In this week’s edition of the Acheron Insights chart book:
- The post September options expiration window of weakness could usher in a period of volatility….
- Market internals and investor positioning continue to suggest further upside for risk assets…
- Energy markets looking stretched.
One
Welcome to the period of vulnerability after the September options expiration. During this time, the movement of the S&P 500 and other broad market indices may be influenced more by macro flows and fundamentals rather than supportive Vanna and Charm flows. While there are no guarantees that stocks will decline during this period, the potential for larger moves in one direction or another is increased. This window of weakness, which extends for one to two weeks after options expiration, may result in higher volatility in the next two to three weeks.
Two
The second half of September and early October is generally considered a less favorable time for the stock market due to its increased vulnerability to negative flows. However, the author is skeptical that stocks will decline in the next few weeks.
Three
The S&P 500 has already had a poor few weeks, which reduces the likelihood of unfavorable moves during the window of weakness. Market internals, such as the author’s cyclical index and risk appetite index, suggest that the market is holding up relatively well.
Four
Other measures of market internals, including the cyclicals vs defensives ratio and the high-beta/low-beta ratio, are not showing significant weakness. This suggests that the current dip in the market may be an opportunity to buy, rather than a sign of material weakness.
Five
The reset in investor positioning over the past couple of weeks is another reason for a bullish bias in the next few months. Positioning across the board has moved from extreme bullishness to neutral levels.
Six
Hedge funds have significantly reduced their exposure to stocks in recent weeks, which is another positive indicator for the market. This decrease in exposure is the largest since the market bottomed in Q3 of last year.
Seven
For downside follow-through during this vulnerable period, there would need to be a sustained spike in implied volatility. However, given the current supply of volatility and overall neutral positioning, this is unlikely.
Eight
The well-supplied volatility and the positioning reset increase the probabilities of further upside for stocks into year-end. While the author suggests having a cautious exposure to risk assets on a cyclical basis, the short-term risk for the stock market has been to the upside for the past 12 months.
Nine
Career risk and the existence of cash on the sidelines may contribute to a year-end blow-off top style move in the market. Discretionary investors who have underperformed throughout the year may want to participate in the market rally.
Ten
The oil market is experiencing stretched positioning as hedge funds and CTAs have become extremely bullish. However, there are indications that the oil market is due for a pullback, such as resistance levels and technical sell signals.
Eleven
Despite the bullishness surrounding oil, the author remains cautious and believes that prices may top out around the $95-$100 level for WTI. The author sees prices exceeding triple figures as a story for 2024/25 rather than 2023.
