Week of Jan 22 2023

Market Wrap

EOW 03 - Benchmarks

SPX (D) - Trailing 12mo and +/- 1σ Expected Weekly Range (+/- 2.9% 3857.2 → 4087.5)

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

Narratives

The three global ‘left tails’ from 2022 and primary drivers of last year’s ‘US dollar wrecking ball’ trade — 1) Fed ‘impulse tightening’ due to hot inflation overshoot; 2) European ‘hard recession’ due to the continental energy crisis; and 3) China’s ZCS strategy — have instead seen counter-consensus relief from prior worst-case scenarios, in turn repricing the ‘right tail’ global growth outcomes higher in recent weeks / months. That’s why it seems the entire trading world is grabbing into these obvious ‘anti-US dollar’ trades as the ‘cleanest’ plays around for the start of 2023, even just on a simple repositioning, as legacy ‘shorts’ in rest-of-world versus US are unwound / covered, let alone the longer-term reallocation / re-weighting trade for allocators who’ve been underweight Europe, Japan, China / EM versus US for over a decade — Charlie McElligott, Nomura

Our take is it’s unlikely that anything will emerge in the week ahead that will bring into question the quarter-point hike forecast. As a result, the Timiraos-Effect will be limited and any confirmation from the financial media that 25bps is the FOMC’s base case will lack its market-moving potential. Suffice it to say this won’t prevent pundits from punditting; even if we’ll be skeptical of any insight on offer aside from what Fedspeak has already communicated during the week just passed. Brainard’s decision not to push back against the undue easing of financial conditions linked to the rebound of US equites was a tacit endorsement of the rally in Treasurys and one of the reasons our conviction is high that the 10-year sector won’t revisit the >4% zone for any meaningful period of time, if at all, during 2023 — Ian Lyngen and Ben Jeffery, BMO

Although upper-income (<125k) spending modestly outperformed lower-income (<50k) spending during the holidays, we see no clear signs of cracks in the latter. Lower-income HHs are still allocating a larger share of total card spending to discretionary categories than they were before the pandemic. This suggests they are not yet moving to a more precautionary stance. Lower-income HHs also do not yet appear to be facing liquidity issues, since they are allocating a smaller share of total card spending to credit cards than they did in 2019 - BofA

The annualized three-month change in US CPI is 0% i.e. there has been zero inflation in the US over the past three months and markets are super-bullishly trading two final 25bps hikes, then 200bps of cuts over the following 18 months. The expected end of tightening occurring before policy rates are in restrictive levels in real terms and hikes ending with economies at full employment may be tantamount to central banks quietly accepting higher structural inflation. If so, the super-trend of favoring inflation assets is still in its infancy - BofA

Consensus isn’t optimistic on a return to the US mega-tech exceptionalism trade, but this could change in the blink of an eye. Revenue exposure to Asia is in part linked to US end demand, where the outlook has not changed materially and the sector’s long duration versus the index means its returns are particularly vulnerable to interest rate risk. Rising real rates represent a counter-balance to the tailwind of China reopening for Info Tech, and we remain neutral on the sector - Goldman Sachs

Week Ahead

In the US the spotlight will be taken by a preliminary reading of the US Q4 GDP growth and the PCE price index. The US economy has likely grown an annualized 2.8% in the final quarter of 2022, slowing from a 3.2% percent expansion in the prior period. The Fed's preferred inflation gauge is expected to have cooled further in December, following last month's lower-than-anticipated CPI figures and producer prices decline. Still, core PCE inflation is seeing a rise of 0.2% over the previous month. Also, the durable goods orders are likely to rebound by 2.5% MoM in December fueling the debate on whether the world's largest economy is heading toward a recession or is already in one. Additionally, investors will pay close attention to personal spending and income data, which are likely to show that tight financial conditions continue to curb spending. Next week also feature inflation expectations, the S&P Global PMIs, and new and pending home sales. Aside from the economic calendar, the US earnings season will kick into a higher gear as several big tech names report their quarterly results including Microsoft, IBM, Tesla, and Intel - TradingEconomics

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Economic (UTC-5)

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Earnings

Earnings

Metric	UpDn	This Week	Prior Week	Baseline	Baseline TF
Forward 12-mo Estimate	🔴	226.23	227.67	230.43	September 30, 2022
Forward 12-mo PE	🔵	17.6	17.5	15.5	September 30, 2022
Nominal Earnings Yield	🔵	5.7	5.69	6.43	September 30, 2022

Options

Metric	UpDn	This Week	Prior Week	Net CHG	% CHG
Implied Volatility	🔵	17.56	16.5	1.06	6.43%
Call Skew	🔴	-3.7	-2.2	-1.5	-68.18%
GEX Flip	⚪️	3,962.5	3,957.5	5	0.13%
Total GEX	🔴	1,729,124,767	9,957,199,179	-8,228,074,412	-82.63%
Skew Adjusted GEX	🔴	495,048,421	1,954,598,199	-1,459,579,778	-74.67%
Put/Call Ratio	⚪️	1.92	1.87	0.05	2.67%

Gamma by Strike - @tradevolatility

Gamma Change - @tradevolatility

SPX Skew - @tradevolatility

Open Interest for SPX - @tradevolatility

Futures

Friday's E-mini S&P 500 market was higher with the March contract adding 73.00 (1.86%), to 3988.50. Across all maturities, 1,623,361 contracts were traded, with 1,620,355 done in the March maturity. Combined open interest fell 21,779 (1.07%) to 2,014,965. March shed 22,089, or 1.09%, finishing at 1,996,007.

