Weekly Trader's Outlook

Follow Randy on X (formerly Twitter) @RandyAFrederick. He posts interesting observations about volatility, put/call ratios, technical signals, economics, option block trades and other unusual activity.

The regular Q3 earnings season begins in about two weeks, though not all companies follow a standard calendar year. This week seven S&P 500^® companies reported Q3 earnings and six of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.

Overall, 16 (3%) of companies in the S&P 500 have reported Q3 results so far. I'll begin reporting the aggregate beat rates relative to the final results from recent quarters, as soon as Q3 is over.

From a growth standpoint, Q3 earnings are 0.0% year-over-year, versus an estimate of -0.2% when Q3 ended. Q3 revenues are +0.0% year-over-year, versus an estimate of +1.5% when Q3 ended. This compares to final growth rates of -5.8% and +1.0% respectively in Q2. 

• S&P Case-Shiller Home Price Index for Jul: +0.13% vs. -0.10% est
• Durable Goods Orders for Aug: +0.2% vs. -0.5% est
• Initial (weekly) Jobless Claims: 204k vs. 215k est
• University of Michigan Consumer Sentiment for Sep: 68.1 vs. 67.7 est

• Personal Income for Aug: +0.4% vs. +0.4% est

• Consumer Confidence for Sep: 103.0 vs. 105.5 est
• New Home Sales for Aug: 675k vs. 698k est
• Pending Home Sales for Aug: -7.1% vs. -1.0% est
• GDP for Q2 (Final): +2.1% vs. +2.2% est
• Chicago PMI for Sep: 44.1 vs. 47.6 est
• Personal Consumption Expenditures (PCE) for Aug: +0.4% vs. +0.5% est
• Core PCE for Aug: +0.1% vs. +0.2% est
• Personal Spending for Aug: +0.4% vs. +0.5% est

This was a fairly average week for economic data. At +3.9%, the Federal Reserve's favorite inflation gauge, the August Core PCE, was right on target and it confirms what the CPI and PPI told us two weeks ago; inflation continues to slowly moderate. Additionally, at just 204k, Initial Jobless Claims came in 11k below expectations and just above last week's revised 202k level. This was the second-lowest reading since January of this year. There are still virtually no signs of weakness in the labor market (shown below).

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. 28, 2023):

Here is the 2023 YTD (versus 2022 full-year) performance of the major U.S. equity indices (as of the close on Sep. 28, 2023):

While the SPX did manage to muster a small rally in the final days of the month, it was too little, too late; September and Q3 both ended with a loss.   As you can see below, the SPX fell though the 50-day SMA back on Sep. 15, the 100-day SMA on Sep. 21, and now appears to have finally found some support around 4,294; the level that allowed the declaration of a new bull market when it was first breached back on Jun. 9. But even though the SPX closed below that level on Sep. 26 and Sep. 27, this is still a bull market.

Since bull markets are typically defined by a 20% rise from the bottom and bear markets are defined by a 20% drop from the top, the SPX would need to decline 20% (to 3,671) from the current bull market high of 4588.96 (reached on Jul. 31) for the bull market to end. That would require a drop of >14% from current levels.

The federal government's fiscal year ends on Saturday (Sep. 30). While there is still a remote possibility Congress could pass a continuing resolution (CR) to keep the government open, a shutdown seems likely at the moment. Even with a CR deal, a shutdown could still occur after it expires, which is likely to be in November or December.

And while there is often an initial dip in equities on the day following a government shutdown, markets usually rally before it reopens, as news of an imminent deal leak out. As a result equities were either flat or positive overall, during the past eight shutdowns.

As I mentioned three weeks ago, September has a well-deserved reputation as the worst month of the year. In fact, the SPX has declined in September 55% of the time since 1949. As you can see below, unless the SPX gains 4.6% on Friday (Sep. 29) it appears that this month will be the fourth-consecutive negative September, and the seventh decline in the past 10 years.

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 +5.1%         
• VIX put OI was +24.7%        

Historically, the daily change in the VIX and the SPX have been opposite each other about 80% of the time. These changes reflect a strong bias toward the put side, so I see the VIX OI Change as bullish 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 +6.6%     
• SPX put OI was +3.4%         

While SPX volume tends to be mostly institutional hedging, these changes reflect a small bias toward the call side, so I see the SPX OI Change as moderately bullish 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 +4.4%        
• ETP put OI was +3.0%         

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 bullish 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 +2.3%         
• Equity put OI was +2.3%         

Equity volume tends to have a large retail component to it. These changes reflect no bias toward the call or put side, so I see the Equity OI Change as neutral for the market in the near-term.

