Last week was quite the wild ride, with the markets clocking in significant upside. Leading the S&P 500 to close up 5.9% and the NASDAQ up 6.6%, which were both the largest gains since November of 2022.
Across the world we're seeing global central bank rate cuts at the fastest pace since August of 2022. If past is anything resembling prologue, then the weakening of the global economy may be leading us down the path towards some turbulence here at home.
Rate cuts are often a reflexive response towards a weakening local economy, and we can certainly see that weakness in global PMI data as well as Europe and China's wobbly economic situations.
Looking at rates in the US on the longer-end of the curve we can see that the drop in 10s helped to drive a bid in US stocks last week. Rate sensitivity was a big driver of the mark down of risk assets as rates were rising, so seeing them fall gave stocks an opportunity to bounce as the cost of capital dropped.
We're also seeing lower core inflation and wage growth, though still nowhere near the Fed's goal. Though there are some signs of the labor market beginning to soften, with non-farm payrolls coming in below expectations at 150K, the unemployment rate ticking up to 3.9% and wage growth decelerating to 0.2% month-over-month. JOLTS, however, remains elevated suggesting that there's about 1.5 jobs available for every unemployed and insured person seeking work.
Shifting over to the earnings picture, we're seeing downward revisions in materials, real estate and healthcare and positive revisions in communication services and energy. I continue to favor energy plays as I believe there are opportunities in the sector, particularly after oil's recent sell-off.
Last week was one of the most dramatic changes in one measure of breadth that I've ever seen in such a short time, with less than 20% of NYSE-listed stocks above their 20-day moving average to start the week and nearly 75% of the same above their 20-day moving average to end it.
This led the NYMO to showing a significant breadth thrust into overbought territory, which may provide an opportunity for the market to cool off a bit, but often is the case that when we see a strong rally on Friday, it carries through to Monday. Perhaps that brings us to SPX 4400 / ES 4417.75, where there's a large amount of net call positioning. More on that later!
Last week was also the first week about two months that we saw new highs outpace new lows on the NYSE. Looking below, we can see that 2023 hasn't really looked much like the bull market we experienced in 2021, where new highs consistently outpaced new lows as upside participation was much more broad-based.
This strong push higher was, in part, led by some of the lowest quality components of the market. The most shorted basket of stocks rallied up 13%, clocking their most impressive gain in almost a year. I identified the aggressive flows from hedge funds into shorting single stocks last week, now we're seeing the unraveling of some of those bets. Probably a good time for traders that were agile enough to take advantage of this rally to book gains (if not already).
Meanwhile, US banks are at an all-time low vs the S&P 500, suggesting that amid the rubble there may be some opportunities. Caution is required, however, as not all banks are created equal and some are perilously positioned with large unrealized losses in their loan books and duration portfolios.
Emerging markets may be another area of interest, particularly outside of China, as the ratio between US and EM equities is most blown out it has been since 1971.
Looking at relative strength to identify trading opportunities, we can see a significant outperformance by large cap value vs growth. I believe this trend is set to continue as we have had a rather significant increase in rates over the last few months and that tends to both benefit value and hurt growth as we see managers with the flexibility to rotate from one factor to the next, and growth underperform in an environment where the cost of capital is elevated.
We can see the same in the small caps, with IWN (value) outpacing IWO (growth) meaningfully since the summer. In fact, this relative strength preceded that which we're seeing in the large caps, and I believe it was an early indication of shifting risk appetites. There's likely more to this trade, but after the move we've just seen in it it may need to cool off a little bit first.
EWZ (Brazil) is outperforming SPY here, which also has me more interested in looking at EWZ as a potential swing trade on the basis of relative strength. The concentration in PBR and exposure to Brazilian currency, however, does mean that I would be cautious with position sizing.
Japan is outperforming China, and meaningfully so, suggesting that this momentum-driven trade has further to go as Japan's market is objectively cheap and China remains in trouble, with Xi seemingly reluctant to do much more than speak in grand overtures and underwhelm with lackluster stimulus. Unless and until the situation in China changes, it remains an area that I would favor no or negative exposure.
