SPY Tech Anal: Spooky Season for the markets October

[Yong]

Starting this thread for the big brain NI.

I’ll probably do my TA later tn, but from what I see, we have increasing volume on this selloff heading into Friday. I suspect more selling to come as the daily and weekly has increasing volume on these sells while the monthly has still high volume selling with a solid red bar.

Also, October is the seasonal time where we double dip into lows and then rally into EOD, so it’s not unreasonable that we keep selling off halfway into October before the Santa rally.

Given the harsh selloff EOD Friday, I still see a lot of bears present and looking to sell. I expect another red week and a bottom within 2 weeks though for a big bounce.

[Yong]

TLDR: I expect more downside, but to bottom sometime in October for a Santa rally

On the hourly chart, the RSI and MACD are still below the 0 line and in the negative bearish region. We made it to the MACD then immediately shat down hard EOD. Bears are still active and I believe that this is a sign that we’re not due for a big rally for a bit

On the daily, we had a huge red candle where we couldn’t hold the gap fill. We had increasing volume on this sell off with the RSI and MACD on the daily in the bearish regions. With us unable to hold the gap up for the last 3 days and increasing sell volume, I don’t have much confidence that we’re going to push up from here.

The weekly also had a losing week, although it did have a bottom wick. But we had increasing volume on this sell off. With the continuing increase in selloff volume, I see bears in control. The RSI is rolling over into below the 50 region again on the weekly, which usually means we’re going into a longer term bear trend. Makes sense with the Fed being hawkish and data not so good. MACD has rolled over and not looking like it’s gonna roll back over.

On the monthly, we have a lower volume, but still similar volume as previous month and the last few bullish months (volumes are all looking at SPY). Seems like the monthly charts are showing that we’ve topped and we’re going to continue on with the drop. This is a big solid red candle and each monthly chart that ended like this has led to much more downside on the next monthly candle.

The VIX had a big bottom wick on Friday, but we’ll see if if can continue to head higher or if this is just setting up a lower high on VIX and higher low on SPX and markets.

The dollar is on a strong run and it had another bottom wick. Since the dollar doesn’t seem to be pulling back, I think there’s a good chance that we see a strong dollar and weakening markets.

One bullish sign that I see is that the JNK is not making as deep lows as the markets. Maybe this shows that we’re actually going to set up a higher low and rally up here.

Overall, I see lots of bearish signs that I think that October will have more red until we price in the Fed being hawkish or see data be not as bad, then have a Santa rally. Gl all

[The_Ni]

Tl;dr - Need to keep an eye out on which way bond yields and USD goes to determine if the bottom is in. We’ll likely need this week to sort that out.

Overview

Thanks Yong!

Indeed, it should feel like we’ve hit the bottom, but that’s not what it feels like. Considerations:

• We bounced solidly off of the MOAT (mother of all trendlines), which is bullish.
• We’re stuck below 20, 50 and 100SMA, which is bearish. There’s also the downward channel.

For now, the fate of the market seems to be strongly affected by bond yields and the USD. (Technically its yields that drives DXY, but internal responses can also affect the latter.) Both took a breather at the end of last week after roaring upward since FOMC. Since bond yields can’t go up forever, at least in one go, we can keep an eye out the lond end flattening to feel good about the bounce back.

Personally, I’d feel solidly good over the 4400 level, which is also where the 20/50/100 SMAs are.

It was also good to see IWM, the main street tickers, reject its lower trendline.

Structural Consideraions

Vol trigger is 4350 and put wall (support) is at 4200. This puts where we closed (4288) somewhere between the two, suggesting that we can at least expect some volatility, as well as decisive moves in some direction or other. We have various macro metrics being published this week, culminating with Jobs numbers on Fri, so this first week of Oct can get toasty.

Oct opex related flows should really start taking hold from next week, so where we end up this week will be important. If we can end up over positive gamma territory by Fri, that would be great. The magnet stuff can start happening from there next week.

Market Indicators

Most other charts seem to suggest it is reasonable to expect that the bottom is in.

VIX never made it over 20, and is curling down already. Not much stress there.

The MOVE index, which is the bonds’ VIX, spiked last week (expected), but made a lower high. Again, not much stress.

The number of S&P tickers that were over its 50SMA was as low as it has gotten during recent lows.

The only thing that gives me pause is the uptick in high yield (junk) bonds. But its nowhere near March, or earlier, so doesn’t seem too worrisome.

Sentiment Indicators

The Fear and Greed Index, and the AAII Investor Sentiment Survey both suggest significant deterioration of consumer sentiment, reaching previous lows. Which is great, as these often signal the bottom.

