/ October 20 / Weekly Preview
-
Monday:
N/A
---
Tuesday:
N/A
---
Wednesday:
N/A
---
Thursday:
Initial Jobless Claims (depending on Gov. Shutdown)
PPI (depending on Gov. Shutdown)
Retail Sales (depending on Gov. Shutdown)
---
Friday:
Inflation Rate YoY (3.1% exp.)
Core Inflation Rate YoY (3.1% exp.)
Building Permits (depending on Gov. Shutdown)
Housing Starts (depending on Gov. Shutdown)
-
Monday:
Steel Dynamics, Inc.
---
Tuesday:Netflix, Inc.
GE Aerospace
Coca-Cola Company (The)
Philip Morris International Inc
RTX Corporation
Texas Instruments Incorporated
---
Wednesday:
Tesla, Inc.
SAP SE
International Business Machines Corporation
Thermo Fisher Scientific Inc
Lam Research Corporation
Amphenol Corporation
Boston Scientific Corporation
---
Thursday:
T-Mobile US, Inc.
Intel Corporation
Union Pacific Corporation
Honeywell International Inc.
Blackstone Inc.
---
Friday:
Procter & Gamble Company (The)
Sanofi
General Dynamics Corporation
Dip-Buyers to the Rescue
Got a question about the markets, your investments, or a topic you’d like us to discuss in an upcoming article? We read every message and may feature your question in our daily write-ups!
Email: andrei@signal-sigma.com
Follow & DM on X: @signal_sigma
Over the past week, we’ve encountered a sharp pickup in volatility which manifested in quick and unpredictable reversals that whiplashed traders all over between support and resistance. The tape has become increasingly fragile, with Euphoria and DOOM sentiment just a couple of percentage points apart.
During the first part of the week, markets initially bounced hard over president Trump’s partial reversal on the China tariffs. Then, the banking sector came under scrutiny as regional banks revealed exposure to loan losses, fraud accusations, and deteriorating credit conditions. Contagion became a running theme after Zions Bank flagged a $50 million loss and Western Alliance Bank faced fraud claims. Furthermore, liquidity problems appeared as a sudden sharp increase in borrowing from the Fed’s repo facilities, rising over $15 billion in two days. This is a clear signal of stress in short-term funding markets.
Meanwhile, comments by Fed Chair Jerome Powell soothed the markets somewhat, as he emphasized that quantitative tightening (QT) is nearing its end. This should alleviate funding pressures and lower long term rates. Late in the week, Trump also backpedaled on tariff threats and confirmed talks with Xi Jinping would still proceed. Some regional bank earnings came in better than expected and lifted the sector modestly.
With the week’s trading range coming in at +/- 2.5%, technicians will argue that conditions remain in a balance. Bullish sentiment definitely cracked but remains unbroken. The market initially fell to the 50-DMA and bounced, but remains range-bound between the 20 and 50 DMAs.
Overall, the price action is jittery with confidence lacking. This week will test the bulls again, with a barrage of high profile earnings announcements (Tesla, Netflix, Lam Research, Intel among key companies) on the backdrop of stretched valuations, headline risk and funding stress. A potentially volatile mix!
Markets ended the week on a positive note, but did not convincingly break out to the upside. While the bounce relieved some pressure, the added volatility is unwelcome for bulls. The VIX Volatility Index spiked to 28 before settling at 20, highlighting instability and risk. Options markets swinged from positive to negative total GEX, finishing on a barely positive note. In theory, positive GEX should result in calmer markets, as dips will be bought and rallies sold during the cash session.
Now, we are stuck in a consolidation range which could provide a jolt if either support ($652) or resistance ($665) are taken out on SPY. It should be pointed out that several market breadth metrics have deteriorated during the week. Sentiment has collapsed to Extreme Fear levels, despite the market being just a couple of percentage points away from all time highs, as the measure below shows:
Market breadth deterioration can also be seen at the number of stocks trading above key moving averages, especially the 20-DMA (blue bars). While it’s too early to call a “top”, the index level of the market can’t keep moving up without adequate participation. Get the Market Study by clicking here.
Rising correlation across risk assets suggests that macro factors, liquidity, rates, and credit dominate technical setups. Mag-7 SPY Correlation Variance for instance (upper panel) has been trending lower since mid-September.
