Week of Oct 01 2023

Market Wrap

EOW 39 - Benchmarks

SPX (D) - Trailing 12mo and +/- 1σ Expected Weekly Range (+/- 2.2% 4193.8 → 4382.5)

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

Narratives

Although the arguments for structurally higher rates are sound, this simply isn’t a world calibrated to 5% Treasury yields or policy rates. If rates continue to rise or stay higher for longer, increased borrow costs would disincentivize companies to take on greater amounts of leverage, which is problematic for profits. Lower interest expenses and corporate tax rates explain more than 40% of the real growth in corporate profits from 1989 to 2019, and falling COGS drove the remainder of the profit margin increases not driven by taxes or rates. But we’re now in a world of higher rates, higher taxes and higher input costs for everything from raw materials to labor - David Kostin, Goldman Sachs

We examined the history of bond selloffs across seven instances going back two decades during which 10-year US yields rose 100bps within three months. Across those seven episodes, yields rose an average of 125bps, and subsequently fell by around 40bps in the three months thereafter - Goldman Sachs

US Treasurys are poised for a third straight annual loss, and everyone is familiar that 10-year US bonds have never logged three straight years of losses in the history of the republic. A hard landing, however, should make long bonds the most likely biggest trade’ of 2024. Humiliation is always the best asset to own - Bank of America

Although the long-maturity, fixed-rate debt structures of S&P 500 companies generally insulate them from higher rates, borrow costs have ticked up on a YoY basis by the largest amount in nearly two decades. Higher rates are having an impact and everybody has a maturity wall. It’s just a matter of how far out it is - Goldman Sachs

Week Ahead

The first week of the month is usually jampacked with employment indicator releases. On balance, we expect they will show that the labor market remains relatively strong. August's JOLTS report (Tue) could show that job openings fell but remained high as evidenced by the "jobs plentiful" series in the consumer confidence survey.

The jobs plentiful series also suggests less upward pressure on wages, as measured by average hourly earnings, which will be released along with August's employment report (Fri).
Also confirming the resilience and strength of the labor market has been initial unemployment claims (Thu) in recent weeks.
September's M-PMI (Mon) likely remained below 50.0 according to the general business composite average of the regional business surveys conducted by 5 of the 12 Federal Reserve district banks. However, it might have continued to move higher again, suggesting that the rolling recession for goods producers and distributors may be bottoming.
September auto sales probably weakened for the second month in a row as tighter lending conditions are weighing on auto sales.
How will the stock and bond markets respond to September's relatively strong labor market? Not very well if investors conclude that this increases the odds off another hike in the federal funds rate. However, we are counting on lower-than-expected wage inflation to calm those fears - Yardeni Research

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Calendar (UTC-4)

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US Macro

Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 4-qtr Estimate	🔵	232.95	232.63	228.39	January 1, 2023
Forward 4-qtr PE	🔴	18.4	18.5	17.2	January 1, 2023
Nominal Earnings Yield	🔵	5.6	5.38	5.86	January 1, 2023

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔵	15.5	14.32	1.18	8.24%
SPX GEX Flip	🔴	4,402.5	4,437.5	-35	-0.79%
SPX Skew Adjusted GEX	🔵	-10,181,376,713	-14,569,522,294	4,388,145,581	30.12%
Equity Put/Call Ratio (CBOE)	🔴	0.73	0.85	-0.12	-14.12%
VIX Put/Call Ratio (CBOE)	🔵	0.91	0.51	0.4	78.43%
SPX/W Put/Call Ratio (CBOE)	🔴	1.35	1.57	-0.22	-14.01%

Skew-Adjusted Gamma by Strike - @tradevolatility

Skew-Adjusted GEX Trend - @tradevolatility

Implied Volatility Trend - @tradevolatility

Put/Call OI Trend - @tradevolatility

Futures

Dec E-mini S&P 500 futures closed at 4325.50 Friday, down 12.00, in higher trade across the board. Overall, 2,014,667 contracts changed hands, with 2,004,716 traded in Dec.

Option volumes were greatest for the Nov EW 4700 call (10,573) and the Oct E1A 3600 put (90,538). For Dec options, the 4875 calls had the highest volume with 3,461 changing hands, and the most active put was the 4050 strike with 3,184 contracts done.

Implied Volatility finished the session slightly up with the 30-day at-the-money gaining 0.0551%, to end at 15.16%. Historical volatility (30-day) closed the day at 12.35%, up 0.0008%.

Higher TF (W → D) BEARISH - The Break of Structure (BOS) < HL 4350 (+0.57%) confirmed a Higher TF change of condition with sufficient follow-through to close our targeted June 4305.75 Departure Gap. The position of monthly close tilts the odds in favor of QTF 1TFU cessation entering into Q4. Despite a qualifying divergence signal on Wednesday, Higher TF market structure has shifted bearish. Sellers remain in control below the swing range midpoint 4458 → 50d MA 4478.50 (+3.54%), both levels lie beyond +1σ (W) expected 4416 (+2.09%). Conversely, the rising 40w/200d MA 4241.50 (-1.94%) appears to be the path of least resistance.

Lower TF (3H → M30) BEARISH - 3H market structure (Pane 1) is bearish but with budding divergence on the M30 timeframe, indicative of downtrend pause (and balance < WLO.1 4357.25) or the start of a Lower TF countertrend (Higher TF pullback > WHI 4383.50). Overall price action, relative to the last week’s value area, suggests the former: price was rejected both above and below the last week’s value area (Pane 1) and settled just above the WVPOC. Thus, last week’s VA will serve as a bull/bear pivot: long above, short below, and rotational in-between. The negative gamma regime remains in effect, but with declining exposure.

Bull v Bear

This Week (30d ATM IV 15.16% v 30d RVOL 12.35%)
Bulls will seek to recapture > WVAH 4317.25 and ideally WHI 4383.50 (+1.34%) on closing basis. Upside: Recapture 4400 (+1.72%) is within +1σ (W) 4416 (+2.00%). 50d MA 4478 (+3.5%) < +2σ (W) 4507.
Bears will seek to break < WVAL 4307.25 and ideally WLO 4277.00 (-1.12%) on a closing basis. Downside: 200d MA 4241 is within -1σ (W) 4238.50 (-2.01%). Q322 PB HI 4175 (-3.5%) > -2σ (W) 4152.

Last Week (4325.50 DEC23 -1.02%)
~~Bulls will seek to recapture > DTF 1TFU 4399 and 4400 (+0.89%) on closing basis. Upside: DTF BOS 4434.25 (+1.68%); DTF GAP 4443.50 (+1.69%) are~~ ~~within~~ ~~+1σ (W) 4450 (+2.06%).~~
Bears will seek to break LL 4350 and ideally close the 4305.75 Departure Gap (-1.27%). Downside: 200d MA 4230 (-3%); Q123 HH BoS (breakout) 4208.50 (-3.50%) are beyond -1σ (W) 4275.00 (-1.97%).

Indicators

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Markets

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Positioning

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Sentiment

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Volatility

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Breadth

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Disclaimer

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Sources