Big Picture

Based on the data presented above, it seems that we should be near the bottom. We might need a retest of a few things this week, but as long as they hold, feeling optimistic.

On a longer timeframe, we have earnings starting next week, and expectations are positive from it. There is the overhang of lots of bond selling and that will put some pressure on the markets, but it’s the fourth quarter, every fund manager wants their bonus, and negative performance is not good for that.

As noted above though, bonds still have the ability to unend all this, and if they do, it will be in a major way as we are already at a bottom, so let’s keep a close eye on that as we trade.

Good luck!

[The_Ni]

Welp, the super-hot JOLTS report donkey-punched SPX through all those trendlines … need new ones now.

We’re closing up on the 200SMA, which is deeply bearish.

Bonds reacted strongly to that report, going up near parabolically like a low-float de-Spac…

Some additional signs of concern include VIX going over 20 intraday after a long while, realized vol starting to creep up, and MOVE index (bonds) spiking.

We have ADP tomm, initial jobless claims on Thu and NFP on Fri - together, we should have a pretty good idea on whether this Jolts number is an anomaly or if we actually have a resurging job market. If the latter, markets are likely in trouble as yields will probably shoot for the stratosphere anticipating Fed action.

Having said all that, once the onslaught of data ends and bonds stop throwing a fit, we will be left with a situation where markets are even more oversold (% stocks < 50SMA below) than what we started the week with. I’ll be sitting tight till Fri, and then, NFP and unemployment numbers willing, consider opening up positions for a rebound.

[The_Ni]

Tl;dr - let volatility be our guiding star this week.

At least the first few days of next week will likely be affected by the ongoing Israeli-Palestinian conflict. Far be it from me to attempt to predict a direction, but what I’ll be looking at is how volatility moves over the coming days.

If vol does increase enough, along with a dip back into negative gamma territory, MMs may help markets fall quite a bit. Note that we are two weeks out from monthly opex, so those flow effects become important again. It wouldn’t be the worst thing in the world to revisit the 200 SMA (around SPX 4206) properly. As one market commentator put it, “We didn’t really test the levels… we barely kissed it. It’s like how you kiss your aunt. I need to see at least some tongue!” Of course, vol increase will eventually dissipate, providing us with vanna tailwind. Along with the charm flows happening as we get closer to opex.

This is all to say that a day or three red days will only be pulling the beachball down so that it can do what it does when it is released - pop back up.

This likely only applies if vol increases, but there is no expansion of the scope of the conflict. If Iran gets pulled in, oil will likely spike, and then all bets are off.

At the other end of the spectrum… markets don’t pay too much heed to the conflict, and vol slowly evaporates. To state the obvious, markets will slowly climb, then.

[The_Ni]

Well, a war couldn’t keep SPY down. And so it looks like we won’t be getting tongue.

Many bullish signals, pointing out the ones that stood out to me:

• As noted yesterday before market open, vol would be the primary tell. And vol went down quite a bit, despite escalation on the ground. (Image 1)
• Bond yields are retreating. The 10Y is almost a full 25bps lower from its highs from just 2 days ago. The Fed speeches today could have something to do with it, or it could just be overstretched. Either way, this reduces pressure on equities. (Image 2)
• Breadth is returning - though nowhere near even yet, more than twice as many S&P stocks are over their 50DMA. (Image 3)

Finally, we are in positive gamma territory (4325), so things should be less volatile. As always macro can prick the , but for now … 4450 by opex (10/20)?

[Kevin]

Do you think the bond yield move was because of a flight to safety trade into buying bonds? But then if that’s true, then I would expect equities to be down as the money should come from somewhere.

The beakmap doesn’t show any obvious weak sectors either.

[The_Ni]

@Kevin

Do you think the bond yield move was because of a flight to safety trade into buying bonds? But then if that’s true, then I would expect equities to be down as the money should come from somewhere.

Sorry missed this earlier. Bond yields are going up probably from a combination of the reasons that put pressure on bonds:

• Economy continues to be strong. Jobs and PPI show no slowing down. If economy is strong, there is growth. Which leads to inflationary pressures, which increases possibility of rate hikes.
• Relatively low demand for bonds. We saw this today, when the 30Y auction was weak. Fewer buyers need higher yields to buy the same underlying.
• Higher supply of bonds. Treasury is dumping 100’s of billions of bonds into the market. Japan may be selling bonds to support the yen, and others to pay their import bills. All this supply lowers price of underlying (and so yield goes up).
• Better stuff to buy. Aka stocks. There is a general sense that we hit the bottom with almost-4200, and almost-200SMA. Fund managers chase performance, and relatively speaking, stocks promise that compared to bonds.