Low volatility large caps are taking a much-needed breather vs their high beta peers. If one missed out on this trade, this may be a decent place to start building a position.
Retail sentiment just registered the third lowest reading of 2023, as us home gamers aren't as optimistic about the market's prospects
Bearishness rose markedly to 50.3% and bullishness dropped to 24.3%. After readings that are this exhaustive we typically get a sizable pop in the market, and sure enough we did get just that last week. Important to remember that this data was collected for the week ending on November 1st, meaning it's up-to-date as of Wednesday (before a big chunk of the rally played out). It will be interesting to see how it evolves from here.
Managed money sentiment has dipped below neutral as of the end of October, but nowhere near the exhaustive sentiment reading we just registered in AAII.
Goldman's positioning-driven sentiment indicator is showing moderate long positioning. Nowhere near the stretched levels we've seen over the summer, and certainly it never registered exhaustively light positioning in the most recent drawdown.
Last week brought us the most aggressive TLT call buying on record as bond prices surged on the news that the Treasury wouldn't be issuing quite as much debt, particularly on the long-end, as was expected. Though some modicum of caution may be warranted as the Treasury often upscales their issuance mid-quarter, and that may cause bond traders to reevaluate supply vs demand mechanics.
Managed money did not aggressively buy last week before the rally began to intensify. NAAIM data is current as of Wednesday, which shows us that this time around they did not buy the dip having been burned recently. Instead they exhaustively sold into it, and their current positioning is the second lowest net long exposure of 2023. One wonders how much FOMO buying they did on Thursday and Friday.
Goldman's prime book data on hedge funds shows very high levels of gross leverage. This is important as hedge funds have been aggressively shorting single stocks and the Russell 2000 while buying mega caps hand over fist. That's one reason we saw an actual squeeze last week in the most shorted stocks and the small cap index.
These same hedge funds have the lowest net exposure to US equities in over a decade, preferring to park funds in Europe and Japan's risk assets instead.
Bank of America's private clients also have the highest allocation to cash and t-bills that we've seen since 2010. I believe a fair amount of this cash will be destined for longer duration fixed income, but some could certainly find its way into the stock market as well.
Goldman's CTA model suggests that there may be a lot of buying to do should we see this upside push continue, in upwards of about $60B of S&P 500 exposure.
There's a similar picture across US Treasuries, though it is less sensitive towards price, suggesting that CTAs are likely to be marginal buyers regardless of where the market goes, but of larger size should note and bond prices be "up big" showing a shift in momentum.
This same dynamic extends to global debt as well.
I like to look at the CBOE equity put-to-call ratio (that means I am excluding index options as they tend to have far more hedging activity and that can cloud signal).
The current reading suggests we're back in greed territory. Not quite euphoric, but certainly a very "risk on" mood from stock and ETF traders expressing their views in the options market. This type of reading is often somewhat exhaustive and tells me that short-term some level of caution may be warranted, particularly when combined with what we are seeing in NYMO and the number of stocks surging above their 20-day moving averages on the NYSE.
This doesn't mean the rally has to immediately reverse, but what it does suggest is that we're getting a bit lopsided by some measures -- which is quite a contrast to sentiment in retail and to a lesser extend managed money, as well as the most recent NAAIM data on positioning. Mixed signals, to be sure.
The wall of calls at SPX 4400 (ES 4417.75) is a rather significant potential obstacle for the bulls this week, with positioning there having grown meaningfully last week.
Here are the key levels to watch for the week ahead. Our Traderade+ Discord bot Gir is able to provide these anytime he is queried with !spx for the S&P 500 and !es for the S&P 500 e-mini futures. Levels in bold are the most consequential to watch.
Key Level: 4550.0
Gamma Level: 4500.0
Gamma Level: 4450.0
Key Level: 4425.0
Call Wall: 4400.0
Key Level: 4375.0
Vol Trigger: 4350.0
Gamma Flip: 4316
Gamma Level: 4300.0
Put Wall: 4200.0
Key Level: 4100.0
Last week we also managed to push back into positive gamma territory, which is certainly constructive as it is likely to reduce volatility as dealers tend to be sellers of rips and buyers of dips as they hedge gamma exposure.
