Navigating the Markets

I hope that everyone is having a great weekend. It's time to start preparing for what awaits us this week. But before we do, let's have a look at what's going on in the markets and beyond.

The personal savings rate in the US is falling again as consumers are contending with headwinds from rising prices and many wages not keeping pace.

Credit card borrowing has risen over $1 trillion, and interest rates on credit cards are at all-time highs.

We're also seeing an increase in delinquency rates on credit cards and auto loans, particularly within younger demographics and subprime borrowers.

In a nutshell, the bottom 50% of consumers are struggling while the top 20% are flourishing because they have assets that have risen quite a bit in price. It's a K-shaped recovery, and in aggregate the lower tiers of earners are getting hit particularly hard.

Credit are conditions tightening for small firms, and that is likely to put some pressure on the economy as the impacts work their way through in the form of less demand for workers and orders.
 

Commodities have broken down in terms of relative strength vs the S&P 500. This tells me it's not a great time to be long a large basket. Instead one must be much more selective about opportunities in the space. I continue to favor sugar, cocoa, orange juice, soybeans, and think after last week's correction natural gas may be interesting to watch.

The NASDAQ is showing positive momentum again using my momentum indicator. Often times these moves have continuation, so it will be worth watching closely to see what happens as breadth and momentum are showing some signs of stabilizing and improving.

I wouldn't say we're out of the woods, though, as we have new lows continuing to outpace new highs in the composite, which tells us that the smaller companies are still not faring well.

We saw a big boost in retail sentiment last week, one of the sharpest rises over the last year. This tells us that we are now in a period of excitement, where there's more buying from retail traders and investors. Not quite euphoria where they're maxed out, but certainly big rise from where we were.

Managed money also registered a moderate increase in overall bullishness, though not as pronounced as retail.

Goldman's positioning-driven sentiment indicator is approaching stretched positioning again, showing institutional participants are beginning to buy again pretty significantly.

Hedge funds were selling single stocks and buying macro products last week, with the overall flows showing them increasing long positiong in US equities. Though there was noteworthy selling in energy, financials, and communications and strong demand in real estate and consumer discretionaries.

We can see that hedge fund flow into larger single stock short positions and covering macro product shorts (as well as adding to longs). Once again this continues to suggest that there may be pockets of aggressively shorted single stocks that should upside continue, could present decent squeeze opportunities.

2023 is a banner year for money markets, registering the largest inflows ever and the longest streak of them in a long time. Meaning there is a lot of cash on the sidelines, so to speak. But whether it is more interested in stocks or fixed income will be a key question.

Managed money bought the rip again last week, rather aggressively. This often does not end well as they've been a reasonably consistent contrarian indicator. That being said, however, they are nowhere near exhaustion levels of net long positioning.

Hedge fund gross leverage is back near recent highs, around 256%. This tells us that there is plenty of room for more volatile unwinds of long and short positions should the market move aggressively against them. One reason we sometimes see the Russell 2000 rally while the mega caps are getting slammed or why certain hedge fund favorites on the short side may rally as the broader market is selling off.

This is why some of these very crowded shorts could become interesting trades. Because high gross leverage often leads to violent squeezes if it happens to cut the wrong way.

We are back in fear territory with the CBOE equity put/call ratio pushing above 0.9. If it gets above 1 that tends to be a contrarian indicator that its a decent time to cover shorts and look for longs in single stocks. Combine this and what we're seeing with hedge funds and it continues to make the case that stocks with large short interest (20%+), high days to cover (10+) small floats (50M or less), and a skew towards puts (if optionable) could be attractive.

We can see SPX skew is staying elevated as we approach monthly OpEx, giving those passive delta and theta decay flows an extra boost. That means that as we start and end the trading day especially, these flows could provide a boost, or at least a buffer.

We can see SPX call buyers moved the wall up to 4450 after the market closed decisively above 4400 last week. This is a bullish development short-term, particularly when combined with the technical picture. But, make no mistake, last week's rally wasn't one on healthy breadth. Equal weight and small caps were not participating.

