Weekly Trader's Outlook

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The regular Q2 earnings season is over now, though not all companies follow a standard calendar year. This week four S&P 500 companies reported Q2 earnings and three of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.

Overall, 498 (99%) of companies in the S&P 500 have reported Q2 results so far. Below are the aggregate beat rates relative to the final results from recent quarters.

From a growth standpoint, Q2 earnings were -5.8% year-over-year, versus an estimate of -6.8% when Q2 ended. Q2 revenues were +1.0% year-over-year, versus an estimate of -0.4% when Q2 ended. This compares to final growth rates of -2.8% and +4.3% respectively in Q1.

• Core CPI for Aug: +0.3% vs. +0.2% est
• Treasury Budget for Aug: $89.2B vs. -$232.5B est
• PPI for Aug: +0.7% vs. +0.4% est
• Initial (weekly) Jobless Claims: 220k vs. 225k est
• Retail Sales for Aug: +0.6% vs. +0.1% est
• Import Prices for Aug: +0.5% vs. +0.3% est
• Export Prices for Aug: +1.3% vs. +0.4% est
• Industrial Production for Aug: +0.4% vs. +0.1% est
• Capacity Utilization for Aug: 79.7% vs. 79.3% est

• CPI for Aug: +0.6% vs. +0.6% est
• Core PPI for Aug: +0.2% vs. +0.2% est

• NFIB Small Business Optimism Index for Aug: 91.3 vs. 91.5 est
• Business Inventories for Jul: 0.0% vs. +0.1% est
• University of Michigan Consumer Sentiment (Prelim) for Sep: 67.7 vs. 69.0 est

This was a fairly heavy week for economic data and it included two key inflation reports; the consumer price index (CPI) and the producer price index (PPI). At +3.7% the headline August year-over-year change in the CPI ticked up again (from +3.2% in July) and it came in just above the +3.6% estimate. At +1.6%, the headline August year-over-year PPI also ticked up (from +0.8% in July) and it came in above the +1.3% estimate. As shown below, these two monthly upticks follow 12 consecutive downticks (red box) from July 2022 through June 2023.

Sector performance remains mostly cyclical again this week. Here is the 2023 YTD (versus 2022 full-year) performance of the market broken down by the 11 market sectors (as of the close on Sep. 14, 2023):

Here is the 2023 YTD (versus 2022 full-year) performance of the major U.S. equity indices (as of the close on Sep. 14, 2023):

With the SPX +47 points (+1.1%) through Thursday (Sep. 14) it looked like last week's outlook of Neutral was a little off the mark. However, with the SPX -42 points as I'm writing this (midday Friday, Sep. 15) it may turn out to be right on target.

The SPX has been battling with the 50-day SMA (currently 4,483) for the past four weeks now, and with few upside or downside catalysts on the horizon, it is difficult to predict when/if it will break away, or in which direction it might go. In a mostly sideways market, technical thresholds tend to remain relatively static. Thus longer-term resistance remains at 4,600, the daily gyrations continue around the 50-day SMA, and support remains at the 100-day SMA (currently 4,363).

The federal government's fiscal year concludes at the end of September. As I mentioned last week, the House and Senate are expected to pass a continuing resolution (CR) to keep the government funded for the next couple of months until a deal can be reached. However, even with a CR deal, a shutdown could still occur after it expires, likely before year-end. As you can see below, equities were either flat or positive during the past eight shutdowns.

September option volume is averaging 42.1M contracts per day. That is below the final August level of 44.5M, and slightly below the September 2022 level of 43.5M. February 2023 remains the current all-time monthly record with 46.7M contracts per day.

The following data comes from the Chicago Board Options Exchange (Cboe) where about 98% of all index options, about 20% of all Exchange Traded Product (ETP) options, and about 15% of all equity options are traded:

In reviewing the VIX OI Change for the past week I observed the following:

• VIX call OI was +6.5%                     
• VIX put OI was -1.3%                       

Historically, the daily change in the VIX and the SPX have been opposite each other about 80% of the time. These changes reflect a clear bias toward the call side, so I see the VIX OI Change as bearish for the market in the near-term.

In reviewing the SPX OI Change for the past week I observed the following:

• SPX call OI was +2.8%         
• SPX put OI was +2.7%                      

While SPX volume tends to be mostly institutional hedging, these changes reflect an insignificant bias toward the call side, so I see the SPX OI Change as neutral for the market in the near-term.

