Weekly Trader's Outlook

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The regular Q4 earnings season is over and Q1 earnings season won't begin for about another two weeks. However, since not all companies follow a regular calendar quarter, this week, four S&P 500 companies reported fiscal earnings and four of them beat consensus EPS expectations. A detailed earnings calendar can be found by logging into Schwab.com and selecting Research>Calendar>Earnings.

Overall, 0 (0%) of companies in the S&P 500 have reported Q1 results so far. Below are the aggregate beat rates relative to the final results from recent quarters. I'll begin reporting this data as soon as Q1 is over.

From a growth standpoint, Q4 earnings were -2.9% year-over-year versus a -4.1% estimate when Q4 ended. Q4 revenues were +5.6% year-over-year versus a +3.8% estimate when Q4 ended. This compares to final growth rates of +3.8% and +11.5% respectively in Q3.

Better (or higher) than expected

• Existing Home Sales for Feb: 4.58M vs. 4.08M estimate
• Initial (weekly) Jobless Claims: 191k vs. 197k estimate

On target

• None

Worse (or lower) than expected

• New Home Sales for Feb: 640k vs. 685k estimate
• Durable Goods Orders for Feb: -1.0% vs. +0.2% estimate

This was a very light week for economic data. At just 191k, Initial Jobless Claims came in lower than expected and also 1k lower than last week. Claims are now averaging 196k for the past four weeks; the ninth straight week below 200k. As you can see below, the labor market remains very strong.

As you can see below, 2023 continues to have a rather cyclical bias. 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 Mar. 23, 2023):

Here is the 2023 YTD (versus 2022 full-year) performance of the major U.S. equity indices (as of the close on Mar. 23, 2023):

Last week's outlook was moderately bullish in the early part of the week, but volatile overall. With the SPX +2.2% on Monday and Tuesday, but -1.3% on Wednesday and Thursday, and a top-to-bottom range in the VIX of nearly 7 points, I'd say that outlook was right on target.

The net gain in the SPX through Thursday (Mar. 23) was +32.08 (+0.8%), but with the SPX down about 32 points as I'm writing this (midday Friday, Mar. 24), it's impossible to know if the week will end up net positive or negative overall. 

The SPX remains below the 50-day SMA (currently 4,013) and continues to struggle with the 100-day SMA (currently 3,961) and the 200-day SMA (currently 3,932). The current bear market low (3,577) from last October is about 9% below, and the start of a new bull market (4,292) is about 9% above current SPX levels.

With one week of trading remaining, March option volumes are averaging a potentially record-setting 47.7M contracts per day. That is above the final February level of 46.7M, and far above the March 2022 level of 41.0M. As a reminder, last month (February 2023) set a new all-time monthly record at 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 -11.8%
• VIX put OI was -32.0%

Historically, the daily change in the VIX and the SPX have been opposite each other about 80% of the time. These sharp declines however, are due to the March monthly contract expiration on Mar. 22. Therefore, I see the VIX OI Change as N/A for the market in the near-term.

As a result of the March monthly option expiration on Friday (Mar. 17), the following changes are calculated from Monday (Mar. 20):

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

• SPX call OI was +3.3%
• SPX put OI was +4.7%

While SPX volume tends to be mostly institutional hedging, these changes reflect a small bias toward the put side, so I see the SPX OI Change as moderately bearish 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 +10.6%
• ETP put OI was +6.3%

The aggregate changes in Exchange Traded Products options reflect a bias toward the call side, so I see the ETP OI Change as 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 +8.3%
• Equity put OI was +7.4%

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

Index OI Participation is +20.0% versus 2022 levels, so I see it as bullish in the long-term.

Equity/ETF OI Participation is -0.3% versus 2022 levels, so I see it as neutral in the long-term.

The VIX OIPCR is down 5 ticks to 0.30 versus 0.35 last week. Since this ratio tends to move in the same direction as the VIX index, this downtick seems mostly consistent with the VIX which was -2.90 points (-11.4%) over the last four sessions. However, it is probably being exaggerated by the March VIX contract expiration on Wednesday (Mar. 22). Either way, it probably implies that traders feel the VIX is likely to tick up just a bit in the near-term. Therefore, I see the VIX OIPCR as moderately bearish in the very near-term for the markets. This ratio is now just one tick above its YTD low, and it is below the 200-day SMA of 0.34. At the risk of overstating the impact of expiration, I see it as neutral in the long-term for the markets.

