Market 12/01: SPX hits call wall 4600 while small caps continue to shine

Macro structure:

Cash flows rotating back to small-caps throughout the past week with reasons:
- Bond yields decline
- Confidence and soft-landing
- Profit margins better than expected after earnings reports
- Optimistic sentiment after Thanksgiving week retail data
Options positions of IWM extremely light compared to SPX and QQQ, plus good earnings from many key names created short-squeeze
- However IWM has now hit call wall at OpEx today and is likely to pullback lightly early next week.

SPX continues to maintain in positive gamma environment to suppress volatility with very large call wall at 4600, put wall 4400 and gamma flip at 4500 “risk-off” level.
- Most positions focused on 12/15 create extremely favorable environment for rally at present time.
- SPX is likely to pullback here and unable to break above 4600 level until demand for calls above 4600 appears

Key points:

Still too early ("premature") to be confident about containing inflation or laying out plans for rate cuts.
Fed plans to “keep policy restrictive” until they believe inflation is returning to 2%.

=> Conclusion: low likelihood Fed continues hiking rates, i.e.,

… high probability Fed pauses on rates for a period to observe (long pause),
… lower probability Fed cuts rates next year (real pivot).

Fed's statement only warns against the market's “overly positive and excited” attitude last week as the whole market expects Fed rate cuts:

Total value of money market funds (MMF) rose to 5.836 trillion USD, highest in history.

Inflows into both types funds for retail investors and funds of institutional investors (strong increase +71 billion USD).

Because institutional funds usually wait until rates peak (or start declining) to invest in T-bonds.
(... because they can enjoy higher yields if held to maturity - or sell at higher market prices if Fed cuts rates next year).

Meanwhile, Fed's balance sheet value declined sharply - total -14.7 billion USD last week to lowest since April 2021.

Fed's QT policy continued to accelerate last week, as Fed reduced up to -12.3 billion USD in financial assets on balance sheet (red column below).

Reason due to Fed's emergency support fund for banks (BTFP) declining about -228 million USD last week vs previous.
- will Fed reduce BTFP funding in the near future?
However, BTFP remains at record high (~113.87 billion USD), meaning banking system still receiving major support from Fed…
- as people less interested in bank deposits and choose to invest in MMF.

This even worse when unrealized losses (Unrealized losses) of banks at record high, -684 billion USD in Q3…
— due to surging mortgage rates reducing value of mortgage-backed securities.

Contrary to expectations of increase, ISM October manufacturing PMI at 46.7, below expected 47.8.

All indices in ISM report recorded declines.

Prices index (at 49.9) higher than expected but still below 50 threshold → The manufacturing sector is still contracting overall.

Pfizer stock falls more than 7% - biggest one-day drop in 3 years:
- Weight loss drug trial paused due to side effects.

- Texas sues Pfizer for allegedly providing inaccurate information on Covid-19 vaccine efficacy.

Evergrande needs to present debt restructuring plan by 12/4.
- The company is in last-minute negotiations to avoid liquidation of overseas assets before Hong Kong court rules next Monday.

- Evergrande creditors demand equity stakes to control the company's restructuring.

George Santos expelled from Congress for corruption, reducing Republican seats further.

Brazil to join OPEC from January 2024.
- Brazil currently produces 3.2 million barrels of oil/day.
US home prices have never been this expensive - 10% higher than the 2008 peak, while supply is 40% below the historical average.