Market 10/24: SPY defends 420 amid stable bond yields

Shorts-cover rally ends after morning

Stock market opens Tuesday's trading session with fairly stable sentiment as most companies reporting earnings this morning surged strongly. Stable bond market throughout the morning is the optimistic highlight for cash flow, helping SPY rally to near the volatility trigger at 425 before pulling back.

However, the conditions to continue maintaining buying pressure were still satisfied in the morning with VIX, despite a slight bounce when SPY was rejected at 425, continuing to turn back at 20 and 10Y Yield completely suppressed to 4.831%

Overall, if the above 3 conditions continue to be maintained, SPY and the market in general are likely to 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 buying equities, VIX will return below 18 and create conditions for the rally to continue to SPY/SPX ~440/4400 call wall. - Viet Hustler 10/23

Overall, the noteworthy point is the strength of the “vanna-bounce” as Viet Hustler described this rally, clearly demonstrated in the morning when VIX refused to drop further, leading the market to gradually stall and reverse when VIX started rising again, amplifying the impact of put delta volume as SPY and SPX remain in negative gamma territory.

Overall, the conditions to maintain the rally have not changed: VIX under 20, SPY above 420 and 10Y Yield under 5%. However, investor buying strength is noticeably weaker than expected due to the impact of political tension news, making the target from now until FOMC 11/01 mostly at 430 with a bottom at 420 instead of aiming for the 440 call wall as previously.

Finland continues to accuse Chinese ship of deliberately sabotaging gas pipeline

China's Newnew Polar Bear ship accused of deliberately breaking the gas pipeline from Estonia through Finland, with evidence of the ship's anchor found on the Baltic Sea bed. This is an extremely serious accusation as energy security is Europe's top concern right now, with both Finland and Estonia being NATO members.

Meanwhile this morning, China dismisses Defense Minister Li Shangfu. Are the two above events related?

October preliminary PMI: economy gradually improving, inflation slowing

Despite the sharp decline in data in recent weeks, S&P Global's October preliminary PMI shows improvement in manufacturing and services sectors (both predicted to decline).

• Manufacturing PMI: 50.0 (previous month 49.8, expected 49.5)

• Services PMI: 50.9 (previous month 50.1, expected 49.9)

• October preliminary PMI is one of the most optimistic economic indicators in recent months → Q3 GDP growth forecast will be good data.

• Future output expectations also climbed to the highest level in nearly a year and a half despite geopolitical tensions.

Despite rising oil prices, businesses' input price inflation has dropped sharply to the lowest since October 2020.

Eurozone October preliminary PMI down 0.6 points to 46.5, below expectations, due to services sector decline. The US is currently the only region where PMI did not decline.

Bond yields reverse, $51B 2Y auction as expected

After surging above 5% in recent days, bond yields have now reversed lower. 30-year Treasury yield has fallen below 5%.

Today's noon $51B 2Y bond auction proceeded as expected with yield at 5.055% matching market levels. This is the 2nd 2Y auction without major volatility. This is also the first decline in 7 months.

Dollar surges after PMI news, breaks 106 mark.

Oil prices drop sharply on demand concerns

WTI crude down 2.19% on the day and currently at 83.83 USD/barrel;

Brent crude currently down 2.04% at 88.098 USD/barrel.

• Prospects of additional crude from Venezuela and rising US crude inventories are pressuring oil, overshadowing geopolitical risks.

• On the other hand, concerns about escalating conflict have eased amid growing calls for Israel to reconsider attacking Gaza.

• Oil prices back to pre-war levels.

Bloomberg reports Russia's oil flows steadily increasing as Moscow complies with pact with Saudi Arabia to prevent weakening of oil exports to global markets.

Update on earnings results of some major companies

1. Coca-Cola

Coca-Cola reports Q3 earnings beating analyst expectations.

• Revenue: up 8% to 11.91B USD, higher than 11.44B USD expected

• Profit: 3.09B USD, higher than 2.83B USD expected

• EPS: 74 cents vs 69 cents expected

All Coke beverage categories reported volume growth. Both sparkling beverages and juice, dairy & plant-based beverages divisions reported 2% volume increase.

2. 3M

3M's Q3 earnings also better than expected with:

• Revenue: 8.31B USD, 4.52% above estimates, up from previous year's revenue of 8.62B USD.

• EPS: 2.68 USD, higher than the estimate of 2.34 USD and slightly down from 2.69 USD in the same period last year

3. General Motors

Revenue increased but net profit decreased, but overall results still better than analysts' expectations as GM struggles with labor strikes that cost this automaker about 200 million USD per week.

• Revenue: 44.1 billion USD, marking a 5.4% increase from Q3 2022.

• Profit: down 7.3% to 3.1 billion USD.

• Net profit margin: down from 7.9% in Q3 2022 to 6.9% in Q3 2023.

• EPS: 2.28 USD vs. expected 1.18 USD

Other news

1. United Auto Workers (UAW) announces targeted strike at Arlington Assembly Plant - General Motors' largest plant. A total of 5,000 workers have joined this targeted strike and the total number of UAW strikers has increased to 45,000 members.

2. China dismisses Defense Minister Li Shangfu. Qin Gang, who was dismissed as foreign minister in July, was also stripped of his state councilor position today.

3. Xi Jinping strengthens support for China's economy by issuing more new debt

4. CAE agrees to sell its healthcare business segment to Madison Industries for a transaction value of 311 million Canadian dollars.