Weekly Trader's Outlook

November 18, 2022 Randy Frederick
Equities trend very modestly lower on mixed economic data.

Note: So that Nate and I can both enjoy the Thanksgiving holiday with our families, there will be no Weekly Trader's Outlook published on Friday, Nov. 25, 2022.

Follow me on Twitter @RandyAFrederick. I'll tweet interesting observations about volatility, put/call ratios, technical signals, economics, option block trades and other unusual activity.

Weekly Market Review

Earnings Summary

The regular Q3 earnings season is virtually over. This week 15 S&P 500 companies reported earnings and nine of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.

Overall, 476 (95%) of companies in the S&P 500 have reported Q3 results so far. Below are the aggregate beat rates relative to the final results from recent quarters.

Past performance is no guarantee of future results.

From a growth standpoint, Q3 earnings are +3.2% year-over-year versus a +2.9% estimate when the quarter ended. Q3 revenues are +11.7% year-over-year versus a +8.7% estimate when the quarter ended. This compares to final growth rates of +7.3% and +13.7% respectively in Q2.

Economics Recap

Better (or higher) than expected

  • Producer Price Index (PPI) for Oct: +0.2% vs. +0.4% est
  • Core PPI for Oct: 0.0% vs. +0.3% est
  • Retail Sales for Oct: +1.3% vs. 1.0% est
  • Housing Starts for Oct: 1,425k vs. 1,410k est
  • Building Permits for Oct: 1,526k vs. 1,514k est
  • Initial (weekly) Jobless Claims: 222k vs. 228k est
  • Existing Home Sales for Oct: 4.43M vs. 4.40M est

On target

  • None

Worse (or lower) than expected

  • Industrial Production for Oct: -0.1% vs. +0.1% est
  • Capacity Utilization for Oct: 79.9% vs. 80.4% est
  • Business Inventories for Sep: +0.4% vs. +0.5% est
  • NAHB Housing Market Index for Nov: 33 vs. 36
  • Leading Economic Indicators for Oct: -0.8% vs. -0.4% est

This was an average week for economic data and like last week, it included a key inflation report: the Producer Price Index (PPI). Normally the PPI doesn't move markets much but this time it confirmed the modest easing we saw in the CPI last week. At +8.0%, the Headline October year-over-year change in the PPI eased somewhat from +8.4% in September and was also below the +8.3% estimate. Likewise, at +6.7% year-over-year, the October Core PPI also eased up from +7.1% in September and was below the +7.2% estimate. Last week, the October CPI sparked the largest single-day gain in the SPX in 2½ years (+5.5%) and the PPI added another +0.9% this week.

As you can see below, while these levels are still quite high historically, with four consecutive monthly declines, last week's year-over-year CPI (orange line) and this week's year-over-year PPI (white line) both seem to confirm that headline inflation peaked in June.

5-year CPI and PPI chart

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Market Performance YTD

While the 7% YTD rise in West Texas Intermediate Crude (WTI) prices is well off its +64% peak (reached in early March), the Energy sector is still sharply outperforming all other sectors YTD, and remains the only positive performer in a largely defensive market.

Here is the 2022 YTD (versus 2021 full-year) performance of the market broken down by the 11 market sectors (as of the close on Nov. 17, 2022):

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Here is the 2022 YTD (versus 2021 full-year) performance of the major U.S. equity indices (as of the close on Nov. 17, 2022):

Source: Bloomberg L.P.

Past performance is no guarantee of future results.

Technicals

Despite a very modest pullback this week, very little has changed. As shown in the chart below, the YTD low of 3,577 remains, Oct. 12 remains the earliest date the bear market could have ended and 4,292 remains the upside target for a new bull market to begin. The SPX remains >10% above that level and after breaking through the 100-day SMA last week, is now finding support at that level (currently 3,910). I would continue to watch the 200-day SMA (currently 4,067) as the next possible upside resistance level. I also still expect this year-end rally to continue but potentially top out in the 4,000 – 4,200 range by year-end.

6-month candlestick chart of the S&P 500 Index

Source: StreetSmart Edge®

Past performance is no guarantee of future results.

Option Volumes

With three weeks of trading completed, November option volume is averaging a massive 47.7M contracts per day. That is well above the final October level of 43.3M, and even above the November 2021 level of 45.2M contracts per day. Keep in mind, November 2021 was the all-time monthly record, so that record could be broken this month.

