**Friday's Jobs Report:**
Friday’s NFP came in soft, further supporting the suggestion that the Fed can pause at the October meeting in order to digest more data before making a decision. Nonfarm payrolls increased by just 29,000 in September, well below expectations, while unemployment ticked up to 4.2%. The prior months (July & August) were both revised down as well, by a combined 60k jobs. As the Fed has made clear, they’re most concerned with the unemployment rate in determining labor market strength & or weakness, as the headline number can oddly be skewed some months, with August being a perfect example where 133k jobs were added whereas in September, just 29k jobs were added. Nevertheless, another supporting datapoint was wage growth, which is now running at just 3.1% over the past year, which has essentially been wiped out by inflation as inflation is running around 3%+ over the period, so the feared ‘wage-price spiral’ isn’t materializing either, which will be taken as a positive by the Fed here.
Fed rate hike expectations fell sharply throughout last week, supporting equities higher. The probability of an October hike was around 70% earlier in the week, falling to roughly 37% after PCE and around 15-20% following Friday’s jobs report.
The following dovish FedSpeak throughout the week also helped to reduce hawkish expectations around October, with the data supporting the commentary provided by key Fed governors, Williams, Bowen and Jefferson:
Fed's Williams: If the economy meets expectations, one further hike is likely this year.
Fed's Bowman sees no urgent need for more rate moves this year.
Fed's Jefferson: US central bank 'may take more time’ to decide next rate move.
Fed's Jefferson: Weighing more data will allow the Fed to make better calls on rates.
**Bonds:**
Note, however, that despite the dovish shift in expectations, the 10Y remains resilient, above 5.2%, with the rate of change the most concerning aspect here.
https://preview.redd.it/xl0222k75nth1.png?width=1400&format=png&auto=webp&s=92f3df1f4a66758309b622531535bdbd1ea62a4e
If we look at the MOVe index, it's a complex picture as there are arguments to be made on both sides, and I suppose the answer lies in whether the downtrend breaks to the upside.
Thus far, the soft NFP meant that the MOVE closed within the downtrend ( a positive thing):
https://preview.redd.it/ubt1b4u85nth1.png?width=1400&format=png&auto=webp&s=f269fddc56286f9486869f3917cc522ce622724d
Notice that previous tests of this downtrend, which then reversed lower from there, coincided with a positive expansion in SPX.
In 2 of the 3 cases, it led to a V shaped recovery.
https://preview.redd.it/4pzxqlg95nth1.png?width=1400&format=png&auto=webp&s=64075084ec89e1519228a639b47280312a1f88ee
The question, then, is whether we will get a reversal off the trendline, or if we will head on straight through.
**Credit spreads**
Credit spreads are concerning I would say.
They do continue to rise sharply. In terms of the SPXL strategy, the sell signal would be triggered if credit spreads reach the red line. Thus far, we are still some way off, so the call is to hold. However, the rate of change here is clearly concerning.
https://preview.redd.it/rmxoexba5nth1.png?width=1400&format=png&auto=webp&s=10f2cd3bed42f8b8c0c8ccab8197d5529556c59c
And perhaps the most concerning chart is if we overlay VIX on top of credit spreads over the past few years. Clearly a near 1:1 relationship, and whilst we have had VIX spikes where credit spreads didn't move higher, I don't think we have seen credit spreads spike where VIX hasn't followed higher.
https://preview.redd.it/c8k3700b5nth1.png?width=1400&format=png&auto=webp&s=d7c5e5195638a26ec1e88aa2538cd3026f10c483
That's the Volatility spike risk to the market in a nutshell right now.
**VIX term structure:**
If we look at the VIX term structure, it's actually very calm right now. No real cause for concern.
https://preview.redd.it/68j2tntb5nth1.png?width=1400&format=png&auto=webp&s=8bff99b639f34b4ab185206893a4cdbf0af84a03
And if we look at the VIX positioning, a lot of vol sellers sit to suppress VIX right up to 19, so again, VIX does seem to be contained by most metrics I am watching, but this overlay with credit spreads is the risk.
https://preview.redd.it/1yzgxmbc5nth1.png?width=1400&format=png&auto=webp&s=b78763349636042c71dc4f75beee029ca6d3f0fa
**Week Ahead events:**
Overall, a quiet week. PENG are reporting earnings on Tuesday which will of course be one of my main priorities for the week, and I expect a double beat and raise there again, and separately, AEHR is also reporting earnings this week.