This usually occurs in bearish environments, where traders are insensitive to which stocks they hold (hence the similar correlation to the market). Bullish environments tend to be associated with rising variance, as capital rotation dampens volatility.
All of this is to say that there are multiple reasons why investors are on edge right now (and multiple metrics that reflect it).
However, there are also substantial reasons to remain bullish. First and foremost, we just had a positive confirmation from the market regarding the Fed’s rate cut in September. Analyzing all rate-cut instances from the past 25 years, the key interval to watch is 1-Month. September 17 (date of the last rate cut) to October 17 was positive for SPY, which bodes well for 3-Month and 1-Year returns (+5.5% and +16% median returns), but is less favorable for the 6-Month outlook (+2.8% median returns).
In any case, the long, protracted bear markets with severely negative longer term consequences seem avoided at the moment.
The ongoing government shutdown and a heavy slate of earnings will certainly move the market this week. CPI data will also be released next Friday. Q4 has started on a slightly sour note following the spectacular rebound form the April lows. As far as seasonality is concerned, this is a very “middle of the road” quarter, with historical performance ranging from a high of +12% to a low of -7.5% by this point.
Conditions for equities to continue their rebound are strong earnings, especially from regional banks still due to report, as well as any macro data that could allay inflation fears.
At this juncture, surprises tend to be punished more severely than data that comes in “as expected” simply because expectations are very high and surprises tend to be to the downside. With 12% of S&P 500 companies having reported results so far:
- 86% reported a positive EPS surprise
- 84% reported a positive revenue surprise
And the market barely moved. Stocks have pushed too far, too fast so it’s unsurprising to see investors take a break from relentless buying. There remains a disconnect between psychology and positioning, as the latest AAII bull-bear survey shows. Bearish sentiment, expressed as expectations that stock prices will fall over the next six months, have increased to 46% — unusually high for a metric that averages 31% historically. This is far more unusual since it’s occurring within single digit distance to all-time-highs.
Our takeaway is that the contrarian position is to remain bullish. Normally, corporate earnings season should provide a tailwind for stock prices, especially with expectations having been lowered dramatically.
Q3 EPS estimates were originally $243.25 for S&P 500 companies, but declined to $232 / share at the start of the quarter. As such, a high percentage of companies should provide “earnings beat” headlines (around 70-80%). This will help justify current valuations, especially for companies with strong pricing power and exposure to secular growth trends like AI and automation — which have been the market leaders anyway so far.
And then there are stock buybacks.
Citadel reported share repurchases of over $1 trillion expected in 2025. This is one of the strongest periods of corporate repurchase activity in market history and equates to $7 billion daily. While the buyback window is temporarily closed, these programs will see a resurgence in the latter part of Q4. As such, this consistent corporate demand helps support prices and absorb selling pressure.
It’s also why market makers are firmly bullish on the market at the medium term (click here for study).
Our Trading Strategy
With the calendar now turning to one of the best seasonal time of the year for equities, our default positioning is risk-on, despite the jitters and vulnerabilities present. Until we see a clear bearish downturn, there is no need to be extra defensive.
Although some investors remain skeptical at the margin, many institutional and quantitative strategies still allocate capital based on price trends. These are positive at the moment.
Those investors sitting on cash are certainly feeling the need to participate and will most likely fuel another melt-up or dip-buying stage when either a breakout or breakdown happens. According to Citadel, FOMO is still very real, and last Friday’s 2.71% decline was met by retail flow skewed 11% better to buy (vs a 4% average). It was the most significant single-day call buying ever.
This is an environment where we simply need to participate with the markets, despite our fears or “better judgement”. Tomorrow’s rebalancing session for Signal Sigma strategies (especially Enterprise) will most likely confirm our thinking.
Signal Sigma Research & PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!
Disclosures / Disclaimers: This is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this blog post. I currently do not own or plan to own any position, long or short, in the securities mentioned.
I am not a financial advisor licensed in the United States. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject to change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this blog post.
I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter. Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.
I wrote this blog post myself, and it expresses my own opinions. I do not have a business relationship with any company whose stock is mentioned in this blog post. The information in this blog post is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
The primary purpose of this blog post is to share industry expertise and research and receive feedback (confirmation / refutation) regarding my investment theses.