The SPX OIPCR is up 5 ticks to 1.97 versus 1.92 last week. Since this ratio tends to move in the same direction as the SPX, this increase seems mostly consistent with the SPX which was +32.08 points (+0.8%) over the last four sessions. However, it is probably also being exaggerated by the March options expiration on Friday (Mar. 17). Either way, it implies that SPX option traders (who are almost entirely institutional) have slightly more hedges outstanding this week and probably believe the SPX has some modest downside potential in the near-term. Therefore, I see the SPX OIPCR as moderately bearish in the near-term for the market. This ratio has risen for the past three weeks now, and it remains well above the 200-day SMA of 1.74. I see it as moderately bearish in the long-term.

The normally very stable Equity OIPCR is unchanged at 0.92 versus 0.92 last week. This ratio remains well above the yearly low of 0.76 reached in mid-December, and it remains only one tick below the two-year high it reached in February. At this level it implies that equity option traders (which includes a lot of retail traders) remain quite cautious in the near-term. But, retail investors tend to be wrong in the short-term, and this particular ratio has a contrarian history in the short-term. Therefore, I see the Equity OIPCR as moderately bullish in the near-term for the market. This ratio remains well above the 200-day SMA (currently 0.84), so I see it as still moderately bearish in the long-term.

The Cboe VIX VPCR has been mostly moderately bearish (<0.40) this week. The 0.39 level on Thursday (Mar. 23) was moderately bearish but the current reading of 0.49 as I'm writing this (midday Friday, Mar. 24) is neutral. Since intraday levels tend to decline as the day goes on, I see the Cboe VIX VPCR as moderately bearish in the very near-term.

The Cboe SPX VPCR has been neutral (1.60>1.30) all week. The 1.52 reading on Thursday (Mar. 23) was neutral, but the current reading of 1.47 as I'm writing this (midday Friday, Mar. 24) is neutral. 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 1.47 versus 1.40 last week, it is neutral in the long-term.

The Cboe Equity VPCR has been all over the map this week. The 0.77 level on Thursday (Mar. 23) was moderately bearish and the current reading of 1.00 as I'm writing this (midday Friday, Mar. 24) is bullish. With such a wide range this week, I see it as volatile in the very near-term. With a five-day moving average of 0.63 versus 0.72 last week, it is neutral 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 wavered between moderately bearish (>1.10) and neutral (1.10>0.90) this week. As a result, I see it as volatile in the near-term. And, since this pattern has been going on for about three weeks now, I see it as neutral in the long-term.

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 of 0.94 versus 1.04 last week, I see it as moderately bearish 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 four 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

This is still the only bear market in which the VIX has not (yet) touched or closed in Zone 4.

At the time of this writing (midday Friday, Mar. 24), the VIX is +1.67 to 24.28. That is still in the middle of Zone 2 and it illustrates how worries over the stability of the banking sector are still causing a fair amount of concern in the markets.  

At its current level, the VIX is implying intraday moves in the SPX of about 49 points per day (this was 50 last week). The 20-day historical volatility is 130% this week versus 128% last week. The VIX remains rather elevated compared to the first two months of the year. It is above its long-term average (19.74) and well above its long-term mode (12.42) which is the most common level of volatility.

With a top-to-bottom range this week of 6.98 points, day-to-day volatility has been substantial. At this level I see the VIX as still volatile in the very near-term for the equity markets. At the time of this writing (midday Friday, Mar. 24) the VIX is about 3½ points below its weekly high, but also about 3½ points above its weekly low. I see it as moderately bearish in the long-term.

On a week-over-week basis, VIX call prices have risen modestly while VIX put prices have fallen modestly. As a result, at +49 versus -20 last week, the VIX IV Gap (the average IV of VIX calls less the average IV of VIX puts) is higher, and in this range I see it as moderately bullish in the very near-term. The recent rise in VIX call prices and VIX put prices have both leveled off somewhat. Therefore I see the VIX IV Gap as 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, Mar. 24) the nearest VIX futures contract (which expires on Mar. 29) was trading at 24.85; about a half point above the spot VIX level of 24.28. Adjusting this price for the risk premium factor (which takes into account the time until expiration), the Risk Premium Adjusted Price (RPAP) is 24.37; very close to the spot price.

