SPX in 2024: chronicling adventures of the Wood Dragon!

[The_Ni]

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:

• Moving averages, RSI and MACD (above)
• % of stocks over 20SMA, 50SMA and 100SMA
• NAIIM exposure index
• AAII investor sentiment
• Put-call ratio

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.

[DonDegenerate]

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

[DonDegenerate]

[The_Ni]

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.

[The_Ni]

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.

[The_Ni]

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?

[The_Ni]

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. )

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.

[The_Ni]

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.

[Yong]

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.

[The_Ni]

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.

[The_Ni]

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:

• YTD NVDA gains: 50.75%
• YTD QQQ gains: 6.09%
• NVDA is 5.25% of 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:

• YTD SMCI gains: 181.42%
• YTD IWM gains: 1.13%
• SMCI is 1.46% of 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.

[The_Ni]

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.

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).

[The_Ni]

@The_Ni

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).

There was no correction during the window of weekness beyond the two slightly red days after opex, so expecting the positive drift noted above to continue into the second half of next week. (Usual caveats around unexpected shockers apply.)

There’s a few pieces of news coming in this week around jobs and unemployment, but I don’t expect those to upend things much. There’s JPow’s testimony on the Hill Wed and Thu, but he’d have to say something really off base to disrupt the momentum. Structurally, we are in a supportive area too - vol trigger is 5095, and call wall is 5200. So we should be able to move up to 5200 without much resistance over the next few days.

Next week, we have CPI on Tue (3/12) and PPI on Thu (3/14), which could have potential to set off some alarm bells if they too come in hot; otherwise, the heavy quarterly opex should cause pinning into the end of the week.

It’s the week after, though, when we have to really watch our six. FOMC projections accompany the FOMC presser on 3/20, and markets should respond pretty solidly to any changes in those dreaded dotplots. Interestingly, VIX options also expire that very Wed (3/20). And all this is happening in the “window of weakness” when supportive options flows are weak or non-existent.

All in, expecting an easy ride into late next week, and then will wait till FOMC to decide on direction.

[The_Ni]

Well, Jpow was about as dovish as possible. He completely discounted the rising inflation prints, came up with a new metric of rising unemployment to justify incoming rate cuts, and did nothing to temper the animal spirits in the markets. One basic rule in the markets is one does not short at ATHs. And we are at ATHs for SPX. This makes me feel that we should reach 5300 by EoM. (RIP JPM collar trade.)

In terms of market structure, there is much overhead call gamma support. The large move yesterday did run past some of these market markers so we might need to digest today. Vol trigger is 5190, and call wall is 5250. We’d love to see call wall move up to 5300 or higher by the end of the day today to confirm this bearish view.

Given all this, my default view is onward and upward for the foreseeable future.

Meta point … what I am saying is also textbook “capitulation of short sentiment”. The circumstances are demanding this view, and almost forcing it. I know this, you know this, everyone knows this. And we have no choice but to partake, as “one simply does not short at ATHs.” The meltup that will continue sets us up for a correction sometime in the future. But these meltups can run for months, so I have no idea when that might be. Till then, it’ll probaby be more memes than structural analysis. Good luck! <:cheers:848949090771009536>

[The_Ni]

Call wall still at 5250 today, so probably more digestion and sideways movement today.

[The_Ni]

We got as high as 5265, but not quite 5300, as I was hoping in last week’s note. I continue to be bullish for a variety of reasons:

• The simplest reason that there is no good reason to be bearish.
• We are seeing rotation where other sectors are catching up to tech, which is taking a breather.
• Both investor sentiment and allocation are bullish.
• VIX is chilling out.
• No stress in bonds, spreads or USD either.

The only cautionary signal I see is 83% of S&P tickers are at 50-day highs, and we usually get some kind of pullback when this goes to 90%.

We’re still 3 weeks from opex, so positive flows won’t kick in earnest till next week. But if we can end this week green, 5400 might not be impossible two weeks from now.

[The_Ni]

Last Friday left us with a cliffhanger, ending with an inside bar. Aka “I need time to decide where I wanna go next.” Economic data suggested a robust laborforce and a resilient economy. That seemed to be enough to overcome both “no cuts for you!” Kashkari and the Iran/Israel slapfight. Biggest unknown this week is CPI, but difficult to see how that doesn’t come on the mark, or slightly hotter. Even if we go sideways for the next two days as VIX stays elevated, the VIX crush after, and then positive flows from opex in two weeks should lead us upward to 5300. Or at least that’s how I’ll be playing this coming week, barring some surprise. What will invalidate this is a day or two solidly below the 20SMA line, which we straddled on Friday.

[The_Ni]

Israel just bombed Iran a few hours ago, and Iran is pretending they intercepted it all. If this retaliation by Israel is defuse thus by Iran, it is possible that this round of the conflict will deescalate. In the last few hours, BTC, gold and Vix futures have all reverted to where they were before the attacks; crudo oil futures are half way back. If we see retracement by morning, it’s quite possible that we end up in a green day. Not just because of vol falling sharply, but also because a good chunk of the put negative gamma we are under will dissipate in the morning, and the rest at the end of the day. Dehedging flows can double the ball-resurfacing effect, with a triple helping from the fact that we are in deep negative gamma territory where MMs exacerbate movement.

This is all to say that if the market starts moving upward, not much can stop this train.

[The_Ni]

VIX did not go back down, and market did not march upward, as I was hoping last Thu (above). Nevertheless, since the window of this dehedging is not over until this coming Tue, I feel like there’s still a possibility of a bounce, as long as we can get over that SPX 5000 vol trigger, i.e. into positive gamma.

Other reasons to expect a bounce here is markets are just oversold at this point. Not just per RSI and MACD, but also % of stocks that are below their moving averages. Attaching QQQ here since its been leading the correction - only 18% are over their 50 SMA at this point. DXY has gone up sharply, and so has the 10Y yield (attached) - these tend to have pullbacks, as the move in a certain direction, and any pullback on these will give the market some reprieve.

In summary, will have a bullish outlook for next week, VIX allowing.

[The_Ni]

The anticipated bounceback has presented itself over the last few days, primarily fueled by vol dying. We are in a super tight range where call wall is 5100, put wall is 5000, and vol trigger is 5075. We will likely move into positive gamma territory today, which will slow down the speed at which price will move. 5125 is 50% retracement, and where 20SMA and 50SMA lie, so expecting price to flatten out around there until QRA/FOMC next week.