In reviewing the ETP OI change (which includes SPY, QQQ, DIA, IWM, etc.) for the past week I observed the following:

• ETP call OI was +2.1%                     
• ETP put OI was +2.5%                      

The aggregate changes in Exchange Traded Products options reflect an insignificant bias toward the put side, so I see the ETP OI Change as neutral for the market in the near-term.

In reviewing the Equity OI Change for the past week I observed the following:

• Equity call OI was +2.8%                  
• Equity put OI was +2.6%                  

Equity volume tends to have a large retail component to it. These changes reflect an insignificant bias toward the call side, so I see the Equity OI Change as neutral for the market in the near-term.

Index OI Participation is +26.6% versus 2022 levels, so I see it as bullish in the long-term.

Equity/ETF OI Participation is -3.0% versus 2022 levels, so I see it as neutral in the long-term.

The VIX OIPCR is down 3 ticks to 0.28 versus 0.31 last week. Since this ratio tends to move in the same direction as the VIX index, this downtick is consistent with the decrease in the VIX which was -1.02 points (-7.4%) over the last four sessions. This implies that VIX options traders may be expecting the VIX to move higher over the next few days. This is not terribly surprising given the VIX index closed at a 44-month low of 12.82 on Thursday (Sep. 14). As a result, I see the VIX OIPCR as moderately bearish in the very near-term for the markets. This ratio is now below the 200-day SMA of 0.32, and with the VIX at its lowest level post-COVID, I see it as moderately bearish in the long-term for the markets.

The SPX OIPCR is unchanged at 2.04 versus 2.04 last week. Since this ratio tends to move in the same direction as the SPX, this unchanged reading is somewhat inconsistent with the moderate increase in the SPX of +47.61 points (+1.1%) over the last four sessions. This implies that SPX option traders (who are mostly institutional) have held steady on their hedges this week, and despite recent gains, may be expecting the SPX to move mostly sideways in the near-term. Therefore, I see the SPX OIPCR as neutral in the near-term for the market. This ratio is now 9 ticks below the 19-month high it reached on Jul. 20 but it remains well above the 200-day SMA of 1.94, so I see it as still moderately bearish in the long-term.

The normally very stable Equity OIPCR is unchanged at 0.86 versus 0.86 last week. This ratio remains well above the 12-month low of 0.76 reached in mid-December, and is still 8 ticks below the two-year high of 0.94 reached in February. At this level it implies that equity option traders (which includes a lot of retail traders) continue to show a mostly neutral sentiment on the market as it remains in a mostly sideways trajectory. Therefore, I see the Equity OIPCR as still neutral in the near-term for the market. This ratio is just below the 200-day SMA (currently 0.88), so I see it as neutral in the long-term too.

The Cboe VIX VPCR has moved from moderately bearish (<0.40) to neutral (0.90>0.40) this week. The 0.44 level on Thursday (Sep. 14) was neutral but the current reading of 0.36 as I'm writing this (midday Friday, Sep. 15) is moderately bearish again. Since intraday levels on this ratio tend to rise as the day goes on, I see the Cboe VIX VPCR as neutral in the very near-term.

The Cboe SPX VPCR has been mostly neutral (1.60>1.30) all week. The 1.48 reading on Thursday (Sep. 14) was neutral, and the current reading of 1.37 as I'm writing this (midday Friday, Sep. 15) is neutral. Since intraday levels on this ratio tend to decline as the day goes on, I see it as neutral in the very near-term. With a five-day moving average of 1.43 versus 1.48 last week, it remains neutral in the long-term.

The Cboe Equity VPCR moved from neutral on Monday (Sep. 11) to a bearish extreme (>0.83) over the next three sessions, which is bullish. The 0.85 level on Thursday (Sep. 14) was a bearish extreme and the current reading of 0.87 as I'm writing this (midday Friday, Sep. 15) is also a bearish extreme. While intraday levels tend to decline at the day goes on, I see it as a bearish extreme (bullish) in the very near-term. With a five-day moving average of 0.86 versus 0.79 last week, it remains moderately bearish in the long-term.

Since volume based put/call ratios are very reactive and very short-term in nature, near-term usually means just a day or two, while long-term is more like a week or two.

