Week of Sep 17 2023

Market Wrap

EOW 37 - Benchmarks

SPX (D) - Trailing 12mo and +/- 1σ Expected Weekly Range (+/- 1.6% 4379.1 → 4521.5.)

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

Narratives

Wait and see what happens if energy stays high, spreads into goods and services and central banks look through it to ‘focus on core’ CPI. Think what happens if central banks have to act again. You can see why Mr. Market mostly prefers not to think — Michael Every, Rabobank

If the Fed’s done and the first rate cut is in June, current trends indicate US headline and core inflation will be between 3-4%. If the Fed does start cutting rates in Q2 and the trends in the charts hold between now and then, it’d be an implicit admission that the Fed is tolerating a higher inflation target and could be interpreted dovishly especially in an election year - Bank of America

US stocks may fall 15-20%. But not until they make a run at records and not until next year. Meanwhile, cyclical leading indicators are in a less negative zone and support the re-rating of equities. The no landing scenario is not yet priced in and should be over coming months as recession calls are deleted/delayed. In other words, we are bullish near-term, despite likely jitters in 2024 - SocGen

We think markets may rally into the first negative US payrolls print but this is likely followed by a slump on a second negative payrolls print. Between now and whenever those negative NFP headlines show up, investors should be long assets that have discounted a hard landing given that they have less to lose in a recession and big upside (if a downturn is averted) - Bank of America

Week Ahead

Other than another FOMC meeting, it's a slow week ahead for economic indicators. The committee's statement is widely expected to pass on another rate hike, but suggest that there could be another one at the November meeting. All eyes will be on the Summary of Economic Projections (SEP), which is updated quarterly and includes the "Dot Plot," which shows the range of the committee's forecasts of the federal funds rate (FFR).

Here are a few observations to keep in mind when the latest SEP is released on Wednesday:

The FFR estimate for this year was raised from 5.1% to 5.6% at the June meeting, implying one more rate hike this year, "one-and-done." That isn't likely to change.
June's SEP showed a 100bps drop in the FFR next year to 4.6%. We expect that will be raised closer to 5.6% in line with the Fed's "higher-for-longer" mantra. Convincing the markets that the Fed is in no rush to lower interest rates would be a restrictive measure that could reduce the need for any more rate hikes.
During August, the headline and core PCED inflation rates were 3.3% and 4.2%. June's SEP anticipated these rates will fall to 3.2% and 3.9% by the end of this year. Those estimates probably won't change much in September's SEP.
In our opinion, the financial markets have discounted a higher-for-longer FFR at the current level. That's apparent in the following chart of the FFR futures. The drop in the 12-month futures FFR during the March banking crisis has been followed by a rebound back to 5.02% on Thursday.
The two-year Treasury yield was also back up at 5.02% on Friday. Any market reaction to the latest FOMC meeting is likely to be in response to Fed Chair Jerome Powell's speech on Wednesday. He will probably sound hawkish again, while indicating that the Fed might succeed in lowering inflation without causing a recession. That wouldn't be a new message and the bond and stock markets might remain relatively dull - 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	🔵	233.39	233.38	228.39	January 1, 2023
Forward 4-qtr PE	🔴	19	19.1	17.2	January 1, 2023
Nominal Earnings Yield	⚪️	5.24	5.24	5.86	January 1, 2023

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
SPX Implied Volatility	🔴	11.35	11.83	-0.48	-4.06%
SPX GEX Flip	⚪️	4,477.5	4,477.5	0	0%
SPX Skew Adjusted GEX	🔴	-2,984,020,932	-2,872,723,571	-111,297,361	-3.87%
Equity Put/Call Ratio (CBOE)	🔴	0.7	0.75	-0.05	-6.67%
VIX Put/Call Ratio (CBOE)	🔵	0.43	0.32	0.11	34.38%
SPX/W Put/Call Ratio (CBOE)	🔴	1.44	1.54	-0.1	-6.49%

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 settled at a one week low of 4498.00 Friday, down 57.00 (1.25%). Across all maturities, volume was 1,873,486, with Dec seeing 1,825,966 change hands. Total open interest decreased 68,383 (2.62%) to 2,542,462. Dec dropped 7,449, or 0.35%, finishing at 2,097,945.

Option volumes were largest for the Sep E3A 4570 call (12,751) and the Sep E3A 3880 put (43,755). In Dec options, the most actively traded call was the 4850 strike with 9,039 done, and the 4200 put leads with volume of 2,619. Option open interest is greatest for the Oct EW3 100 calls at 23,745, and the Sep E3A 3880 puts at 42,599.

Implied Volatility closed the session moderately up with the 30-day at-the-money gaining 0.85%, to settle at 11.31%. The 30-day historical volatility finished the day up 0.54% to a one week high of 11.36%.

Higher TF (W → D) NEUTRAL - Consecutive Inside Weeks continues to indicate an interim balance (within a 2 month triangular Higher TF compression 4634.50 → 4350). The next directional move, likely a multi-week trend, will emerge from the resolution of this consolidation. September seasonality suggests the S&P is prone to weakness towards the end of the coming week. Loss of the 4434.25 → 4471.75 Demand Zone (Pane 2), risks secondary test of 4350, just beyond the -2σ (W) expected range. Conversely, recapturing WHI 4566 (+1.51%) opens the gate to retest the YTD HI 4634.50 (+3.03%).

Lower TF (3H → M30) NEUTRAL - A Lower TF bearish change of condition was signaled on Friday’s engulfing reversal, abruptly restoring a negative gamma regime, and closing near the bottom of the 3H Demand Zone. Downside continuation in the coming week risks < WHI.1 4483.25 (back-adjusted) creating scope for retesting the deeper 4414.25 → 4476.25 3H Demand Zone (pane 1) and within -1σ (W) expected range. Lack of angulation between price action and short term MAs (on M30) shows no sign of counter-trend exhaustion. Sellers remain in control below HVL 4548 (+1.11%).

Bull v Bear

This Week (30d ATM IV 11.31% v 30d RVOL 11.36%)
Bulls will seek to defend the 4414.25 → 4476.25 Demand Zone, and ideally recapture WVAH 4540 on a closing basis. Upside: WHI 4566 (+1.51%); 4600 is above +1σ (W) 4572 (+1.65%).
Bears will seek to quickly break WTF 1TFU and ideally recapture WLO.1 4438.25 on a closing basis. Downside: U23 Roll SETL 4461.75 (-0.81%); LL 4414.25 is beyond -1σ (W) 4426.50 (-1.59%).

Last Week (4498.00 DEC23 -0.29%)
Bulls will seek to extend DTF 1TFU > 4526.75. Upside: WVAH 4541.00 (+0.66%); WHI 4580.25 (+1.53%); 4600 is above +1σ (W) 4584.00 (+1.61%). YHI 4634.50 is within +2σ (W) 4660.00 (+3.30%).
Bears will seek to break DTF 1TFU < 4491.75. Downside: WLO 4483.25 (-0.62%); WLO.1 4414.50 (-2.14%) is beyond -1σ (W) 4439.00 (-1.60%). 4400 (-2.47%) is within -2σ (W) 4368.00 (-3.18%).

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