With an adjusted level that is very close to the spot price, futures traders are indicating that they believe the VIX is likely to remain about where it is 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 23.59 and 22.29 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.

While the VIX itself has been rather volatile again this week, the VIX Hedging Effectiveness has fallen back to Moderate in the near-term. At the moment, this means that options on the VIX (and possibly other volatility-related products) are showing only moderate sensitivity to market volatility, and may be only partially effective as hedging tools in the very near-term. VIX Hedging Effectiveness is Good 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.

On Thursday (Mar. 23) shares of Coinbase Global (COIN) fell about 15% after the crypto trading platform said it had received a warning notice from the Securities and Exchange Commission (SEC) that it will soon face securities charges. The formal declaration of an intended enforcement action known as a "Wells Notice," alleges that COIN violated investor protection laws, and that COIN's staking products require SEC registration.

CEO Brian Armstrong has criticized the SEC, saying that the rules surrounding staking are "too vague," and Chief Legal Officer Paul Grewal called the matter a "disappointing development." Rival crypto exchange Kraken recently settled with the SEC on similar charges, paying a $30M fine and agreeing to stop offering staking services. Back in January, COIN agreed to a $100M settlement with New York regulators over what officials described as significant failures in spotting and preventing criminal activity.

None

S&P Case-Shiller Home Price Index for January – This index measures the year-over-year change in the average prices of single-family, residential real estate across a broad section of 20 major cities in the US.

Conference Board Consumer Confidence for March – There are several other confidence measures, such as the University of Michigan Consumer Sentiment, and they don't always agree. Gasoline prices and stock market performance tend to have the biggest impact on these measures.

Pending Home Sales Index for February – This report measures actual contracts signed, whereas existing sales (reported last week) measures actual closings, so this one is slightly more forward looking. This one will usually only affect equity markets adversely if it comes in very low.

Initial Jobless Claims – For the week ending Mar. 18, 2023, claims were down 1k after being down 20k the prior week. The four-week moving average now stands at 196k, down 1k from the prior week.

GDP for Q4 – The third (final) estimate; usually released about 90 days after the end of the calendar quarter. This report typically causes far less market reaction than the Advance or Preliminary GDP report, which it revises.

Personal Income & Spending for February – These reports use data from the monthly employment report to gauge income from wages and salaries. Personal income is also sometimes used to forecast future consumer spending.

Personal Consumption Expenditures (Core PCE) for February – PCE includes durable goods and nondurable goods which are directly influenced by the retail sales reports and services. This is the Federal Reserve's preferred inflation gauge.

Chicago PMI for March – This report is a gauge of business conditions within manufacturing and service firms in the Chicago area. A reading above 50 indicates expansion and a reading below 50 indicates contraction.

University of Michigan Consumer Sentiment for March – 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.

As expected, the Fed hiked interest rates +0.25% on Wednesday (Mar. 22). It was the ninth consecutive rate hike since tightening began 12 months ago, for a total of +4.75%. There was no change to their quantitative tightening program which means the balance sheet reduction will continue at a rate of $95B per month. The median estimate for the peak fed funds rate FOMC members remains at 5.1%. 

As you might imagine, this led to a rather volatile week in the Treasury markets. The interest rate on the 10-year U.S. treasury ($TNX) began the week around 3.41% increased to 3.65% by mid-week, before falling in the latter half of the week. It is currently around 3.36% at the time of this writing (midday Friday, Mar. 24); a level that has provided some technical support over the past three months. 

Just before it happened, the probability of this week's +0.25% hike was 82%. For the eight years in which this data is available, whenever the probability has exceeded 65% just before a Fed meeting, a rate hike (or cut) has occurred. As you can see below, the fed funds futures are now pricing in very little chance (11%) of another rate hike on May 3 and a very high probability (82%) of a rate cut on June 14.

Stress and anxiety in the banking sector continue to drive volatility in the equity markets. The indicators say there is likely more volatility and directional uncertainty to come.  

While the Fed said it would not cut interest rates this year, the futures and bond markets indicate that a cut is now a very real possibility. Time will tell if banking sector woes will force a premature Fed pivot. 

As you can see below, there were a few more downgrades than upgrades this week and they net out to about neutral overall. But perhaps most notable is the number of indicators showing volatile indications. With no clear directional bias, the only logical outlook for next week is Volatile overall.  

Issue Number: 683