Open Interest (OI) Change

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 -24.4%
  • VIX put OI was -27.2%

Historically, the daily change in the VIX and the SPX have been opposite each other about 80% of the time. These sharp declines are due to the November monthly VIX contract expiration on Wednesday (Nov. 16), so I see the VIX OI Change as N/A 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 +3.8%
  • SPX put OI was +4.2%

While SPX volume tends to be mostly institutional hedging, these changes reflect an insignificant bias toward the put 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 +2.7%
  • ETP put OI was +3.2%

The aggregate changes in Exchange Traded Products options reflect a very small bias toward the put side, so I see the ETP OI Change as moderately bearish 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 +1.5%
  • Equity put OI was +2.7%

Equity volume tends to have a large retail component to it. These changes reflect a small bias toward the put side, so I see the Equity OI Change as moderately bearish for the market in the near-term.

Open Interest Participation

Index OI Participation is +16.7% versus 2021 levels, so I see it as bullish in the long-term.

Equity/ETF OI Participation is +0.7% versus 2021 levels, so I see it as neutral in the long-term.

Open Interest Put/Call Ratios (OIPCR)

The VIX OIPCR is down 2 ticks to 0.29 versus 0.31 last week. Since this ratio tends to move in the same direction as the VIX index, this downtick is somewhat surprising with the VIX +1.41 (+6.3%) over the last four sessions. As a result, it implies that traders feel the VIX is likely to move even higher in the near-term. Therefore, I see the VIX OIPCR as moderately bearish in the very near-term for the markets. This ratio has been relatively stable over the past four weeks, and it remains well below the 200-day SMA of 0.46. Therefore, I see it as neutral in the long-term for the markets.

The SPX OIPCR is up 5 ticks to 1.73 versus 1.68 last week. This ratio tends to move in the same direction as the SPX, so this uptick is inconsistent with the SPX which was -46.37 points (-1.2%) over the last four sessions. As a result, it implies that SPX option traders (who are almost entirely institutional) have increased their hedges this week and may be expecting at least some more downside in the SPX early next week. Therefore, I see the SPX OIPCR as moderately bearish in the near-term for the market. This ratio has been ticking higher for nearly four weeks now and since it is now just below the 200-day SMA of 1.76. I see it as neutral in the long-term.

The normally very stable Equity OIPCR is up 1 tick at 0.80 versus 0.79 last week. At this level, this ratio remains well below its recent high of 0.89 (in mid-August) and it likely implies that equity option traders (which includes a lot of retail traders) feel as though the market is likely to remain at least sideways in the near-term. At this level I see the Equity OIPCR as still neutral in the near-term for the market. This ratio remains below the 200-day SMA (currently 0.82), so I see it as moderately bullish in the long-term.

Cboe Volume Put/Call Ratios (VPCR)

The Cboe VIX VPCR has moved from moderately bearish (<0.40) to bearish this week. The 0.18 level on Thursday (Nov. 17) was bearish and the current reading of 0.16 as I'm writing this (midday Friday, Nov. 18) is bearish. While intraday levels tend to decline as the day goes on, I see it as bearish in the very near-term.

The Cboe SPX VPCR has been neutral all week. The 1.40 reading on Thursday (Nov. 17) was neutral, and the current reading of 1.40 as I'm writing this (midday Friday, Nov. 18) is neutral again. While intraday levels 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 1.35 versus 1.29 last week, it is neutral in the long-term.

The Cboe Equity VPCR has moved from neutral to moderately bullish to a bearish extreme and back to moderately bearish this week. The 0.73 reading on Thursday (Nov. 17) was moderately bearish but the current reading of 0.68 as I'm writing this (midday Friday, Nov. 18) is neutral. While intraday levels tend to decline as the day goes on, with such wild swings this week, I see it as volatile in the very near-term. With a five-day moving average of 0.79 versus 0.85 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.

OCC Volume Put/Call Ratios (VPCR)

The OCC Index VPCR has moved from neutral to moderately bearish (>1.10) this week. As a result, I see it as moderately bearish in the near-term. However, it has been neutral in six of the last nine sessions, so I see it as neutral in the long-term.

Like the CBOE Equity VPCR, the OCC Equity VPCR has been all over the map this week. As a result, I see it as volatile in the very near-term. With a five-day average is 0.85 versus 0.88 last week, I see it as still moderately bearish in the long-term.

Volatility

Cboe Volatility Index (VIX)

At the time of this writing (midday Friday, Nov. 18), the VIX is -0.38 to 23.55. At its current level, the VIX is implying intraday moves in the SPX of about 49 points per day (this was 47 last week). The 20-day historical volatility is 60% this week versus 53% last week. Despite a 12-point decline over the past 30-days, the VIX remains above its long-term average (19.72) since late August, and well above its long-term mode (12.42) which I consider to be "normal" volatility, all year. 