Here’s another thought that I don’t have evidence for yet, but seems to follow. It’s not just about the yield, but about the value of the underlying. Sure, the MAG7 don’t pay anything in dividends, but they are rock solid companies that recession will likely not touch, and do very well in a good economy. On the other hand, as rates keep going up, the bond values themselves go down - so it’s little consolation getting an extra 1% in yield if 3% of capital is lost.

Under these circumstances, it would be reasonable for money to move from bonds into MAG7 and other solid companies.

[Kevin]

Great commentary!

Haha my question was actually from a time of when bond yields were dropping, e.g. money actually going into bonds.

But yes today the yields are moving back up due to demand being weak + expectation on higher rates.

[The_Ni]

Tl;dr: Still cautiously optimistic this opex week.

Even though opex is on Friday and we should have been swimming in supportive flows, both macro (PPI, CPI, 30Y bond auction and UMich Sentiment) and news (Israel-Hamas conflict) got in the way of things. While we do not have nearly as many high importance macro items this week, VIX spiking the way it did on Friday suggests the Gaza conflict is playing an outsized role at the moment.

I contiue to be optimistic for a couple of reasons:

• Despite the red days, we are actually up +0.48% on the week. (As well as +0.45% the week before).

• We’ve gone up 150 points between Fri (10/6) and Wed (10/11), and so a 60 point pullback is not unexpected at all.

• VIX ended up near 20. If news does not warrant such heartburn, vol will go down, and will provide the nice vanna flow support. Vixpiration is on Wed, which also tends to suppress vol.

• The there’s charm flows (effect of time). Every moment something is not pulling markets down is charm flows pushing it up.

• Both investment grade and high yield (junk) bonds show no sign of systemic stress. This supports the notion that VIX is high because of geopolitics, along with the spike in gold.

• Buyers came in, as evidenced from number of S&P companies over 50SMA. (Image below) Still a long way to go, so much room overhead.
  

  

• Bond yields are taking a breather, after rising at breakneck speed. 10Y below.
  

  

Nevertheless, there remains some causes for concern, so we can’t get too comfortable:

• We made a third lower high since the Jul top. Lower highs are bad, m’kay?

• VIX did go up 20% when SPY went down only 0.5%. This is highly unusual. Vol unwind begets more vol unwind, so need to keep an eye on this.

• Bond auctions are continuing to absorb liquidity (which depresses equities because it takes liquidity from them). The 30Y showed there might not be as much liquidity to hoover everything up. If this is confirmed next week, and especially the week after when another 100B+ hits, this should be bearish. MOVE index also contiues to be elevated.

Earnings is the wildcard for this week.

In terms of levels, there is support at SPX 4280, and magnet at 4380. Vol trigger was 4357 on Fri close, will update on Mon. (Closed at 4327).

Overall, while we likely won’t see 4450 by Fri, still expecting to end closer to 4400 than not.

[Kevin]

$SCHW Charles Schwab seems to be on many radars for a potentially dreadful earnings on Monday premarket. This one should be kept on the watchlist for the earnings results. Could undo the Friday financials optimism.

[The_Ni]

Aggressive curve steepening and geopolitical concerns have caused SPX to be down 1.15% for the week so far. We are in deep negative gamma (VT = 4345), and IV is high, so it’s quite possible we have another red day to end the week.

If we do that, we’ll be back on the MOAT and the 200SMA.

Given that a ton of puts are ITM, especially if we end the week < 4300, this should result in some positive flows early next week from MM dehedging.

Of course… the conflict and the >100B bond issuance could mess things up next week, so I’m not feeling too certain about this. Nevertheless, will likely initiate bullish positions at the end of the day.

[The_Ni]

Tl;dr - Lots of red flags popped up last week, but no idea how long they will stick around, so will wait till EoM for clarity.

@The_Ni

Overall, while we likely won’t see 4450 by Fri, still expecting to end closer to 4400 than not.

Well, this expectation from 7 days ago turned out to be completely off. Things were looking decent into Wed morning, when Vixpiration happened, vol got a bit unpinned, and market puked.

One can choose what triggered the three days of deep red since - JPow, bond issuance, or weekend conflict uncertainty - but the result is SPX ended below both the 200SMA and the MOAT.

I have no strong feelings on bullish or bearish until the end of the month, but what I do expect is a lot of violence in one or both directions. For the simple reason that we are in deep negative gamma territory, and VIX and VVIX have both mooned since Wed. Great for day traders, painful for swingers.