Option volumes were largest for the Jan E4A 4045 call (8,652) and the Jan E4B 3330 put (17,500). Greatest volumes in March option trading were seen in the 4100 calls (1,736) and the 3600 puts (4,847). Option open interest is largest for the Jan E4A 4300 calls at 16,765, and the March 3600 puts at 36,315.

E-mini S&P 500 implied volatility finished the day lower as the 30-day at-the-money dropped 0.94% to close at 17.90%. The 30-day historical volatility finished the session up by 0.85% to a one week high of 18.52%.

Larger TF (PRE-COVID HI → Present) BEARISH - Holding above the OCT HI 3955.75 (-0.82%) and Q4 VPOC 4000 (+0.29%) maintains scope for continuing the sweep up scenario to Q4 VAH 4085 (+2.42% and within +2σ). Notice the approximate convergence of the declining LTF (2022) Supply Line and Q4 VAH. Conversely, the inclining 2020 Demand Line has crossed above the OCT Breakout 3851.50 (-3.48% and within -2σ); < WLO creates scope for retesting this LTF bull v bear inflection. YTF and QTF remain synchronized 1TFD.

Intermediate TF (2022 → Present ) NEUTRAL - The ITF bull flag scenario was neutralized this week as the market auctioned back into the DEC VA, indicative of monthly balance continuation. ITF consolidation is evident below the LTF 2022 Supply Line. Responsive sellers defended the DEC 22 PB HI 4043 while responsive buyers defended WLO.1 resulting in a neutral position of close (owed to Friday’s short-covering rally). We remain considerably above the 1TFU MTF ending point: DEC LO 3788.50 -5.1% vs. DEC HI 4141.50 +3.84% (within +2σ W).

Short TF (Trailing 8-weeks) NEUTRAL - W3 featured rejection above WHI.1, resulting in a characteristic backtest of the prior week breakout, ending in a 2-week balance. Friday’s covering flows were sufficient to revert back to the 2-month VPOC (highlighted above) - indicative of price action being controlled, for now, by the shorter timeframe. WTF 1TFU cessation threshold coincides with -1σ (W). Short-term bias remains neutral until resolution of the 2-week balance with marginal bullish lean whilst positive GEX remains in effect (above 3962.50 -0.65% ~200d MA).

TPO ETH v RTH (W4-23) BULLISH - Wednesday’s liquidation → Friday’s short covering price action is laden with weak structure. Friday, in particular, featured a rare quadruple distribution trend day. Short-covering can often weaken a market because it removes natural buyers. The resulting vacuum could easily spawn backing and filling →3950 HVN and -1σ D. BBZ 3978 → 3996.50 (above) will provide an early tell of continuation conviction at the opening of a busy news and earnings week ahead.

Bull v Bear

This Week (30d ATM 17.90% v 16.05% p)
Bulls will seek to recapture 4000, and ideally extend range > WHI 4035.25 (+1.17%) are within +1σ (W) expected. Upside: Q4 VAH 4085 (+2.42%); 4100 (+2.80%); DEC HI 4141.50 (+3.84% → extending MTF 1FU) are within +2σ (W).
Bears will seek to defend 4000, and ideally offer below the 200d MA and flip GEX negative below 3962.50 (-0.65%). Downside: WVAL.1 3846.25 (-1.06%); 50d MA 3936 (-1.32%); WLO 3901.75 (-2.18%) are ≤ -1σ (W). $PUT Wall 3820 (-4.22%) marginally beyond -2σ (W) expected.

Last Week (3988.50 MAR23 -0.75%)
Bulls will seek to maintain bid above 4000, and ideally extend range > WHI 4024.25. Upside: Q4 VAH 4090 (+1.79%); 4100 (+2.03%) are within +1σ (W); the DEC HI 4141.50 (+3.07%) is within +2σ (W) and would signal extension of MTF 1TFU.
Bears will seek to offer below 3973.50(-1.11%), and ideally flip GEX back to negative below 3957.50 (-1.51%). Downside: WVAL 3846.25 (-1.79%); 3900 (-2.94%); WLO 3891.50 (-3.15%) are within -2σ (W). WVPOC.1 3832 and $PUT Wall 3825 are below -2σ (W) expected.

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