The CASP: November 10, 2023
Thursday was a fake-out bearish breakdown. Is it up, up and away into year-end, or will fundamental reality take hold?
In one of the great downside fake-outs in recent memory, within hours of declaring that a correction down to SPX 3721 was underway it became clear the market wanted higher, at least for the day. What a business.
As discussed starting on page 66 of the October 15 WOTE Report, and conducted every day via private Xwitter, I utilize what I call the Cross-Asset Market Signaling Process for tactical risk management of my positioning around my core market view1. In light of yesterday’s major fake-out, I thought it was only fair to publicly update my tactical market view through the lens of The CASP.
VOL: Moderately Bullish.
Overall, VOL certainly confirmed the move up in stocks, but the fact VVIX materially outperformed VIX is a good sign the VOL market has not granted its full endorsement of the move up.
As discussed in the November 9 CASP update, CDX did not fully endorse the bearish breakdown in stocks. In hindsight, ignoring the lack of bearish enthusiasm from CDX was my biggest mistake in jumping to conclude a fresh correction leg was underway.
On Friday IG CDX fell by a hefty 2.4 bps and is now decisively below its 50dma. There is no way to interpret this other than bullish for equities in the near-term. With the Fed decisively hawkish, long rates high and sticky, and the economy softening, bullish action in CDXs makes very little sense to me - but it is what it is. Until CDXs stop falling (I thought they had as of the 11/9 CASP update), equities are going to have a difficult time breaking down.
Breadth continues to be the biggest impediment to sustained equity market upside with the NYSE advance/decline line and 50dma breadth already materially diverging to the bearish side just two weeks off the 10/27 SPX low. And yesterday’s seemingly powerful advance was no exception: NYSE and NASDAQ advance/decline volume were exceedingly weak at just 2.4x and 1.8x. However…
The composition of breadth yesterday was not bearish with defensive sectors underperforming RSP, SPY, and IWM. Combined with bullish CDX signaling, the composition of breadth supports more equity upside in the very near-term.
Short-end rates up on a hawkish FED is bearish, but USD flat to down and TLT up is moderately bullish for stocks.
SPX Tactical Outlook
Bullish signaling from CDX with defensive sectors underperforming suggests the rally continues into early next week, but VVIX > VIX and very weak breadth structure say the rally is running on fumes. VIXperation Wednesday and OPEX Friday are likely key from a flows perspective while CPI Tuesday will be critical from a fundamental narrative perspective.
Zooming out, Mark Dow nails it in the xweet below: If equities are going to continue powering higher into year-end and through 2024 despite decisively hawkish monetary policy, in the absence of bull market confirmation from a wide swath of decisive breadth thrust signals I will need to completely reshape my framework. It’s that simple.