I note “end of the month” because of the following reasons:

• JOLTs on Nov 1, jobless claims on Nov 2 and NFP on Nov 3 - feels like the labor market is the primary focus re: recession

• The Treasury’s Quarterly Refunding Announcement (QRA) on Oct 31 - this can materially change the yield curve, based on bond issuance amounts - you can see how the QRA on 7/31 triggered 10Y yields to start mooning, and go up a full 100bps since. And ~25bps of that just last week.
  

  

• We just had opex on Fri. Option flows will not contribute much for the next 2 weeks, and start up in earnest around Nov 6

There is also a lot of chatter around seasonability, market crashes and bad things happening in October. While this has no predictive value, widespread expectations of such things can drive bearish sentiments.

The next level we could look for support is in the 4120-4180 zone, which has worked as both support and resistance for 1.5 years.

Some other data points to keep in mind:

• DXY has been relatively flat for the last week, so likely no contribution of the USD in this move
  

  

• Breadth was returning to S&P until Wed, and then went the other way. Looks oversold, but not as oversold as it could be …
  

  

• Credit spreads are going up. Not quite as bad as duing the March '23 banking crisis, but about half way there.
  

  

All in, there are too many red flags that are showing up. But I can’t tell how long they will stick around. And so will wait until there is some clarity.

[The_Ni]

Interesting day. Equities and bonds started by going down right out of the gates, then literally at 9.45pm, Ackman tweets he’s covered his bond shorts, and market does a 180-degree.

At some level, it feels absurd to consider that something he says would move the bond market like so, but the timing is too perfectly synced to totally ignore…

But here’s where it gets even more interesting - from around 1pm onward, that lockstop move up breaks down. Bonds chill out close to where they peaked, but equities decouple and fall back down again. This kinda feels ominous …

We can see a similar pattern with DXY - probably just means that DXY moved with yields, and therefore that it had nothing to do with equities being down.

And … breadth has gone even lower for the S&P.

Overall, bearish.

Nevertheless, with big tech earnigs over the next 2-3 days, and 100B+ bond issuances to boot, we could go anywhere. And go anywhere fast, since we’re still in deep negative gamma.

So just watching for now.

[Kevin]

Bill Ackman has flexed his callout power before, e.g. when he announced a stake in DPZ (Dominoes Pizza) in a live interview it immediately spiked 7% in after hours that day or when he announced a stake in NFLX. I forget how much NFLX spiked but it spiked.

Bond yields moving with equities seems like a fear/flight to safety type of move. The fact that bond yields closed at the lows while equities lost its gains suggests that perhaps stock market is realizing that bonds are moving for the wrong reason. Not enough data to confirm yet though.

[The_Ni]

And … SPX’s dance on the knife’s edge continues.

Setup:

• Sitting right on the 50SMA and 100SMA
• Right around the lower trendline
• Deeply negative gamma territory (VT was 4300)
• Breached put wall of 4200, which may now act as resistance
• 1-ish year POC is just below where we are
• The next meaningful option-based support is around 4000
  
  

Catalysts:

• META is down so far, after ER
• 8.30am EST - GDP. Already expected to come in relatively hot; if hotter than expected, bonds will moon, with predictable bearish effect on equities
• 1.00pm EST - 38B 7Y notes being auctioned. If it is bad like today’s 52B 5Y one, we can expect a similar mooning of yields, again with predictable bearish effect on equities.

Now… IF some combo of GDP and bond auction puts us below 4120, there’s a chance we flush hard not just tomorrow, but day after too. Since day after is Friday, and for the last two weeks, folks have bid up vol, and have been reluctant to hold over the weekend.

We’ll have to play by ear depending on GDP and 7Y auction, but the setup is there for a bit of a flush.

Fwiw, if that does happen, money should be getting into bonds, and that will help stabilize some of the vol bonds have seen. That’ll take some time though, and would be on the other side of the flush anyway… but mentioning it as a silver lining kind of thing, that might also finally signal the bottom.

[Kevin]

Holy shit the expectation for GDP Q3 is 4.7%. That’s huge. Did the US economy really grow this much?

Bidenomics cooking the number hot?

[The_Ni]

We have an interesting setup for the week. SPX has fallen through the 50SMA and 100SMA, and is deep below the vol trigger (4300). Put wall is at 4100. So there’s room to fall.

We don’t have major news until Wed - with FOMC, and probably more importantly, the details of the Treasury’s quarterly funding announcement (“QRA”). If the latter is coupon/bond heavy, it will be quite bearish for markets.

In the background, we have equities still reporting decently well. And the markets are oversold.

Considering the lack of clarity I am feeling, will sit tight till Wed, then move depending on FOMC+QRA.