Index OI Participation is +20.2% versus 2022 levels, so I see it as bullish in the long-term.

Equity/ETF OI Participation is -2.1% versus 2022 levels, so I see it as neutral in the long-term.

The VIX OIPCR is up 5 ticks to 0.30 versus 0.25 last week. While this ratio tends to move in the same direction as the VIX index, this is a rather sharp uptick given the very small increase in the VIX which was only +0.14 points (+0.8%) over the last four sessions. However, the VIX is +3.23 (+22.9%) over the past seven sessions. In any case, this implies that VIX options traders may be expecting the VIX to drop at least a few points over the next few days. As a result, I see the VIX OIPCR as moderately bullish in the very near-term for the markets. This ratio is still below the 200-day SMA of 0.32, and with the VIX more than 4 points above the 44-month low it hit on Sep. 14, I see it as moderately bearish in the long-term for the markets.

The SPX OIPCR is down 6 ticks to 2.02 versus 2.08 last week. While this ratio tends to move in the same direction as the SPX, this is a rather sharp downtick given the rather small decrease in the SPX of -20.36 points (-0.5%) over the last four sessions. This implies that SPX option traders (who are mostly institutional) have reduced their hedges this week and may be expecting an upside move in the SPX in the near-term. Therefore, I see the SPX OIPCR as moderately bullish in the near-term for the market. This ratio is now 11 ticks below the 19-month high it reached on Jul. 20 but it remains 7 ticks above the 200-day SMA of 1.95, so I see it as still neutral in the long-term.

The normally very stable Equity OIPCR is unchanged at 0.85 versus 0.85 last week. This ratio remains well above the 12-month low of 0.76 reached in mid-December, and is still 9 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 neutral (0.90>0.40) to moderately bearish (<0.40) this week. The 0.38 level on Thursday (Sep. 28) was moderately bearish but the current reading of 0.86 as I'm writing this (midday Friday, Sep. 29) is neutral again. While 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 neutral (1.60>1.30) all week. The 1.35 reading on Thursday (Sep. 28) was neutral, but the current reading of 1.25 as I'm writing this (midday Friday, Sep. 29) is moderately bullish. While 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 1.45 versus 1.45 last week, it remains neutral in the long-term.

The Cboe Equity VPCR has been all over the map this week. The 0.80 level on Thursday (Sep. 28) was bearish and the current reading of 0.76 as I'm writing this (midday Friday, Sep. 29) is moderately bearish. While intraday levels tend to decline as the day goes on, I see it as a volatile in the very near-term. With a five-day moving average of 0.84 versus 0.78 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 seven of the last nine sessions, so I see it as moderately bearish in the long-term.

The OCC Equity VPCR has been at a bearish extreme (which is bullish) in five of the past six sessions. As a result, I see it as bullish in the very near-term. It has risen sharply over the past three weeks, and with a five-day average of 1.06 versus 0.95 last week, It remains volatile in the long-term.

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

At the time of this writing (midday Friday, Sep. 29), the VIX is +0.06 to 17.40; 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 39 points per day (this was 39 last week). The 20-day historical volatility is 92% this week versus 92% last week. The VIX is below its long-term average (19.70) but 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 3.88 points, day-to-day volatility has been fairly similar to last week. With the VIX still elevated but virtually flat for the week at the time of this writing (midday Friday, Sep. 29), I see it as moderately bearish in the very near-term for the equity markets. At the time of this writing the VIX is about 4½ points above the 44-month low it reached on Sep. 14, but more than 2 points below its weekly high, so I see it as neutral in the long-term.

On a week-over-week basis, VIX call prices are little changed, and VIX put prices are slightly lower. As a result, at +1 versus -21 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is slightly higher, and in this range it is moderately bullish in the very near-term. Call prices have trended mostly sideways, while put prices have trended modestly higher 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. 29) the nearest VIX futures contract (which expires on Oct. 4) was trading at 17.35; very close to the spot VIX level of 17.40. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 17.02, still very close to the spot price.

With an adjusted level that is very near 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 16.65 and 16.16 respectively. With the RPAPs of the further-dated contracts both below the spot VIX, I see VIX futures as moderately bullish 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 but elevated for the month, the VIX Hedging Effectiveness remains 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.

