SPX in 2024: chronicling adventures of the Wood Dragon!

2023 ended just a whisker away from SPX’s all time highs. It would be a shame to not kiss that level at least. Folks coming back to realloacte funds for the new year, and pre-opex supportive flows should see it happen.

Generally, the markets are extended by most measures:

Nevertheless, rates, DXY and global liqiudity levels continue to be supportive, so there does not seem to be any imminent trigger for a rollover.

And as usual, we are entering the two weeks before opex, so we can expect supporting flows from all that positive gamma all the way up to SPX 5000:

Thus, expecting mostly positive movement into opex (1/19).

Some smart people I have learned much from have been calling Jan 17 (Vixpiration) to be the start of the correction. Other near term potential inflection points are QRA announcement on Jan 29 (bond/bill issuance), and FOMC on Jan 30 (will Fed cut rates?).

What happens after that really depends on how the economy continues to respond to the lagged effects of all the rate increases under our belt, along with global liquidity levels, EPS revisions, and of course, the occasional thing that will go bump at night.

Here’s a list of end of 2024 targets from Wall Street’s best and brightest (h/t @DonDegenerate). Note that they all missed 2023 by being too bearish…

On an admin note, @Yong I’ve started this annual thread as volume had died down for our monthly threads on this topic. And it’s nice to be able to go back months at a time without having to scroll through multiple threads.

Everyone, please share any perspectives you have on markets in this thread.

Re: Wood Dragon:

According to the Chinese Horoscope 2024, the dragon represents authority, prosperity, and good fortune. Those who were born in the year of the dragon are known for their captivating demeanour, distinct personality, and strong leadership abilities.

The Wood Dragon year 2024, when combined with the nourishing Wood element, will bring evolution, improvement, and abundance; it is the perfect time for rejuvenated beginnings and setting the foundation for long-term success.

3 Likes

I’ll attempt to pontificate here after a rough start to the year:

  • We’re seeing structurally lower VIX under 20 which has indicated a bullish period in the past

  • Statistically SPY averages about a 7-12% return after a 20% year; however, this return drops if January performance is poor

  • Political outperformers are positioned bullishly on the most part; however they are not nearly as aggressive in years past

  • Howard Marks, in his October memo, indicated that he expects a period of lower than average equity returns and to overallocate to high yield credit (i.e. junk bonds like SPHY or creditors like APO). Note: he did not say to sell equities.

  • Traditional recessionary signals such as the yield curve (10yr/2yr and 10yr/3mo) are still well under 0. Historically recessions occur 4-10 months after the crossover into positive territory (>0) suggesting recession in 2025. Of course, everyone is watching this so it may have declining utility this time around

If I had to guess, barring black swans, I would assign an 80% probability to SPX 5150 by year end, with a 20% chance of higher than normal returns at SPX 5500

2 Likes

imageimageimage

1 Like

Today should be interesting.

The morning’s numbers suggests a slightly stronger economy than expected, given stronger job numbers than expected:

This has already made 10Y+ yields start to go up. If this holds after market open, it will add to the headwind.

We are right on vol trigger - SPX 4715. Call wall is at 4800 and put wall is at 4600, so much room to move around. Below, and it’s negative gamma territory, where the 0DTE folks are likely to show up to tip the cow.

Will be important on whether we end up above or below the 20SMA by the end of the day - below, and we’ll end up into more weakness tomorrow.

1 Like

Last week was a bit all over … we ended up below the 20SMA, then finished Fri green.

Positioning this week is just like last week - we’re right at the edge of where positive and negative gamma switch. This is week before opex, so flows will be supportive, as long as we can get over the vol trigger.

All the major events are in the second half of the week:

  • Wed - 10yr auction
  • Thu - CPI, 30yr auction
  • Fri - PPI

Going in feeling somewhat bullish into next week, though prepared for it to be crushed by the 0DTE miscreants.

1 Like

Vol trigger at 4745 today, so we’re just above where positive gamma starts. Also just over 20SMA. Call wall is 4800, which will likely be resistance, if we get there.

10Y auction at 1pm today, though most eyes are likely on PM CPI.

