Happy Sunday, friends! I hope the weekend has treated you well. It's time to start looking at the week ahead. Before we do, however, let's take a moment to zoom out.
Yields up, red alert. New highs were reached in the 2-year, 5-year, and 10-year last week, taking us back to yields we haven't seen in nearly two decades.
The 10-year yield tends to have a positive correlation with oil, and the oil supply deficit we're seeing suggests that prices may move higher from here, giving yields room to follow.
In fact, JP Morgan foresees triple digit oil as possible and even manageable. A goal that Saudi Arabia would like to see as the oil rich country is now targeting $100/bbl.
Retail sentiment remains conservative as the market has been less than rewarding for longs of late.
Professional investor sentiment is also relatively neutral here, but bulls and bears are both feeling a bit more confident (as seen in the second chart). We'll see who's right in the weeks ahead.
Goldman's Sentiment Indicator also reset from stretched positioning, indicating a more neutral environment for sentiment.
Hedge funds are starting to aggressively short the market, particularly fundamental long/short funds.
Last week also brought us the largest outflow from US equities since December of 2022, more evidence that the reset in sentiment has been impacting flows as well.
Hedge funds are largely focused on shorting single US stocks, without as much emphasis on ETFs or international equities, according to Goldman Prime Book data.
Managed money remains conservatively positioned in light of more conservative sentiment, and increasing selling within flows from hedge funds.
SPX 4300 has become a key level to watch as a put wall. In fact, it's likely the most important level going into next week.
Key levels to watch:
Call Wall: 4500.0
Gamma Flip: 4464.5
Gamma Level: 4450.0
Gamma Level: 4400.0
Key Level: 4350.0
Key Level: 4325.0
Put Wall: 4300.0
Vol Trigger: 4300.0
Key Level: 4250.0
Key Level: 4210.0
We remain deeply in negative gamma territory, provoking more of a chase dynamic from dealers that may choose to sell dips and buy rips as a part of their exposure hedging.
Last week we saw heavy selling, particularly within tech. TSLA shed 10.76%, AMZN fell over 8%. NVDA dropped 5.22%. There was some strength in healthcare and insurance, but it was largely a bloody week with about $1T in total market capitalization lost in US equities.
Next week we have durables on Wednesday, Final GDP on Thursday, and PCE on Friday. Those will be the most important events to watch for me, but I believe New Home Sales and CB Consumer Confidence will get the market's attention if there's any meaningfully large deviation away from expectations in the reported data.
The Treasury auction schedule brings us $134B of note sales from Tuesday through Thursday. These auctions can be market moving events, particularly if they are better or worse than expected. The 2-year note will be especially important to watch in order to gauge the market's sentiment about Fed policy.
Earnings will be light this week, with some majors like Nike, Costco, Paychex and Micron reporting.
The market has been less forgiving after it reached levels of exuberance we had not seen since November of 2021. This "new normal" of increased investor skepticism amid a backdrop of rising yields, reevaluating the resolve of the Fed and stickier than hoped for inflation is likely to persist.
As always, be nimble out there.