The OCC Index VPCR has been mostly moderately bearish (>1.10) this week. As a result, I see it as moderately bearish in the near-term. Additionally, it has been moderately bearish in eight of the last nine sessions, so I see it as moderately bearish in the long-term.

The OCC Equity VPCR has been neutral, a bearish extreme, and moderately bearish this week; in other words, all over the map. As a result, I see it as volatile in the very near-term. It has also been all over the place for the past three weeks, and with a five-day average of 0.93 versus 0.93 last week, I now see it is volatile in the long-term too.

After studying and analyzing the VIX for the past 30 years, I have found that it generally falls into the following 4 zones:

4. Above 40 – Panic Zone

3. 30 to 40 – High Anxiety Zone

2. 20 to 30 – Elevated Uncertainty Zone

1. Below 20 – Normal Zone

As I mentioned in the VIX OIPCR section above, the VIX close of 12.82 on Thursday (9/14) was not only a YTD low, it was a 44-month low and the lowest close since before the Covid-19 pandemic began. 

At the time of this writing (midday Friday, Sep. 15), the VIX is +0.64 to 13.46; little changed for the week, but still solidly in the Normal range (Zone 1). At its current level, the VIX is implying intraday moves in the SPX of just 32 points per day (this was 32 last week). The 20-day historical volatility is 73% this week versus 84% last week. The VIX is well below its long-term average (19.70) but just above its long-term mode (12.42) which is the most common level of volatility. 

With a top-to-bottom intraday range this week of just 2.00 points, day-to-day volatility has been extremely low again. With the VIX virtually flat for the week at the time of this writing (midday Friday, Sep. 15), I see it as neutral in the very near-term for the equity markets. At the time of this writing the VIX is less than a point above its lowest close since late-January 2020, so I see it as moderately bullish in the long-term.

On a week-over-week basis, VIX call prices are slightly lower and VIX put prices are slightly higher. As a result, at +71 versus +92 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is slightly lower, but in this range it remains neutral in the very near-term. Call prices have trended mostly sideways, while put prices are also trending mostly sideways overall. I see the VIX IV Gap as still neutral in the long-term.

Keep in mind, this is not only a contrarian indicator most of the time, it tends to be one of the earliest and shortest-term indicators I discuss in this report, so it can also change directions very quickly.

At the time of this writing (midday Friday, Sep. 15) the nearest VIX futures contract (which expires on Sep. 20) was trading at 13.85; less than a half point above the spot VIX level of 13.46. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 13.63, very close to the spot price. 

With an adjusted level that is barely above the spot price, futures traders are indicating that they believe the VIX is likely to remain fairly steady over the next few days. Therefore, I see VIX futures as neutral in the near-term for the market. The RPAPs of the next two closest monthly futures contracts are 14.29 and 14.32 respectively. With the RPAPs of the further-dated contracts both less than a point above the spot VIX, I see VIX futures as neutral in the long-term for the SPX.

Since VIX futures are typically much less reactive to current market conditions than the VIX index, near-term for VIX futures usually means a few days, while long-term means a couple of weeks.

With the VIX relatively flat for the week through Thursday (Sep. 14), the VIX Hedging Effectiveness has been Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing at least some sensitivity to market volatility, and may be at least somewhat effective as hedging tools in the very near-term. VIX Hedging Effectiveness is also Moderate in the long-term.

VIX Hedging Effectiveness is a manner of measuring the magnitude of VIX moves relative to the magnitude of SPX moves in the opposite direction. When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.

I've discussed Central Bank Digital Currencies (CBDCs) here several times in the past few years. Currently the U.S. and over a hundred of the largest countries, representing more than 95% of global commerce, are exploring this technology. A few countries including China, India, Nigeria, and the Bahamas, have already partially or fully launched CBDCs. Indeed, the U.S. has been studying the issue since early 2022, but there is still no tentative launch date planned.

An update provided this week from Federal Reserve Vice Chair Michael Barr reiterated that we are still a "long way" off. Barr described the U.S. as still in the "basic research" phase in the areas of system architecture and tokenization, and emphasized his concerns about federal oversight of existing stablecoin issuance and the financial stability risks associated with their widespread adoption. He also repeated a perspective shared by both SEC Chair Gary Gensler and Federal Reserve Chair Jerome Powell, that "it is far more important for us to do this right, than to do it quickly."