As I discussed here during the summer, the world's largest digital marketplace, Binance and its CEO Changpeng Zhao (CZ) have been struggling under the weight of enforcement actions from the Commodity Futures Trading Commission (CFTC) back in March, the Department of Justice (DOJ) in April, and the Securities and Exchange Commission (SEC) in June.

Since that time, Binance has announced several rounds of cost cuts and employee layoffs including more than a dozen senior executives and more than 1,500 staff, due to declining business revenues. While Binance once claimed that only 5% of its volume takes place within the US, it remains the largest player in the industry. According to a new report from the Wall Street Journal, global volume is now closer to 50% versus about 70% in 2022. Other lesser-known exchanges like Huobi, Bybit, and OKX have gained market share at Binance's expense, and domestic volume is nearly gone altogether.

All of this is likely in preparation to handle billions of dollars in fines and even potential criminal charges against CZ, who is reportedly living in the United Arab Emirates, a country that doesn't have a mutual extradition treaty with the US.

For Schwab's perspective on cryptocurrencies, please visit: www.schwab.com/cryptocurrency

Construction Spending for Aug – Construction spending measures new overall construction activity. This report can predict future activity in housing and commodities, which can be a sign of economic growth.

ISM Manufacturing Index for Sep - The Institute for Supply Management (ISM) Manufacturing Index tracks economic data from companies in the manufacturing sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the manufacturing sector are on the rise.  

JOLTS for Aug – The monthly Job Openings and Labor Turnover Survey is designed to measure the number of job openings available. Data such as employment, job openings, hires, quits, layoffs and discharges used in the calculation, are obtained voluntarily from approximately 16,000 companies in sample industries.   

ADP Employment Change for Sep – The ADP report is based on information from approximately 400,000 U.S. businesses and 23 million U.S. employees in the private sector. While the ADP report is often looked at as a predictor of the BLS (Bureau of Labor Statistics) nonfarm payrolls report, ADP data does not include government jobs, so there is sometimes a significant difference between the two.

Factory Orders for Aug – This report includes both durable and non-durable goods orders, as well as wholesale and retail inventories. Like the construction report, it usually doesn’t impact the market much.

ISM Services Index for Sep – The Institute for Supply Management (ISM) Non-Manufacturing Index tracks economic data from companies in the services sector. An increasing value is usually perceived as bullish for equities because it implies that profits in the services sector are on the rise.

Initial Jobless Claims - For the week ending Sep. 23, 2023, claims were up 2k after being down 19k the prior week. The four-week moving average now stands at 211k, down 6k from the prior week.

International Trade (Trade Balance) for Aug – This report tracks trends in the exports and imports of goods and services. Exports can indicate economic expansion both in the U.S. and abroad. Imports can indicate growing domestic demand. However, this is a lagging report so it rarely has any impact on the market.  

Monthly Employment Situation for Sep – This group of reports, typically released on the first Friday of the month, is the broadest monthly view of the labor market. It includes: 

• Nonfarm Payrolls
• Unemployment (U-3) Rate
• Average Hourly Earnings
• Average Workweek
• Underemployment (U-6) Rate
• Labor Force Participation Rate  

The interest rate on the 10-year US Treasury ($TNX) began the week around 4.50%, rose sharply through mid-week, hitting a 16-year high of 4.68% on Thursday (Sep. 28) before pulling back just a bit. It is currently around 4.57% at the time of this writing (midday Friday. Sep. 29).

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. The fed funds futures were pricing in only a ~1% chance of another hike on Sep. 20 so it didn't happen. At the moment, there is a ~19% chance of another +0.25% on Nov. 1, and a ~20% chance of a hike on Dec. 13. All of which means there is a cumulative probability of ~39% that there will be one more rate hike in 2023; by no means a certainty.

Sometimes when things have been bad enough for long enough, the only direction left to go is up. A new quarter can sometimes spark a change of direction and the indicators imply that may begin next week.

With rising interest rates, rising crude oil prices and a strengthening dollar, September was a negative month and Q3 was a negative quarter. But markets have a tendency to change directions as a new quarter begins and Q4 seasonal factors are usually pretty good. By the time you read this, the federal government could be shut down, but any negative impact from a shutdown rarely lasts more than a day or two. Q2 earnings season was not great, but Q3 (which starts in about two weeks) is expected to be better.

As you can see below, there were several more upgrades than downgrades in the indicators this week, and the overall balance moves solidly into Moderately Bullish territory. And while there are still a couple indicators in the Volatile category, any upside move in equities will likely result in lower volatility overall.

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: 709