But outside of that, it's quite quiet.
1. Monday, ISM Services PMI:
Services make up 70% of the US economy.
2. Tuesday, ADP Weekly Employment
3. Wednesday, Mortgage Rates
4. Thursday, Initial Jobless Claims
5. Friday, Michigan Consumer Sentiment
One thing to note that I don't see reported in many cases but almost certainly WILL be relevant are the following, so please note them on your calendar:
Wednesday 10 year bond auction
Thursday 30 year bond auction
**Extreme breadth continues**
Despite the market rallying on Friday on the soft NFP report, with semiconductors leading that move higher, breadth really didn't follow. Cumulative new highs, new lows pretty much sits at the lows.
https://preview.redd.it/gqvoawid5nth1.png?width=1400&format=png&auto=webp&s=c788a6ed487c4fc9baabfbc46fdd3fe35c8f6a75
If we look at NYSI, which tracks the average stock, we are at a support zone below the 2025 April lows.
If we look, price falling into that NYSI support zone has typically led to a bottom, but the issue with that analysis is that every drop into that support zone has been accompanied by SPX heading lower as well. Currently, that's not the case, so it's hard to draw direct conclusions.
https://preview.redd.it/49difs8e5nth1.png?width=1400&format=png&auto=webp&s=44e69c7653c31b185e959abdfd6b046b0a326101
A really interesting thing I read in a JPM paper this weekend, however. Despite the average stock being in the dumpster, JPM note that leverage in margin accounts has actually picked back up (I suppose given the strength in semiconductors), and JPM note then that this leverage still presents a significant vulnerabity for equities.
**Now I want to break down the charts here, key levels and some expectations therein, leaning on the heat maps as well to help to make the picture clear.**
Firstly, let's just review the Aion forecast line as a point of reference:
https://preview.redd.it/bjud7k0f5nth1.png?width=1400&format=png&auto=webp&s=d5c7e9be627d260e14132fee5ae2c944aa5bd97c
The forecast, at least, suggests price has a window for a move slightly higher, before the window of risk really opens for October.
This has been our main flagged risk throughout our recent analysis, and it all basically comes down to this with regards to liquidity:
https://preview.redd.it/qs8ob5wg5nth1.png?width=682&format=png&auto=webp&s=88d48dcaa6748f189063ffaee4cf1c3da7101532
I reiterate that declining liquidity doesn't NECESSARILY have to coincide with declining equity prices. It's not as simple as a 1:1, but it does create the preconditions where bias is to the downside.
Notice that the Aion platform there is already recommending hedging, but we see the liquidity mostly drops off from around next week, so we may still have a week in the clear here.
I've been doing some reading and analysis this weekend, and the good thing is that the levels are quite clearly defined.
To be clear:
Below 760 on SPY, and below 7680 on ES, the downside momentum will mechanically accelerate. As long as this level is defended, for now, the bias is still for the dips to get bought around that level.
However, the issue with waiting to see if this level breaks is that price is currently quite a bit above that. Some pre-emptive action may need to happen soon (I plan to early this week), otherwise your equity positions will likely get caught up in a sell off just to get to that level for us to know if it breaks or not.
Support at this levle is quite strong by the way. You'll see that it also lines up closely with the SD levels, which have held 10 of the last 10 weeks, so the support there is solid, but if it does break, on any type of rising volatility, the sell off from there can be sharp.
Let's look at SPY here generally:
https://preview.redd.it/c613v91i5nth1.png?width=1400&format=png&auto=webp&s=113e0737b728db0ee618129948d305858e881c4b
last week, we held the flag which is a positive, but did retest that 760 level which held.
Below here, we see ther his some technical support around 750 from the dotted trendline, but below here, nothing to 740.