While it's probably a matter of if, not when the U.S. launches its own CBDC, in the interim, the July 2023 launch of the Fed's new real-time payments system (FedNow) which does not operate on a blockchain, should provide some of the same benefits of a CBDC, while also maintaining appropriate safeguards such as FDIC and access to Fed lending.

Separately, this week we learned that temporary FTX CEO John Ray III has plans to begin selling off as much as $100M per week in crypto assets, potentially rattling the Bitcoin, Ether, and Solana markets. FTX is estimated to own more than $1.5B combined in those three coins and another $1.9B in other crypto assets; less than 40% of the estimated $9B that is missing from customer accounts.

NAHB Housing Market Index for Sep – This is a composite index (ranging from 0 – 100) comprised of Single-family home sales, Future sales expectations, and Buyer traffic, and is viewed as an indicator of new home sales trends. Collectively, the components are intended to provide a gauge of overall conditions in the market for selling new homes.

Housing Starts and Building Permits for Aug – Housing starts measure the beginning of the excavation of the land on which a new single or multi-family residence will be built, and is used as a gauge of housing demand and strength in the construction industry. Building permits are required before excavation can begin, and any changes in permits are often reflected in starts in subsequent months.

FOMC Rate Decision – Regularly scheduled Federal Open Market Committee meeting, after which interest rate changes are usually announced. The meetings are usually followed by a press conference with the Chairman of the Federal Reserve.

Initial Jobless Claims - For the week ending Sep. 9, 2023, claims were up 3K after being down 12K the prior week. The four-week moving average now stands at 225K, down 5K from the prior week.

Existing Home Sales for Aug – This is a good measure of overall demand in the housing market, because it aggregates completed closings on all single-family dwellings, which comprise the largest portion of the housing market. Home buying can imply economic stability, since it is often the largest single investment for any family. It can also lead trends in future durable goods purchases.

Leading Economic Indicators for Aug – This index, made up of 10 components that tend to move before changes in the overall economy, is more of a trailing than a leading report since the 10 components have already been released. As a result, the market reaction is usually fairly muted.

None

The interest rate on the 10-year U.S. Treasury ($TNX) began the week around 4.30%, was mostly sideways through mid-week, and then rose modestly in the latter part of the week. It is currently around 4.32% at the time of this writing (midday Friday, Sep. 15).

For the last eight years (which involved 25 interest rate changes), whenever the probability exceeded 65% on the day of the Fed meeting, a rate hike (or cut) has occurred. At the moment, the fed funds futures are pricing in only a ~4% chance of another +0.25% hike on Wednesday (Sep. 20), a ~29% chance of another +0.25% on Nov. 1, and an ~11% chance of a hike on Dec. 13. All of which means there is a cumulative probability of ~43% that there will be at least one more rate hike in 2023; by no means a certainty. While these probabilities do change daily, economic data in Q4 will likely be the deciding factor.

While there is little chance the Fed will hike rates this week, Treasury yields and crude prices are back at YTD highs, keeping markets in check. The indicators point to another choppy sideways week ahead, and likely more volatility.

While traders and consumers alike seem rather gloomy, I daresay things are far better than what was expected when 2023 began. Volatility is at a post-COVID low, the labor market is still strong, salaries are exceeding inflation, which is less than half the level it was 12 months ago, GDP is expected to be >2% in Q3, and the SPX is less than 8% from an all-time high. 

As you can see below, there were only a few changes in the indicators this week. While the balance still implies a rather strong Neutral sentiment overall for next week, the presence of a single Bearish, Bullish and Volatile indicator implies a good chance that it will also be Volatile.   

Key:

OI = Open Interest

OIPCR = Open Interest Put/Call Ratio

VPCR = Volume Put/Call Ratio

IV = Implied Volatility

+ means this indicator has changed in a bullish direction from the prior posting.

– means this indicator has changed in a bearish direction from the prior posting.

+/ – means this indicator has changed bi-directionally; i.e. last week was either Volatile, N/A or Breakout.

^ means this indicator is at a historical extreme that has often (though not always) preceded a market reversal.

Except as noted in certain sections, Short-Term implies about a week, and Long-Term implies about a month.

Issue Number: 707