Skew also rose quite a bit last week, and this is likely to add passive delta and theta-decay flows this week as we approach November OpEx on the 17th. The market is relatively well-hedged given the drop in overall positioning and the increase in put exposure via SPX.
Commodities had a brutal week, and we can see that with the relative strength of the commodity index vs the S&P 500 retreating meaningfully. Though I don't believe the commodity story is over quite yet, and this may actually be an area of opportunity to start looking at gaining some long exposure.
For example, while oil's drawdown was violent and cut deep, it also led to the lowest WTI Net-Longs since 2021. That makes me quite bullish as I tend to be contrarian when it comes to CoT positioning that is this extreme.
I also am looking at DBA vs SPY and thinking it's time to add to this position again as agriculture is likely to continue to see some upside and this ETF's weightings have made it an ideal way to play momentum in the space.
Last week the Russell 2000 rose by 7.4%, infuriating Horse who rightfully believes the small cap index should be trading closer to 0, or even negative infinity. Much of this move was likely driven by short-covering and some being caught on the wrong side as we had a classic head fake look below that led to explosive upside. Japanese equities and the NASDAQ, which tend to move in tandem, also clocked impressive gains approaching 7%.
The VIX, orange juice, oats, and soybean oil were smashed lower, with the VIX leading the way down having fallen a whopping 24.24% on the front month contract.
The S&P 500 showed powerful upside breadth, with the majority of the large caps listed clocking in gains last week.
This sort of breadth is exactly what I have been wanting to see to say perhaps the market's overall health is improving, but one week does not make a new trend.
Let's see if this upside breadth can continue in the weeks ahead. If not, it may be yet another head fake. If so, it could be an indication that equal weight and small cap factors are worth consideration as longs because in every bull market since 1982 they outperformed the market cap weighted S&P 500.
This week will be one of, yup you guessed it, lots of Fed speakers. Our favorite market movers! You have to admit the blackout period was great. But now that they're back, we have to account for that driver of tail risks appreciating in both directions all depending on what they say. Especially with Chair Powell's speech on Wednesday at 10:15 am and again on Thursday at 3:00 pm EST.
We also have some key economic data coming out, but it is a much more quiet week for data than those prior. I'll be most interested in initial jobless claims and the UoM Consumer Sentiment data.
Treasury auctions pick up again next week with $112 of notes and bonds on offer by the Treasury on Tuesday, Wednesday and Thursday. These auctions will be very important to watch to measure whether this appetite for US government paper continues.
We're also expecting some majors to report earnings next week that could move the markets, including Uber, Devon, Marathon, Petrobras, Warner Brothers Discovery, Twilio, HubSpot, and The Trade Desk.
Earnings reactions have been very mixed this season, and making plays around earnings has been risky as volatility is about 4.25x that of the last 25 years of earnings seasons this year.
After the most recent pullback we saw markets surge higher. Whether there is room beyond SPX 4400 to the upside remains to be seen. Looking at prior corrections, the average return was 10.38% from trough to peak over the two months that followed, meaning about two thirds of that return has already been experienced as of last week.
During the Midweek Update video Horse and I discussed the natural flows that provide upside potential for the month of November, from the resumption of buybacks, to the passive bid from options dealers as we approach OpEx, to pensions topping up and CTAs buying.
We're very much in the midst of these constructive flows, so we can reasonably expect that if downside does resume, it could be buffered by the same. On the other hand, bulls have a reasonably decent opportunity to keep pushing here, and if they are able to get above the wall of calls at SPX 4400, I think they could keep this rally going for a while longer.
As a result, I'll be entering next week with a very neutral bias, letting price guide my shorter time frame US equity trading because we have a lot of mixed signals in this market. I will, however, be more encouraged to take longs in commodities and pair trades as illustrated above.
Best of luck out there, and be nimble.