely at the looming 5600 (+0.39%) level with momentum tapering and “Shortening of the Thrust” (SOT) already appearing (4H timeframe). Last week’s “triple-distribution” trend profile left unmitigated 4H FVGs likely to be repaired at some juncture. Backing and filling once underway will offer attractive entries for responsive buyers, which remain in control above the August VPOC 5374 (-3.64%).

Bull v Bear

This Week: 30d ATM IV 11.84% v 30d HV 19.66% -7.82%
Bulls will seek to maintain WTF 1TFU and establish price acceptance above 5600. Upside: July VPOC 5643 (+1.16%) is within +1σ (W) 5677.00 (+1.77%). ATH 5721.25 (+2.56%) is within +2σ (W) 5776 (+3.55%).
Bears will seek to recapture 5600, and offer below the 50d MA 5515 (-1.14%) on a closing basis. Downside: 5500 (-1.40%) is within -1σ (W) 5483 (-1.71%). 5400 is within -2σ (W) 5389.00 (-3.39%)

Last Week: 5578.25 SEP24 +3.91%
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%)~~

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