Interestingly, looks like SPX is forming up a potential H&S pattern. 2 more green days ,CPI willing? :slight_smile:

1 Like

Tl;dr: Unlike the last two weeks, this week, feeling more bearish.

Big week this week - it’s vixpiration tomorrow, and opex on Fri.

Call wall is 4800, put wall is 4700, and most importantly, vol trigger is 4770. There’s a little bit of support around 4750, with 4700 as the last line of defense. If that breaks, we could go down for a while.

I’m still expecting a H&S patternt to play out. (Yes I did move the lines a bit because the #1 rule of TA is the old lines don’t work, just draw new lines to fit the narrative. :upside_down_face:)

image

Vol is up already with all the pew pew in the Middle East, and VIX becomes unpinned tomorrow. A heightened VIX will add to any selloff that starts.

Note that if we start falling fast enough, equity call LEAPS will start getting closer to ITM, at which point they start dehedging action. Things could indeed get spicy. As usual, 0DTE remains the dark horse to watch out for.

That H&S was invalidated, and market did not go down as I was expecting. Today is opex day when a ton of LEAPS are expiring. This can result in some volatility. Will be interesting to resolve again the fact that 4800 is now a very strong magnet and resistance, and we are in deep positive gamma territory. Vol trigger is 4765 today.

TLDR: I expect more upside before we start a big move down. I am starting 2024 as a gay homosexual bear

On the daily, SPX broke out to a new ATH with large volume. I expect this volume to continue on as people pile in on this choo choo train. But I think this is just a trap and we’re going to get a rug pull. The economy is not good enough for us to think it’s the start of a new bull market and with the high interest rates and jobs not showing strength, I believe we are going to see a recession soon. One reason why I believe that we’re going to keep going higher is because I think we set up a better bearish divergence on the RSI and MACD. Even now, we have a big bearish divergence, showing that although we have the volume and candles showing up, we don’t have the momentum underneath.

On the weekly, we already hit my rising channel, breaking upwards. I think with this breakout, we’re going to have more upside as we’re obviously stupidly bullish. We’re going to have some kind of blowoff top and then probably go back to retest the trendline, set up a lower high and then die. I think we’re still going to stay in this area and highs for around 2 weeks because the Fed meeting is in 2 weeks and I think markets are going to stay up with the hope that Fed will be dovish. Additionally, I think with 2 weeks, we’ll continue to set up a better bearish divergence.

The VIX is continously setting up higher lows, making me sense that underneath the markets, there’s some expectation of volatility coming up. This same thing happened before the 2022 top. VIX was continously setting up higher lows while the markets kept crawling higher. I think we’re going to see another higher low set up and then a bullish divergence on the RSI and MACD.

Additionally, I’m looking at the dollar. The dollar got rejected at the 200MA which makes me think that it’ll pull back and allow us to keep climbing higher. During this climb, I expect the dollar to set up a higher low, bottom and then continue to rise, giving us something similar to the 2022 trend.

The biggest thing I’m looking at is the 2 year and 10 year bonds. They’re on the brink of inverting and this is a huge sign of a recession incoming. I think it’ll invert within the month and we’re going to start to see the markets react to this.

Now looking at the percentage of S&P stocks above the 50 day moving average, we’re at the levels where we see tops form. We saw this again in the most recent pullback. I think we’re going to rise higher to set up a bearish divergence here as well.

Overall, I expect more upside into the Fed meetings, maybe with some volatility because of earnings, but continue the rise to set up more divergences and continue this breakout of the rising wedge. The markets are expecting lots of rate cuts this year and think that the Fed will be dovish, helping this hope. But, if we’re cutting rates, that just means that the economy is suffering and needs the cuts before the economy dies. But, if we don’t cut, that’s going to be bearish and markets will react badly. Either way, we’re going to see downside in the close future. Talking to people nearby to me, the job markets are horrible. Many of my uber drivers lost their six figure jobs due to cuts and many cannot get jobs. The economy is not as strong as it looks on the numbers and this bubble is on the verge of popping.

I expect a recession to start this or next year with the markets tanking hard either starting with this Jan meeting or March fed meeting. I am a super bear, but until I see the movement I like, I’ll keep climbing with the bulls because who knows when we’ll top. This is all just a retard’s crayons and crystal ball so this can age horribly, but that would be better for everyone’s 401k and retirement funds.

