Welcome to another Charts of the Week! It’s been quite the week! Ayesha and I recapped it in the latest MacroVisor Podcast. But there’s plenty more to cover in the charts as well. Let’s dive in!

Unrealized Bank Losses Rose in Q3

During Q3 rates rose, and as they did we saw an increase in pressure as unrealized losses grew among US banks.

These losses are probably quite a bit more contained now, however, as yields have dropped with a strong bid in bonds of late. More on that later.

Record Options Expiration

Today we saw $4.9 trillion of notional options exposure expire, which led to some intraday volatility but overall it was a largely tame trading day.

Heading into this week, IWM call open interest surged again, closing in on all-time highs. This also pushed IWM call skew to very, very high levels as the lopsided exposure has shifted the distribution of volatility premiums.

Speaking of volatility, NASDAQ volatility has hit lows that we have not seen in years. As a result, downside hedges are quite attractive at the index level, particularly in QQQ where call skew is also quite elevated. Making 3M out ATM puts even more attractive in comparison as a portfolio risk hedging vehicle.

Small Caps and Retail Sentiment Surges

The Russell 2000 has soared by nearly 10%, bested only by palladium, up 16.13 so far in December. 30-year bonds have also continued their impressive run, clocking a 6.44% gain.

Retail investors have registered the highest level of bullishness since mid-July, during the summer stock rally when bullishness was pervasive.

Dumb Money Confidence, as it’s called, surged to significant highs recently, suggesting that perhaps there’s a heightened chance of a pullback, but it’s no guarantee.

There are reasons that many have held on in 2023. Buying and holding has beaten every popular chart-based trading model this year.

Does that mean we’re going to have the same kind of year ahead? It’s possible, but before that we do have a lot of rather bullish positioning that may need to settle down.

Signs of a Stretched Market

Call skew in S&P 500 stocks has surged as put skew has fallen quite significantly, demonstrating stretched positioning in the options market. Particularly among some of the very popular Magnificent 7 stocks, as well as many of the index ETFs.

Futures positioning in US equity index futures is also quite elevated, suggesting that there is a rather large net long position in place by money managers and traders.

Hedge funds have significant gross leverage, but their net leverage remains rather low compared to 2021, making them an exception to the stretched positioning. However, they are stretched elsewhere. Single stock short exposure is rather elevated, and many of those same hedge fund favorite shorts have been rallying significantly over the last few weeks.

Retail traders and investors are also buying stocks again, according to Vanda Research. Flows that are somewhat unusual based on prior seasonality from 2014-2022.

Peak Seasonality Just Ahead

Speaking of seasonality, the next two weeks tend to be the best weeks of December according to seasonality in the S&P 500 from 1950-2022, as measured by Goldman Sachs.

Record Easing of Financial Conditions

November’s extreme easing of financial conditions had a rather profound impact.

When looking at Bloomberg’s measure of financial conditions, it’s as if the Fed never actually tightened at all. We’re now at levels of easiness that exceed that of where we were before the tightening cycle started.

And yet on Wednesday the Fed told us there are not two, but three cuts coming next year during a week when the ECB and BoE both said it was too early to consider cuts and they were instead focused on inflation.

That dovish tilt by the Fed has created a lot of excitement going into 2024, with six cuts priced in by Fed Funds Futures. The market may be getting a little bit ahead of itself, unless there’s some economic or financial problem coming that would warrant such aggressive cutting by the US central bank.

The Big Picture in the US

During prior cycles we’ve seen job openings and SPX performance show very similar trends. This time could be different as the labor market remains somewhat structurally tight and the services industry is still somewhat resilient. But that’s no guarantee that if job openings keep falling that the market won’t catch down lower. There is a threshold where it becomes a problem, we may just not be there yet.

In addition to job openings falling, we’re also seeing payrolls growth slowing. That suggests that ISM manufacturing PMI may also continue to drop. Today’s flash PMI data showed manufacturing continuing to contract.

Fuel prices are also falling, signaling further relief at the pump for consumers. Just in time to free up some budget ahead of the holidays.

Year-over-year PPI has also rolled over and seems to show that there is more disinflationary pressure in the pipeline. Though core CPI still seems sticky at 4%.

Retail sales firmed up in November, but they were led higher by autos, rather than discretionary spending. Autos had fallen appreciably in October and this gain doesn’t quite make up for that drop. At the very least, however, it does show that nominal retail spend is firming up again and that’s a healthy sign.

Atlanta Fed GDPNow was revised higher to 2.6% from 1.2% as we received stronger than expected economic data. Suggesting that the US economy may close out the year without any signs of meaningful slowing.

The Trouble in China Continues

China’s real estate market continues to languish, as newly started construction has crashed, now down 23.66% year-over-year.

Foreign direct investment in China also fell for the first time ever in 2023, a rather dramatic sign that confidence in the country’s markets and leadership has faded.

Chinese exports to the US are also down 20% from their peak, a side effect of the trade war that continues to stoke tensions between the countries.

Commodities Check-Up

Copper supply growth is slowing and will go negative by 2027, suggesting that more exploration is critical to identify new sources of copper as the world drives more EVs and builds more infrastructure.

Global oil supply is expected to remain oversupplied in 2024, but there are many factors that may alter that potential outcome, including what happens in China. We’ll be covering that as a part of our forthcoming 2024 outlook.

Energy production in the US has hit a record high, another reason we’re bullish of the energy sector here. There are opportunities, even at lower prices, for many companies in the space to make a healthy profit.

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