We've reached the end of the third quarter, which means earnings season is around the corner along with some changes in market dynamics.
Beginning of quarter and month flows should pick up again, along with some of the passive delta and theta decay flows that may provide a passive bid to the market.
Let's look at what's going on.
Core PCE is rolling over, seeing the first sub-4% reading in two years. This is good news on the surface, though there is evidence that in other areas prices are starting to rise again, including services and energy.
Meanwhile, speaking of the potential for rising prices, this chart suggests that real assets may have their day in the sun again. While it is just a ratio, what's interesting here is that we're also seeing structural scarcity for a lot of important commodities like energy, base metals, and areas of agriculture.
Sentiment remains in the neutral zone from institutional investors, with bearishness creeping up and bullishness fading.
AAII retail sentiment is pretty washed out. It's not quite an an extreme low, but it's close.
Managed money positioning continues to fall, closing in on lows for the year.
The most important levels to watch are in bold
Call Wall: 4500.0
Gamma Flip: 4442
Gamma Level: 4400.0
Gamma Level: 4350.0
Key Level: 4315.0
Put Wall: 4300.0 (may act as resistance now, but price is likely to be pulled towards it if close)
Key Level: 4290.0
Key Level: 4275.0
Vol Trigger: 4250.0 (below could set off more selling and a larger amount of volatility)
Gamma Level: 4200.0
Key Level: 4150.0
Key Level: 4100.0
Gamma Level: 4000.0
4200 and 4300 are the most significant net gamma exposure levels.
4300 is also the largest area of overall gamma exposure on the SPX options chain.
We remain deep in negative gamma territory, which is likely to increase volatility.
Skew remains low, but with long positioning coming off the lack of demand for hedges makes sense.
AMD, NVDA, and NKE were bright spots, but overall it was a volatile week. Utilities were the weakest sector, with semiconductors and energy showing strength.
Next week is a very busy week for data releases, with ISM Manufacturing PMI on Monday, JOLTs on Tuesday, ISM Services PMI on Wednesday, and Non-Farm Payrolls on Friday along with the Unemployment rate.
We also have a cadre of Fed speakers as potential volatility catalysts.
The fourth quarter on average yields about a 5% return in the US stock market, suggesting that it could setup for a favorable environment. Rising rates and a strengthening dollar may jeopardize that outlook, however, should those trends continue.
This chart from bank of America shows prior bubbles as well as the current bubble.
At some point, with valuations as extended as they've become, the lack of earnings and rising rates are likely to matter more than they have so far this year.