😎 Summer Sale Exclusive - Up to 50% off AI-powered stock picks by InvestingProCLAIM SALE

Markets Await Today's Comments From U.S. Fed

Published 11/14/2022, 04:58 PM
Updated 09/20/2023, 06:34 PM
US500
-
CAT
-
XOM
-
DX
-
HG
-
CL
-
VIX
-

Stocks finished last week higher, but as I noted on Thursday, we entered the period when option expiration takes over.

It is usually when the market gets pinned down due to those significant gamma levels. For the S&P 500, that big option gamma level is at 4,000, which is easy to see when taking all open interest levels across all strikes.

Puts + Calls

But what is also clear is that the level with the most significant number of open calls for this Friday’s OPEX is around 4,100, which means that unless that open interest level rolls higher, 4,100 is likely to be the extent to which the S&P 500 could rally this week. Once the index gets up to that 4,100 level, call option holders will likely start selling their call options, which would put a lid on things as market makers unwind long S&P 500 future hedges.

Puts and Calls

It would suggest that as we approach Friday, the S&P 500 is likely to trade in a band between, say, 3950 to 4050 to start with. If the index can get above 4,050, then 4,100 would be the extent I think we could see.

VIX

However, by Wednesday or Thursday of this week, that could begin to change because the VIX options expiration is Wednesday. It seems probable for the VIX to stay in the 22 or lower area, as that would wipe out nearly all of the calls that are due to expire this Wednesday. Those calls will start to lose value very quickly, and outside of an unforeseen event, as they lose value, hedges for the VIX will likely be sold, suppressing volatility. But with the expiration on Wednesday morning, we could start to see the VIX drift higher again.

VIX Options Chart

Financial Conditions

This morning could be the day when things shift because that is when Fed Vice-Chair Lael Brainard and the leader of the Doves, spreads her wings, takes flight, and gives her outlook on the economy. Based on the GS financial conditions index, which saw one of the most considerable easing of financial conditions in nearly 40 years, you would think she would try to push back on the market.

Now she could do one of two things: if the Fed is united, she should go out there and push back against the market and hammer home the fact that inflation is too high and the risk of not doing enough outweighs the risk of over-tightening. Or she can go out there and start talking about how things are two-sided and how they need to worry about over-tightening.

I hope the Fed is united and Powell and Brainard have a long discussion ahead of time. Because if she sticks with the dovish tone, financial conditions will continue to ease, which means the S&P 500 will probably test 4,100. Unfortunately, Powell is nowhere on the calendar anytime soon, and the Fed minutes are on November 23, which is plenty of time for things to get out of control.

GS US Financial Conditions Index

Brainard does need to push back, especially following the news on Friday that the University of Michigan saw 1-year and 5-10 inflation expectations rise. Powell made a point of this at the June FOMC meeting.

CONSPXMD Index Chart

US Dollar

The biggest reason financial conditions have eased is that the dollar has been hit hard and has fallen sharply. The dollar isn’t oversold yet, but it is getting close, and support at 104.25 needs to hold. I think support can hold for now.

USD Index Daily Chart

Oil

The falling dollar certainly creates problems; the number one problem is that it helps to push the prices of commodities up. You know, like oil. Oil looks bullish here, and if the dollar falls, there is good reason to think oil rises. On top of that, there is an ascending triangle, with a rising RSI, which probably suggests oil rises towards $100.

CFDs on WTI Crude Oil Daily Chart

Copper

Things like copper can also break out when the dollar falls. On top of that, there is hope the Chinese economy can turn the corner.

Copper Futures Daily Chart

Inflation

Price changes for copper and oil significantly impact the ISM manufacturing index prices paid index, which can tell us a lot about inflation’s direction.

NAPMPRIC Index Chart

Liquidity

This is precisely why the Fed can’t pivot or pause and will need to hold rates high for a long-time. Because there is still too much liquidity in the system, as supported by the reverse repo facility, which still has $2.2 trillion worth going through every day.

Reverse Repo Data

Exxon

If oil can head back to $100, then Exxon (NYSE:XOM) certainly has the potential to run to $120.

Exxon Mobil Daily Chart

Caterpillar

It is probably also why Caterpillar (NYSE:CAT) has been on the rise again, and maybe it continues to push higher toward $245.

Caterpillar Daily Chart

Original Post

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.