Charts of the Week

Options are the Tail that Wags the Dog

Never before have options played such a significant role in single stocks, ETFs or the indices as they do now, with an enormous such in volume over the last several years.

While this is often attributed to increased retail participation, the bigger story is institutional participation growing along with more expiries and the 0DTE revolution, if we can call it that. Whereas more and more volume is in contracts that expire within 24 hours or less.

Seasonality Has Not Disappointed

November and December are among the most seasonally positive months of the year, particularly in years where the market is up year-to-date. This year we’ve seen a rather prolific version of that seasonality after the correction from August to October. Bringing eight back-to-back weeks of gains in the S&P 500, the longest winning streak since November of 2017.

This has led to just over 46% of the S&P 500’s components trading into ‘overbought’ conditions per the relative strength index, though reading this metric is a bit more nuanced in an uptrend. Whereas most of the time an overbought condition can continue in an uptrend for longer than participants may expect, similarly an oversold condition can continue in a downtrend longer than participants may expect.

Free cash flow for the large and mega caps has also been quite strong, even with the hiking cycle we’ve seen, as the economy barely blinked over 2022 and 2023, giving cause for optimism about 2024 as we close out the year.

Speaking of optimism, fund managers surveyed by Bank of America are the most bullish they’ve been since January of 2022, which is interesting because we’re also trading back to similar equity prices at the index level as we were then.

Managed money has also increased their allocation into equities back to levels we haven’t seen since July of 2023, with bearish exposure dropping to flat. Meaning this isn’t necessarily a very well-hedged market (as we see similar levels of lower hedging flows in SPX put skew as well).

Record Cash and Treasury Inflows

Household cash and equivalents are near all-time highs. This measure is thoroughly dragged upward as it is an aggregate of all US households, including the most wealthy.

Such an abundance of excess cash has led to record inflows into money markets with rates rising as much as they had in 2022 and staying high throughout 2023.

Similarly, a record inflow in to US Treasuries was led in no small part by US households.

The Resilient Real Estate Market

Existing home sales are falling, but that isn’t in isolation necessarily bearish for the housing market. If anything it is a sign that there is a lot of supply that is on the sidelines until rates come down or the economy softens (or both).

That imbalance in supply and demand, with existing home sales at the lowest levels since 2010, combined with higher rates has led to housing being much less affordable than renting.

This is because existing home sales historically accounted for the majority of supply. With those sales slowing materially most of that supply is coming from new home sales, which are much smaller in comparison. Leading to prices staying sticky to the upside into an anticipated easing cycle by the Fed.

Rates, Rates, Rates

We’re heading into what may be a rather aggressive global central bank hiking cycle, with the Fed expected to cut by 160 bps next year, just as US interest rates neared their long-term historical average.

The year ahead could be the first time since 2020 that there are more global cuts than hikes.

With 152 global central bank rate hikes expected during 2024 — so far.

A Contrarian Opportunity in Energy?

Fund managers are the most underweight commodities vs bonds since March of 2009, when pessimism was extremely high about the economy. While this environment is a lot different than what we were experiencing then, we do believe the relative hatred for commodities as an allocation here could be presenting us with an opportunity.

We’re particularly constructive on energy, looking at XLE and XOP as swing longs as well as a number of names in the space that we’ve identified to our Premium members. We see net exposure by hedge funds at lows that suggest the lack of allocation leaves many in a position where they may rotate into the space, covering shorts and increasing net long exposure in 2024.

Energy companies are also able to increase margins, using less rigs to produce more oil as technological advances enable greater productivity. As an example of that trend, in 2023 the US produced more oil than any other country in history, and with significantly less rigs than what it had used in past years.

That wraps up this edition of Charts of the Week! I hope you enjoyed it! Our comprehensive 2024 outlook is coming soon for Premium members and will have our latest research and thoughts for the year ahead.

You can get 30% off of your first month or year (depending on the plan you choose) until Wednesday, December 27th. Take advantage of this generous opportunity before our sale ends!