The heat maps pretty much confirm and support the outline that I have shared:
For now, most of the positioning on SPY is higher. The main bet of the market is still h8igher for now with 785 lighting up.
But notice the strong node on 760. And notice the 745 node.
If we break below 760, then the exposure will start to build around that 745, and fade above.
760 is the line in the sand pretty much.
https://preview.redd.it/qf7oj6zi5nth1.png?width=632&format=png&auto=webp&s=2930f855e5eef3e6a10784fade22e6b31aab0b5b
Notice call delta dominant above 760. Notably so on 785 which is the wall on the upside. But put wall is at 745 which tells us that put gamma is already building there. Below 760 notice how the positive call delta flip to put delta.
https://preview.redd.it/nsczjjqj5nth1.png?width=1400&format=png&auto=webp&s=9dab5a3f0ac0465016d3638da0a75d6ae516e5cd
This is the key flip level. If lost, the downside can come pretty fast.
Now if we look at US500 instead:
https://preview.redd.it/d05y3rek5nth1.png?width=1376&format=png&auto=webp&s=22c4bf0eec6f237960c89e80f80ad4ef744b46d7
We faded on Friday, but did still secure a breakout.
The resistance in this 7775 area, up to 7820 is pretty strong.
The market bets that there is a chance of an overshoot of this levle to 7850 this week, but that that level will likely see reversion.
If we look at ES, I know most people track US500, but I have done the most work this weekend in mapping the levels on ES and it's pretty clear, with confluence to what we shared before:
Plot these levels on your chart. even if you normally trade SPX etc, keep an eye on these levels in the background.
https://preview.redd.it/nr86ow2l5nth1.png?width=1400&format=png&auto=webp&s=ab6adec39b106ae51b531d08bcdbd00a49c0810b
7770 = pivot, currently above = bullish
7730 = weak support
7680 = strong support (lines up with 760 SPY).
If that breaks, then clearly bearish, next support at 7575 (which was a previous level of interest).
Above 7770, there's resitance at 7820 but minor resistance. Strong resistance is at 7880. if we break 7820, expect 7880 to print.
There's nothing particularly bearish in QQQ here, as tech shows the best breadth and we got a weekly high close on QQQ.
https://preview.redd.it/ttwvwuxl5nth1.png?width=1400&format=png&auto=webp&s=61999e5df66ff20e325aafe57f500238e26ac4f6
But we did reject the 750 level.
The key levels on QQQ are 760 to the upside , and 736 to the downside.
We see that here:
https://preview.redd.it/zvabqkpm5nth1.png?width=794&format=png&auto=webp&s=09825cfee2f9076450c914cac449308e81a5476f
Notice that if 736 breaks, that 720 node is starting to light up. For now, though QQQ positioning is bullish.
Semis look outstanding here with SMH holding the 628 level and now looking like it wants to push back to 640s:
https://preview.redd.it/5tk30kq2dnth1.png?width=1400&format=png&auto=webp&s=a89e1f444596aec001bac2e9cec186315f5f084c
https://preview.redd.it/b2cajqeo5nth1.png?width=1400&format=png&auto=webp&s=d809bf2375e49dc557330df21af7f0cb85acea44
**S.D levels**
SPY:
Weekly 1SD 758.49-780.79
QQQ:
Weekly 1SD: 733.33-765.83
WE know that price typically closes within this range 70% of the time. The last 10 weeks in a row, buying the bottom of the weekly range has led to a positive return by the EOW.
**How to manage through october:**
Well one of the best ways would be to trail your stops. Your position can be in red and still trail the stops. How you'd do that is to set a stop a few % (depending on the beta) below current spot price. if we do start to see a correction, you'd be out pretty promptly. Or trail it with the moving averages (5 or 9d).
Alternatively, make sure you follow at least the following principles:
1. Have some cash on hand incase an October correction does realise.
2. Make sure you are holding stocks you believe in and are happy to hold if there is a correction.
End of year targets for Spy still above 800 according to the data, so long term holders can hold onto that. how that looks in terms of breadth, I don't know as we see in this current market that the index isn't always correlating to individual stocks.
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