Market 10/23: SPY back above 420 after a tense OpEx week

Shorts-cover rally brings market recovery

"However, most hedge volume is concentrated on exp 11/17 to cover FOMC. With today's 10Y yield retreating below 5% and SPY holding above put wall 420, if no additional macroeconomic tense events at the end of the week, VIX will mostly return below 20 and create a 'quiet' period for the market to have a shorts-cover rally early next week."

After the shake at the session open when bond yields unexpectedly hit peak in the morning, the US stock market gradually recovered after the first 30 minutes of opening. Yield plunged sharply throughout the morning as hedge funds rushed to take profit on shorts positions, creating stability in investor sentiment, pulling SPY/SPX back above put wall 420/4200 with SPX back to positive gamma region.

The above event pulled VIX quickly back below 20, satisfying all 3 conditions for the market to continue strong shorts-cover rally.

"Today's rally can be described as a 'vanna-bounce' with VIX decline leading to IV decline across the entire equities block, followed by delta decline creating conditions for market makers to exit hedge positions and cover shorts, providing fuel for equities to go up and continue trimming negative delta leading to the domino effect commonly seen in shorts-cover rallies after heavy negative-gamma OpEx." - Steve Le

Overall, if the above 3 conditions continue to be maintained, SPY and the market in general can recover in the next 2 days or until SPY/SPX hits vol trigger 430/4300. At 430/4300, if shorts-cover rally from options positions becomes flat gamma (out of fuel), if buyers decide to support by buying equities, VIX will return below 18 and create conditions for the rally to continue to SPY/SPX~440/4400 call wall.

10Y Yield nearly touches 5%, Bill Ackman contributes to market reversal

10-year bond yield hits peak 5.02% causing widespread stock price decline, raising concerns about economic growth erosion.

After touching 4.97% this morning, yield plunged immediately when Bill Ackman announced closing shorts positions and hedge funds started to cover:

More than half of global stocks are currently trading below the 200 MA.

However

One week left until the Fed's November meeting, however most investors believe the Fed does not need to raise interest rates, as current bond yields are already tight enough on the market.

Some other impacts:

Mortgage rates continue to rise: After hitting 8% for the first time in 23 years, mortgage rates are expected to rise further due to yield pressure → Home buying capacity continues to decline.

Student loans may become more expensive: As interest rates on student loans may increase. This is the second largest expense (after home loans) that consumers need to cover.

Car loans more expensive: Average interest rate for new car loans with 5-year term is 7.62%, highest in 16 years. Delinquency rate for auto loans rises to all-time high of 6.1% → Many consumers unable to afford payments.

Savers may benefit: As interest rates on money market funds, CDs, etc., are all above 5% - the highest interest rate in over 15 years.

EU consumer confidence index declines - International trade hard to recover

Eurozone October consumer confidence index falls to 7-month low of -17.9.

Previously, international trade has shown signs of weakness. European consumer confidence index declines again, plus volatility in the US economy may hinder export recovery.

Key events this week:

Building permits - Wednesday
New home sales - Wednesday
Fed Chair Powell speaks - Wednesday
Q3 2023 GDP - Thursday
Pending home sales - Thursday
September PCE inflation data - Friday

Some other news:

30% of S&P 500 companies will report earnings this week.

Foxconn stock drops 3% after China announces tax and land use rights investigation.

Chevron acquires rival Hess for $53 billion. This is the second largest merger among the largest US oil majors.
Giant pharmaceutical company Roche (Switzerland) agrees to acquire Telavant Holdings for $7.1 billion.
Investors net outflow, China issues additional $137 billion in public debt:
- In the past month, investors withdrew a net $53.9 billion to foreign accounts, the largest amount since January 2016.

- On Tuesday, China is expected to approve the issuance of an additional $137 billion in public debt, and it is likely that this debt will continue to increase in the future.