The S&P500 ($SPX) ended the week 0.7% lower, with the long-term downtrend continuing to act as resistance. Thanks to year-end consolidation, the SPX now has a shallow uptrend as well.
2023-01-22-SPX Trendline Analysis - Daily
In terms of moving averages, the 200-day continues to provided resistance, while the 50-day moving average switched to a support role since November.
The ADX and price volume signals continue to show bullish trends.
2023-01-22- SPX Elliott Wave Analysis - Daily - Primary Y
The Elliott Wave signal remains bearish. The current count suggests the beginning of a Minor 3, which would take the SPX back to the October low. On the flip side, rallying back above 4100 would be extremely bullish and require a relabeling.
Apologies for the short/late post last week. After a weekend trip, I returned to a cold home and a busted furnace. A good reminder that owning a home has a lot of positives, but it definitely meets the definition of a liability from a personal finance perspective.
The technical set-up (noted above) looks promising, but underlying economic data isn't keeping pace. For instance, Wednesday's sell-off coincided with the release of December retail data, which showed sales falling 1.1% month over month. Retailers like Macy's ($M), Kohl's ($KSS), Nordstrom ($JWN), etc., rely heavily on the holiday season for annual profitability; so much so that "Black Friday" gets its name from the expectation that it's the day that puts retailers into the "black" for the year (i.e. negative numbers / losses in red ink, positive numbers / profits in black ink). This year, the hope was that holiday sales would eliminate high inventory levels...profitability would be a welcome bonus.
You probably heard something about the U.S. debt-ceiling last week as well. On Thursday, the Treasury announced that the U.S. exceeded its self-imposed debt limit of $31.4 trillion. Now, the Treasury will enact so-called "extraordinary measures," to meet financial obligations. Per the Brookings Institute, the U.S. debt ceiling has been raised 20 times since 2001...basically once a year. Since the debt ceiling comes from Congress, there's a lot of rhetoric and posturing until the very last minute and then a deal gets pushed through. With regard to investing, it's basically a nothing-burger until the June/July timeframe.
And on Friday, monthly options expired. Normally, quarterly option expiration is all that's worth mentioning (i.e. triple/quadruple witching days), but the influence of non-quarterly opex increased dramatically over the past year. In fact, $1.3 trillion worth of options were in play on Friday, which is the biggest non-quarterly expiration EVER. That's a lot of leverage, and definitely impacts volume/price movements.
Behind the scenes, so to speak, YOLO option trading has gone from retail traders to institutions, from WallStreetBets to Wall Street. Market makers and institutions are exploiting a loophole account financing using index options; specifically the daily contracts, which are called Zero Days 'Til Expiration or "0DTE".
Source: Rocky Fishman - Goldman Sachs
If an institution opens and closes a trade intraday, no additional collateral is required because the account balance doesn't change at the end of the day when the books are closed. In the end, it's another form of leverage, used to buy a levered instrument, to exploit intraday price movement, which ultimately moves intraday prices thanks to the volume of trades...what could go wrong?
Earnings season is in full swing this week, after an underwhelming start. So far, ~10% of the S&P500 reported Q4 results. Sales are up ~7%, while earnings are down ~6%. Those figures broadly align with the higher prices / higher costs theme resulting from inflation. On Friday, we get December data for Consumption Expenditures (PCE); the Fed's preferred measure of inflation.
Best To Your Week!
P.S. If you find this research helpful, please tell a friend.
If you don't, tell an enemy.
Sources: Bloomberg, CNBC, Federal Reserve Bank of St. Louis, Hedgeye, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics
Charts provided courtesy of stockcharts.com.
Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.
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