Due to several new readers to the Market Note, let's take a moment to provide the purpose and design of this weekly missive.
The Note evolved from providing a structured and systematic process of a market call and assessment to a quest to crack-the-code of the market. That code is highly quantitative and risk-controlled with dominance in certain derivatives, strategies and potential catalysts because, in the case of SPY, SPX Indices, and SP500 E-Mini Futures, this is where capital often begins to flow through the marketplace. Thus, it's efficient to look at a broad basket of derivatives, then sectors to individual stocks. As an aside, only a small portion of the work product created is provided each week, so if there are instruments or pivots, let me know and those will be considered.
Several key insights were uncovered or levered from my extensive career of trading equities, derivatives and a deep understanding of investment dynamics and structures.
At its core, markets are an anthropomorphic collection of millions of investors and traders seeking a return. Price will not move unless there is an order imbalance caused by dominant buyers or dominant sellers. Price is continually moving in its search for equilibrium. This is market-generated information.
The advent of multiple weekly expirations of S&P 500 options provides key insight into market expectations for risk. Since billions of dollars are trading in this liquid product, we extrapolate the implied volatility to derive an expected move for how far the market is likely to move over the week. Any violation of the upper or lower bound will bring dynamic hedging and often results in rapid moves towards a new equilibrium of balance; otherwise, a rapid reversion back into the expected range will occur. When we trade within market expectations, the market is efficiently pricing risk, and if it is not, then that price is deemed inefficient.
When markets are out of balance or asymmetric, the most aggressive moves often occur. Boundaries and levels aid in anticipating where the market is most likely to trade towards or away from current price. Time and again, price acts magnetized in the direction of these key levels.
Levels and the market's pricing of risk provide a framework for an accurate overall assessment. It then is a matter of waiting for a catalyst, or depending on the timeframe and strategy, monitoring the order book for order imbalances. Additional proxies can also be employed to understand the nature of the informed or uninformed trading activity in an instrument for a complementary edge.
Known catalysts present themselves through observing the seasonal backdrop, current market focus through implied correlation's tilt towards macro or single-stock factors, key economic releases, Treasury auctions, earnings releases, corporate share repurchases (buybacks), conferences, and most importantly, Federal Reserve policy changes and key FOMC member speeches.
The Treasury Market and consequently the Financial Sector are the current keys to overall market health; therefore, we closely monitor expectations for Federal Funds Rate hikes or cuts, probabilities and other key catalysts.
Therefore, the flow of the Notes is to provide insight into what the market is expecting for the new week, what actual levels the market may key off, what the current trend and bias is, what known catalysts may move price, and any other data and experience to aid in more actionable insights.
Finally, if what we, and the market anticipate will happen doesn't occur, the opposite move is often more reactionary.
Let's get to this week.
As I type this, the SP500 E-Mini's are selling off in Globex. We will let the narrative unfold, but likely reasons are Trade and Impeachment.
Expectations for a rate cut in October soared with growing economic headwinds making their way from abroad to the US, especially after the weak ISM Manufacturing and ISM Services data.
Currently, there is an 81% probability for a rate cut at the next meeting on October 30th, and a near certainty for at least one more rate cut this year.
For now, bad economic news, as seen last week, is good news if another rate cut is imminent.
Looking ahead, volatility is still elevated with the SP500 Weekly Implied Move at + / - 53 points or 16.4% implied volatility. The implied moves are 3005.19 and 2898.83, respectively. These are boundaries for which a violation will ignite dynamic hedging.
We have new weekly, monthly and quarterly magnets. As often, we expect for the weekly magnet to be tested early to establish bias.
The SP500 closed at the upper edge of the volatility channel on Friday. Resolution will set the tone for the intermediate term.
Weekly Trends have shifted with focus remaining on Treasuries and Financials.
After a week with large realized volatility, it's helpful to identify leaders. Below, two dispersion models focus our attention on single stocks, sectors, and industry groups (not shown).
Here, we see Homebuilders, REITS, Utilities, and Insurance dominating our dispersion model.
Turning to known catalysts, Economic Releases are moderate with Fedspeak, and once again, binary risk around Tweets, Trade, and Impeachment.
Updated 4-hour Pre-Computed Levels.
Have a great week.
All the best,