FOUR Days To Shutdown
Last week scored a follow-through win for the bulls: The Nasdaq 100 climbed 2.9%, its biggest daily percentage gain since May 26th when Nvidia gapped up on earnings.
The big news late Friday was that Moody’s Investors Service cut its outlook on the U.S. sovereign credit rating to negative from stable, citing higher interest rates and doubts about the government’s ability to implement effective fiscal policies. It was more of a warning then credit downgrade.
Maybe Moody's will change their minds in three months like Fitch did from warning in May to downgrading US credit in August. Meanwhile, the possibility of a US government shutdown looms in just four days as U.S. House of Representatives Speaker Mike Johnson unveiled a Republican stopgap spending measure on Saturday that quickly ran into opposition from lawmakers from both parties in Congress.
Tuesday holds a market-moving event as the October CPI is released, and a new way of reporting Health Insurance CPI could cause the print to be hot interrupting the two-week bull run.
Moving forward, health insurance will be a tailwind to inflation again (officially). But anyone who just got their HI premium renewals already knew that.Expectations for the core index rose 0.34% from September, raising the 12-month rate to 4.2% from 4.1%. The producer price index (PPI) data will follow on Wednesday 11/15.
Market Structure Matters
I analyze many sources of institutional and aggregate money flow to help better identify market direction, intensity and duration. Since my October 26th warning post: "Bounce Hard or Trounce Hard", it is evident that the outsized bounce in play since November 1st in particular should be slowing on waning momentum (technical exhaustion), but what do the flows say?
Option Gamma Flows:
The SPX traded as expected in a muted session ahead of the CPI report and was driven mostly by gamma dynamics (dealers buying weakness, and selling strength in a long-gamma regime).
@GammaLab
Here is an excellent thread on market structure (read: option flows):
$SPX This past week saw the most extreme retail gamma imbalance (-$14B) in history.
$IWM recorded the highest ever call OI on record.
With OPEX this week, participants will look to monetize delta-positive positions.
If Charm and CPI prove positive for the markets, it still doesn't change the cautionary outlook post-opex.
EMPHASIS: If Charm and CPI prove positive for the markets, it still doesn't change the cautionary outlook post-opex.
Quant Flows:
From #tiffs-gamma-flow
GS CTA Green Sweep: Currently short $6.1bn S&P (bought $35bn S&P the last week).
Watching these levels: ST 4338 | MT 4351| LT 4343
1 week:
Flat: +$38bn to buy
Up 2SD: +$37bn to buy
down 2.5SD: +16bn to buy
1 month:
Flat: +$41bn to buy
Up 2SD: +$42bn to buy
down 2.5SD: -$23bn for SALE
Fed/Treasury Net Liquidity Flows:
Since 11/1 Net Liquidity is up over 8% (average 1.2% per day). SPY was driven up almost 6% during the same period. Fed BS decreased by $40B but TGA and RPO decreased by $500B.
Most of the fuel for the move is now gone. @TwitKev
TGA is published at 3pm every day here (under "published reports"):
https://fiscaldata.treasury.gov/datasets/daily-treasury-statement/operating-cash-balance…
RPO is here: https://fred.stlouisfed.org/series/RRPONTSYD
As you can see, even thought QT continues, the RPO and TGA have been dropping more quickly (adding liquidity).
UNTIL BOJ or US Treasury screw something up like another BOND auction, or GOVT shuts down, or JOBLESS CLAIMS spike, flows want higher because nothing is falling apart and quants are in buy mode as are corporates from buybacks.
Short term potential: 4450 call wall then hourly gap fills at 4500 and 4576 are the very real potential/threat to bears, but I contend this IS the Santa Claus rally, and likely produce a "Fake Breakout, Fast Failure" into year-end. Remember, we have many gaps to fill all the way down to 4000.
Rate Cuts: Bullish or Bearish
In a nutshell: Buy the rumor of a Fed Rate Cut; Sell the news of a Fed Rate Cut.
Fed rate cut bets depend on the rate of inflation declining and the economy weakening. Market hears PAUSE with soon-to-be CUT and it rallies on falling yields. Pavlovian.
As long as economy doesn't crater with spending/earnings, market CAN move higher with falling DXY... until Fed actually cuts.
Shortest duration yields ARE rolling over. I am watching the 13 week US yield break and close below the 10W EMA for the first time since December 2021, at the same time the 10Y is on its way to break/close below the 10W at 4.5%. Not yet, but close.
This is a big change, technically, and is one of the key reasons equities are bullish - especially as USD has broken below it's $105.77 wkly close.
The result: the 10Y yield very well could pull back to 4.1% area in the next 3-6 months, offering up more support for stocks and bonds.
But just to confirm: I am still a big bond bear and have been steadfast since AUG 2020 that "Bonds stop going up".
But I can also see the dance - with intervention, with inflation waves, and with that the 10Y taking another year to advance up to my next PT of 6.5%.
In fact, last SEPT 2022 I called for 4.7% in the 10Y yield by end of 2023. We hit 4.99 before breaking back below. As long as we stay below 4.8%, I can see 4.5, 4.3. 4.1 and then it bases and heads higher next year.
So given my SEPT 2022 10Y prediction of 4.7% worked, I will venture a new one for Nov 2023:
My 10Y prediction for EOY 2024 is 6.5%.
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