Good luck yall, trade safe and get your bag.

1 Like

We are about a week and a bit away from Feb Opex. SPX 5000 has massive amounts of gamma, and is acting like a magnet. Call wall is also there. Vol trigger is way below at 4895, so we should be stuck pretty much around here until next

The underlying situation is not that solid, though. Even though we are at ATH, breadth is bad - 38% of shares are below their 50SMA:

We had a good 10Y auction yesterday, but there’s a ton more issuance coming, and rates are still over 4% and it’s not clear they will remain at these levels.

And IWM is near the top of the range from recent times, but still far from an ATH:

None of these signal an imminent correction, but the “window of weakness” allows that to happen mmore easily after opex next week.

My default view is therefore that we stay flat-ish into middle of next week, and then correct a bit. Making the current move more one of exhaustion from overextension, and not consolidation followed by more upside.

It’s that time of the month again. Opex is behind us, after SPX pinned to 5000 into Friday. Note the bounce off of the 20SMA after the hot CPI print.

Given that this was an enormously call-heavy expiration (below), I’d expect some pullback as dehadging occurs.


(Source)

One thing that complicates what would otherwise be a pretty reliable script is NVDA’s earnings on 2/21 (PM). NVDA call buying has been insane, and skew is massively high. Along with other names in semis, and associated ETFs (SOXL, SMH etc.)

NVDA is also responsible for ~44% of QQQ’s YTD gains (working below). It’s sidekick SMCI is responsible for all of IWM’s YTD gains, and then some - IWM would have been negative without SMCI. (Workings below)

NVDA options have priced in a ~10% move for earnings. If they do not beat this and bring all the calls ITM, there is a chance that the dehedging flows could result in the start of a downward move that cascades through the incides too.

I don’t think that a miss will cause a “crash” though - more likely a correction, as there’s a lot of money on the sidelines who missed the rally over the last few months, and are waiting to buy “the dip”. Only if we fall deep into the negative gamma zone is there a danger of cascading down into Mar opex.

Thus, gameplan:

  • Wait till NVDA earnings for directional bets
  • If NVDA beats such that price goes up by more than 10%, the melt-up continues
  • Otherwise, we see a few percentage points of 5% correction

What do you think?

Workings

NVDA/QQQ:

Portion of 6.09% that is NVDA: 50.75% * 5.25% = 2.66%

As a percentage: 2.66%/6.09% = 43.75%.

SMCI/IWM:

Portion of 1.13% that is SMCI: 181.42% * 1.13% = 2.05%

So IWM would actually be negative YTD if it was not for SMCI.

1 Like

Tl;dr: If we don’t start a correction in the next few days, we could be looking at the melt-up continuing into the March opex (3/15).

Well, NVDA saved the market, beating expectations by enough to push up both its own price, and that of multiple indices. We were right on the edge of negative gamma, and at the 20SMA for both SPX and NVDA, too.

SPX ended at 5087, just below the call wall (resistance) of 5100. Interestingly, put wall and vol trigger are both at 5000. We’re solidly in positive gamma territory, so MMs should be supportive.

Are we at a top, now that we’re at record highs? Various indicators suggest … not yet. Tops happen when ~90% of stocks are over their 50SMA; current figures are more like 64%.

Institutional investors are not max allocated, and with markets moving even higher, those left out are likely to come back in again.

image

And investor sentiment is not max bullish either:

It also doesn’t seem to matter that recent bond auctions were bad. Perhaps part of the reason is that GDP is good, economy is stronk, unemployment is below 4% still etc.

As usual, there are storm clouds on the horizon. Vix creeped up even though markets were up. Too soon to say if this is the “unpinning of vol” that could lead to wide destabilization, especially if dispersion trades start to unwind.

And bond yields are marching up again, after briefly dipping below 4% a few weeks ago. It’s a third of the way to 5%; markets started panicking when we went over 4.5% last time.

All in, if we don’t start a correction in the next few days, we could be looking at the melt-up continuing into the March opex (3/15).

3 Likes