After spending most of late September through late October in the 30s, the VIX has been below that range for the past three weeks. I consider the 20-30 range implies high uncertainty but not high anxiety. I see the VIX as still neutral in the very near-term for the equity markets. At the time of this writing (midday Friday, Nov. 18) the VIX is <3 points below its weekly intraday high, but still above its long-term average. I see it as moderately bearish in the long-term

On a week-over-week basis, VIX call prices have fallen sharply but VIX put prices are little changed. At +40 versus +113 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is quite a bit lower, and in this range it is now moderately bullish in the very near-term. Longer-term, VIX call prices moved higher over the past two weeks but fell back down a bit this week. VIX put prices have been trending modestly lower for the past five weeks. At these levels I see the VIX IV Gap as moderately bearish 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.

VIX Futures

At the time of this writing (midday Friday, Nov. 18) the nearest VIX futures contract (which expires on Nov. 23) was trading at 24.65; about one point above the spot VIX level of 23.55. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 24.18; less than a point above the spot price. 

With an adjusted level that is only about a half point above the spot price, futures traders are indicating that they believe the VIX is likely to stay relatively stable 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 22.54 and 22.91 respectively. With the RPAPs of the further-dated contracts both a point or less below 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 above 30 for most of the week, the VIX Hedging Effectiveness has been Poor in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing very little sensitivity to market volatility, and are likely to be mostly ineffective as hedging tools in the very near-term. VIX Hedging Effectiveness is Poor 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.

Cryptocurrencies

Last week's FTX meltdown has continued to dominate news across the crypto industry (and the financial industry) again this week. Following the Chapter 11 bankruptcy filing and resignation of CEO Sam Bankman-Fried (SBF) on Friday (Nov. 11), there are far too many details to the story than I could possibly include here. As a result, I'll just list some of them and you can do your own research if you want to learn more:

  • At least 750 different entities are listed as potentially involved as creditors or debtors, including Bank of America, Wells Fargo, JPMorgan, Silvergate Bank, Sequoia Capital, SoftBank, Temasek, Third Point, Tiger Global, Tom Brady, Kevin O'Leary, and Stephen Curry
  • No chapter 11 reorganization plan is expected so complete (chapter 7) liquidation is the likely outcome in the end
  • With that many entities and as much as $32B at stake, this is expected to be one of the largest and most complex bankruptcies in history
  • SBF knew that at least $10B in customer funds had been used to cover losses at his Alameda Research trading venture, which also owes at least $1.5B to other lenders
  • Several civil suits have already been filed and criminal charges against SBF seem likely
  • FTX had few internal controls, few financial records, no CFO, no board of directors, no official books and records, used unsecured email, didn't secure private crypto keys or other confidential information, had no position reconciliation, no record retention policy, and generally lacked any form of corporate governance
  • U.S. regulatory oversight of the crypto industry has been slow in coming; this event will likely speed up that process

As I stated last week, this story is likely to continue for many months (if not years). However, with crypto market exposure estimated to be around 3%-6%, the spillover into traditional finance (TradFi) is likely to be mostly contained.

For Schwab's perspective on cryptocurrencies, please visit:

http://www.schwab.com/cryptocurrency

Economic reports for next week

Mon Nov 21

None

Tues Nov 22

None

Wed Nov 23

Initial Jobless Claims – For the week ending 11/12/22, claims were down 4k after being up 8k the prior week. The four-week moving average now stands at 221k, up 2k from the prior week.

Durable Goods Orders for Oct – This is a key measure of consumer and industrial spending trends and it may cause market swings if it misses estimates.

New Home Sales for Oct – This report measures sales activity of newly constructed homes and other single-family dwellings, and is generally considered less important than building permits since it is more of a trailing report.

University of Michigan Consumer Sentiment for Nov – The second (final) report; usually released toward the end of the current month. This report is a collection of data on consumer attitudes and expectations, intended to predict discretionary spending.

Thu Nov 24

Market closed (Thanksgiving) – No reports

Fri Nov 25

None

Interest Rates

There is one remaining FOMC meeting this year on Dec. 14th and the Fed Funds Futures probability of a 0.75% rate hike remains at 0%, with theoretically a 100% chance of a +0.50% hike. The interest rate on the 10-year U.S. treasury ($TNX) began the week around 3.90% and trended mostly lower throughout the week. It is currently around 3.79% at the time of this writing (midday Friday, Nov. 18).

Outlook

Despite few economic reports and a shortened trading week, equities appear rather cautious ahead of the Thanksgiving holiday.

Bottom Line

Not only are there few economic reports next week, there are only 3½ trading days. Historically, the week of Thanksgiving has been more bullish than bearish, though that has shifted a bit in the past few years. Indeed, equities moved higher in eight of the past 10 years, though the two down years 2018 (-3.8%) and 2021 (-2.2%) may be still in recent memory, and that may be contributing to the caution we see at the moment.

As you can see below, there were more downgrades than upgrades in the indicators this week and the overall balance is now Moderately Bearish. Additionally with two of the indicators back in the Volatile category, a secondary indication of Volatile also makes sense for next week.

Composite table of the market sentiment indicators for this week

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: 668

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