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Markets Await Today's Comments From U.S. Fed

By Michael KramerStock MarketsNov 14, 2022 03:58AM ET
www.investing.com/analysis/markets-await-todays-comments-from-us-fed-200632311
Markets Await Today's Comments From U.S. Fed
By Michael Kramer   |  Nov 14, 2022 03:58AM ET
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Stocks finished last week higher, but as I noted on Thursday, we entered the period when option expiration takes over.

It is usually when the market gets pinned down due to those significant gamma levels. For the S&P 500, that big option gamma level is at 4,000, which is easy to see when taking all open interest levels across all strikes.

Puts + Calls
Puts + Calls

But what is also clear is that the level with the most significant number of open calls for this Friday’s OPEX is around 4,100, which means that unless that open interest level rolls higher, 4,100 is likely to be the extent to which the S&P 500 could rally this week. Once the index gets up to that 4,100 level, call option holders will likely start selling their call options, which would put a lid on things as market makers unwind long S&P 500 future hedges.

Puts and Calls
Puts and Calls

It would suggest that as we approach Friday, the S&P 500 is likely to trade in a band between, say, 3950 to 4050 to start with. If the index can get above 4,050, then 4,100 would be the extent I think we could see.

VIX

However, by Wednesday or Thursday of this week, that could begin to change because the VIX options expiration is Wednesday. It seems probable for the VIX to stay in the 22 or lower area, as that would wipe out nearly all of the calls that are due to expire this Wednesday. Those calls will start to lose value very quickly, and outside of an unforeseen event, as they lose value, hedges for the VIX will likely be sold, suppressing volatility. But with the expiration on Wednesday morning, we could start to see the VIX drift higher again.

VIX Options Chart
VIX Options Chart

Financial Conditions

This morning could be the day when things shift because that is when Fed Vice-Chair Lael Brainard and the leader of the Doves, spreads her wings, takes flight, and gives her outlook on the economy. Based on the GS financial conditions index, which saw one of the most considerable easing of financial conditions in nearly 40 years, you would think she would try to push back on the market.

Now she could do one of two things: if the Fed is united, she should go out there and push back against the market and hammer home the fact that inflation is too high and the risk of not doing enough outweighs the risk of over-tightening. Or she can go out there and start talking about how things are two-sided and how they need to worry about over-tightening.

I hope the Fed is united and Powell and Brainard have a long discussion ahead of time. Because if she sticks with the dovish tone, financial conditions will continue to ease, which means the S&P 500 will probably test 4,100. Unfortunately, Powell is nowhere on the calendar anytime soon, and the Fed minutes are on November 23, which is plenty of time for things to get out of control.

GS US Financial Conditions Index
GS US Financial Conditions Index

Brainard does need to push back, especially following the news on Friday that the University of Michigan saw 1-year and 5-10 inflation expectations rise. Powell made a point of this at the June FOMC meeting.

CONSPXMD Index Chart
CONSPXMD Index Chart

US Dollar

The biggest reason financial conditions have eased is that the dollar has been hit hard and has fallen sharply. The dollar isn’t oversold yet, but it is getting close, and support at 104.25 needs to hold. I think support can hold for now.

USD Index Daily Chart
USD Index Daily Chart

Oil

The falling dollar certainly creates problems; the number one problem is that it helps to push the prices of commodities up. You know, like oil. Oil looks bullish here, and if the dollar falls, there is good reason to think oil rises. On top of that, there is an ascending triangle, with a rising RSI, which probably suggests oil rises towards $100.

CFDs on WTI Crude Oil Daily Chart
CFDs on WTI Crude Oil Daily Chart

Copper

Things like copper can also break out when the dollar falls. On top of that, there is hope the Chinese economy can turn the corner.

Copper Futures Daily Chart
Copper Futures Daily Chart

Inflation

Price changes for copper and oil significantly impact the ISM manufacturing index prices paid index, which can tell us a lot about inflation’s direction.

NAPMPRIC Index Chart
NAPMPRIC Index Chart

Liquidity

This is precisely why the Fed can’t pivot or pause and will need to hold rates high for a long-time. Because there is still too much liquidity in the system, as supported by the reverse repo facility, which still has $2.2 trillion worth going through every day.

Reverse Repo Data
Reverse Repo Data

Exxon

If oil can head back to $100, then Exxon (NYSE:XOM) certainly has the potential to run to $120.

Exxon Mobil Daily Chart
Exxon Mobil Daily Chart

Caterpillar

It is probably also why Caterpillar (NYSE:CAT) has been on the rise again, and maybe it continues to push higher toward $245.

Caterpillar Daily Chart
Caterpillar Daily Chart

Original Post

Markets Await Today's Comments From U.S. Fed
 

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Markets Await Today's Comments From U.S. Fed

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Comments (8)
Tomas No
Tomas No Nov 14, 2022 8:52AM ET
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I'm begining to worry... Kramer talks bullish :)
Leon Kelly
Leon Kelly Nov 14, 2022 8:39AM ET
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great post.. thanks for the vix info
Mario tragik
Mario tragik Nov 14, 2022 7:32AM ET
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omg Kramer just stop lol
Lazaro Benitez Jaime
Lazaro Benitez Jaime Nov 14, 2022 6:37AM ET
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🙏
John Berry
John Berry Nov 14, 2022 5:59AM ET
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Thanks I will stay long SPY
David Beckham
David Beckham Nov 14, 2022 5:43AM ET
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We are waiting for your comments
jason xx
jason xx Nov 14, 2022 5:36AM ET
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If you know so much how come you are always wrong?
David Beckham
David Beckham Nov 14, 2022 4:44AM ET
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Thanks I can hold my long more comfortable now
 
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