Week of May 26 2024

Market Wrap

Weekly Benchmarks - @Koyfin

Weekly Factors vs. S&P 500 - @Koyfin

Weekly Performance - @Koyfin

Sentiment

Recent US equity strength, fueled by unexpectedly good earnings results and improved inflation data, has created market complacency. Multi-year low VIX levels, the removal of downside put protection, low traded volumes, and elevated risk appetite readings suggest possible market vulnerability to a downside correction. Meanwhile, the strong year-to-date performance of the S&P 500, especially the "Magnificent 7" mega-cap tech stocks, and the ongoing AI revolution support a positive market sentiment. AI could fuel productivity and earnings growth, resulting in higher stock prices.

If the market confidently surpasses the April highs, this upward momentum may persist. A resolution to the U.S. debt ceiling issue and a less aggressive Fed could also reduce significant market concerns. Moreover, China's reopening and a global economic rebound might uplift cyclical and value-oriented sectors; inflation assets outperforming deflation assets suggests a potential regime change lasting several years. Lastly, equity inflows and a historically strong start to the year for the S&P 500 further bolster bullish underpinnings.

Left tail risks include unusual equity volatility dynamics implying a potential volatility regime change and an unwind in positioning. Pressure on consensus trades, like long gamma/short skew, could lead to further unwinds. High gross leverage among hedge funds, combined with deleveraging signs, may exacerbate drawdowns during intensified sell-offs. An abrupt economic downturn or unexpected inflation acceleration could surprise investors and cause a repricing of assets — Claude 3 Opus (Sources: Yardeni Research, Bank of America, Goldman Sachs, LSEG, Nomura, Oppenheimer)

Four additional CPI reports will be available by the September meeting, and if monthly core CPI inflation averages in the high 20s and core PCE in the low 20s, as we expect, then we think most FOMC participants will support a rate cut - Goldman Sachs

The equity put skew continues to be very low across regions while the VIX call skew has been trending higher, suggesting markets are pricing less risk of a sustained drawdown from here, but are worried about temporary spikes in volatility - Goldman Sachs

While our Risk Appetite Indicator reached a new high since 2021, there’s some nuance. The measure is being bolstered by ongoing compression in credit spreads, and also by weakness in haven currencies, partially offset by buoyant gold - Goldman Sachs

Week Ahead

In the US, PCE inflation, the Federal Reserve's preferred inflation measure, will be closely watched. This will provide insights into the development of price pressures in the economy. Although the inflation rate slowed in April, recent flash estimates from the S&P Global PMIs hint at increased price pressures in May.

Both personal income and spending are expected to have grown by 0.3%, marking a slowdown from the previous month, March. Market analysts will also scrutinize the second estimate for Q1 GDP growth. Predictions suggest a slight downward revision to 1.5% from the initial 1.6% estimate.

Other important data releases will include Q1 corporate profits, pending home sales, consumer confidence from the Conference Board, S&P/Case-Shiller and FHFA house prices, and regional manufacturing indexes from the Dallas Fed and the Richmond Fed.

US markets will observe a holiday on Monday for Memorial Day. Various Fed officials will also have speaking engagements throughout the week. Although the earnings season is nearing its end, investors will still monitor the quarterly results from Salesforce, Costco Wholesale, and Dell - Source: TradingEconomics

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Calendar (UTC-4)

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Macro Dashboard

Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 4-qtr Estimate	🔴	252.61	252.93	243.98	January 1, 2024
Forward 4-qtr PE	🔵	21	20.9	20.16	January 1, 2024
Nominal Earnings Yield	🔴	4.76	4.77	5.19	January 1, 2024

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔴	9.54	10.01	-0.47	-4.7%
SPX GEX Flip	🔵	5,287.5	5,252.5	35	0.67%
SPX Skew Adjusted GEX	🔵	800,968,655	-3,415,136,551	4,216,105,206	123.45%
Equity Put/Call Ratio	🔵	0.57	0.54	0.03	5.56%
VIX Put/Call Ratio	🔴	0.28	0.49	-0.21	-42.86%
SPX/W Put/Call Ratio	🔴	1.45	1.47	-0.02	-1.36%

Skew-Adjusted Gamma by Strike - @tradevolatility

Skew-Adjusted GEX Trend - @tradevolatility

Implied Volatility Trend - @tradevolatility

Put/Call OI Trend - @tradevolatility

Futures

Friday's E-mini S&P 500 market was lower with the June contract adding 36.25 to 5321.50. Across all maturities, volume came in at a one month high of 2,022,460, with June seeing 1,191,669 traded.

The May E5D 4425 put saw the most changing hands with 38,006 contracts done. In June options, the most active call was the 5500 strike with 4,094 done, and the 5000 put leads with volume of 4,397.

As measured by the 30-day at-the-money, implied volatility finished the session sharply down, off by 0.78% to close at a twelve year low of 9.49%. Down 0.71% to a one month low, historical volatility (as measured by the 30-day) finished the day at 10.53%.

Higher TF (W → D) NEUTRAL - We previously noted that consolidation could just as easily ensue given the slowing ascent of monthly value (April → May). This has played out as the market continues to base at the 5308.50 → 5349 HVN (circled above) stalling a meaningful advance above the 5330.50 April high. Consecutive downward (AO) momentum bars is also indicative of consolidation albeit within the context of higher-timeframe bullish structure and vol-suppressing positive GEX at the margin. Buyers remain in control > April’s POC 5250 (-1.34%), where responsive action occurred above notable demand zones. Lastly, new highs (WHI 5368.25) printed outside of RTH are considered weak.

Lower TF (4H → M30) NEUTRAL - Thursday’s outside day reversal began with a premarket rejection at new highs followed by a strong liquidation and intraday trend that engulfed the preceding (5-day) consolidation, resulting in the entire weekly range. Friday lacked follow-through, however, and failed to mitigate the prior week’s FVGs. Short-covering was sufficient to retrace and close back inside the 5305.75 → 5349.00 TR, which will serve as the opening reference in the coming (holiday-shortened) W22. Offering below this range with momentum will increase the odds taking out the WLO and mitigating unfinished business below, and possibly reestablish negative GEX.

Bull v Bear

This Week: 30d ATM IV 9.49% v 30d HV 10.53% -1.04%
Bulls will seek to hold 5305.75 and ideally breakout > 5349.00 on a closing basis. Upside: WHI & weak ATH 5368.25 (+0.88%) is within +1σ (W) 5397 (+1.42%).
Bears will seek to offer below 5305.75 and ideally Friday’s Low 5285.75 on a closing basis. Downside: WLO 5273.50 (-0.90%) is within -1σ (W) 5248.00 (-1.38%).

Last Week: 5321.50 JUN24 -0.11%
Bulls will seek to recapture DTF 1TFU and ideally extend WTF 1TFU on a closing basis. Upside: >5400 is just within +1σ (W) 5403 (+1.42%).
Bears will seek to offer < 5305.75 and ideally 5285 (-GEX transition) on a closing basis. Downside: 5266.25 Poor Low & FVG is within -1σ (W) 5253.50 (-1.38%).

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