Key Options Levels (bold for emphasis)

Key Level: 4600.0

Key Level: 4550.0

Key Level: 4515.0

Gamma Level: 4500.0

Call Wall: 4450.0

Key Level: 4425.0

Vol Trigger: 4400.0

Gamma Flip: 4364

Gamma Level: 4350.0

Gamma Level: 4300.0

Put Wall: 4200.0

A move below SPX 4400 could amplify volatility as the gross gamma positioning there is the most significant on the chain. For now, however, I would look towards it as a potential level of support and see if the market gravitates towards it a bit magnetically and gets stuck around that level into OpEx. After Opex the market will be much more unclenched from gamma-exposure related influence and likely to move in a broader range.

We're back in positive gamma territory, with peak positive gamma around 4500 based on current positioning. That means moving above 4500 doesn't have as powerful of an impact on changing dealer hedging patterns, which currently suggest selling rips and buying dips or compressing volatility, which is likely to further solidify the lower volatility regime we're seeing in implied volatility until Thursday, after VIXperation.

Gold is approaching an initial area of potential support around 1915.8 where I will take off my core short position.

Silver is at a key LVN that may decide whether this dip continues to see price fall. For now sellers maintain control with price below the point of control, 20-day moving average, and trendline.

Crude may be basing, but I'm looking at 74.17-74.76 as potential support. I'd like to see if price interacts there before I get into any new positions here.

I remain constructive on soybeans, but I think that we may see some consolidation after slightly larger than expected potential crop yields.

We can see the lack of breadth within last week's rally even in the large caps, where there was narrow upside participation, largely led by mega cap tech.

Orange juice was back last week, clocking in a 7.19% gain, along with rough rice up 5.58%.

Palladium and natural gas collapsed last week, each down over 14%. Commodities are definitely seeing a big shaking up that's likely to put negative pressure on PPI in the month ahead and from there, CPI.

Next week we have at least 15 Fed speeches, which seems a bit much. I don't know about you, but at this point I'm really quite tired of Fed speakers. They don't have much to add to the narrative that drives the market as they approach their peak rate, and we're far enough away from the next meeting that it largely is less important.

The only caveat I would add is if CPI on Tuesday came in hotter than expected and they started talking about hiking in December that could definitely have an impact. Either way, I think we could deal with 2 or 3 and have plenty of input from our central bank rather than ... 15.

There's also PPI on Wednesday along with retail sales. Both of which are going to be important enough that they're worth watching the market reaction. Particularly in rates.

The calendar is so long this week from the speeches that I had to break it up into two parts. Friday brings us building permits and housing starts, which will give us a sense as to whether builders are starting to add to inventory. That will be important for XHB and getting a ready on the economy as well.

The Treasury auction schedule is all about the T-bills this week, with a cool $218 billion on offer. These are likely to be well absorbed, but it's going to be interesting to monitor nevertheless with so much short duration issuance that the market needs to reliably soak up and money market demand for the same starting to slow.

Earnings season continues full speed ahead next week, with a lot of retail reporting, along with some important tech names like Palo Alto and Cisco.

Seeing how the retailers do will give us a lot of insights on the health of the consumer. Wal-Mart trading at all-time highs is a sign that a whole lot of consumers have downgraded their spending habits and are trying to save anywhere that they can. I wouldn't take it at face value as a bullish sign for the economy.

As we head into monthly OpEx week, corporate buyback flows are expected to significantly increase. That could provide a further lift to the market. Many retirement funds are also topping up in November which adds more potential buying.

Seasonality also suggests that there is room to the upside as we close out November, but that it may be a bit volatile.

With seasonality, the post-OpEx period of more vulnerable trading in the S&P 500, and a variety of event volatility catalysts I would say that we're not quite out of the woods in terms of fattened tails in both directions.

I think we may see some attractive opportunities in volatility this week for adding to hedges or for opportunistic traders that like trading such things for appreciation of capital.

I also believe that it will be important to monitor inflation and other economic data for clues as to where rates may go from here. Which, in turn, are likely to impact sentiment in equities, particularly of the longer duration non-mega cap variety as well as gold and silver.

As always, keep an open mind and trade the market in front of you.