WEEKLY MARKET OUTLOOK
FOR THE WEEK OF MAY 22, 2023
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Bull Case: Price finally broke out of the 7 trading day range and above 4200. Bulls will want to continue holding 4200 but if price breaks below, there is a possible Daily Demand at 4148.25 where will need to hold to continue seeing more upside.
Bear Case: Possible supply just above at 4233.25 which has been tested so might not be as strong but there is a 4 hour consolidation within this supply that starts at 4269.75. This supply also lines up with the upper trend line where bears will want to defend.
What’s Moving The Markets?
AI Expands Into Oil
Shell and SparkCognition, a big-data analytics firm, announced last Wednesday that Shell will utilize AI-based technology for its deep sea exploration and production in order to increase offshore oil production. The AI algorithms will process and analyze large amounts of seismic data in the hunt for new oil reservoirs in the Gulf of Mexico. The goal is to improve operational efficiency and speed, and increase production and success in exploration with the new process shortening explorations from nine months to as little as nine days. With the new AI-based technology promising to significantly reduce the time and cost associated with exploration for oil reserves, Shell and other oil companies will be able to increase their offshore production and become more profitable.
US Debt Ceiling
The US debt ceiling is a legislative limit on how much the federal government can borrow by issuing bonds. The US government could fall behind on its bills next month, and even default on its debt, if Congress doesn’t raise a $31.4 trillion cap on government borrowing, a failure that could trigger economic panic in the global financial markets. President Biden and Republican House of Representatives Speaker Kevin McCarthy are attempting to reach a deal, possibly as soon as Sunday, before June, when the Treasury Department has warned the government may be unable to pay all its bills. If the US defaults on its debt obligations, it could have severe long-term economic consequences. The government would be seen as unreliable in honoring its commitments, and the US dollar could suffer a major loss of value, which would make it more expensive to borrow money. Ultimately, a default could lead to a recession as businesses struggle to access credit, skyrocketing inflation, and a string of financial crises.
AI Taking Jobs In The UK
By 2030, BT Group, the largest broadband and wireless provider in Britain, plans to reduce their workforce by 40%, amounting to 55,000 jobs. This change reflects their completion of fiber roll-outs and their need to adapt to the technical advances, such as the use of AI. Adopting artificial intelligence, simplifying its structure, BT will rely on a much smaller workforce and significantly reduced cost base by the end of the 2020s. The CEO stated that around 10,000 fewer network engineers would be needed to run digital networks, while technologies like automation and AI would replace another 10,000. The company also stated that they would use AI to deliver better customer service, driven by customer needs, as well as capturing other business opportunities.
EU states approve world's first comprehensive crypto rules
On Tuesday, the European Union gave the final approval to roll out the first ever comprehensive set of laws worldwide that regulate crypto assets starting in 2024, putting pressure on countries like the UK and the US to follow suit. The rules require firms that want to issue, trade and safeguard crypto assets, tokenized assets, and stablecoins in the EU to obtain a license. According to the EU, events such as the fallout of FTX have confirmed the urgent need for imposing rules which will better protect Europeans who have invested in these assets, and prevent the misuse of the crypto industry for the purposes of money laundering and financing of terrorism. Currently, The US has focused on using existing securities rules for enforcement action in the sector while it decides on whether to introduce bespoke new rules and who would apply them.
Binance Pulls Out Of Canada
Weeks after the country issued a series of new guidelines for cryptocurrency exchanges including investor limits and mandatory registrations, crypto exchange Binance has decided to withdraw from the country. Canada has tightened regulations for crypto asset trading platforms in recent months, with the introduction of a pre-registration process. The companies that do not adhere to the rules will face potential enforcement action according to the Ontario Securities Commission. Binance stated that it does not agree with the latest guidance and hopes to engage with the Canadian regulators to create a comprehensive framework for crypto operations in the country.
Bipartisan Act re-introduced amid regulatory challenges
Amid ongoing legal battles between the SEC and several cryptocurrency organizations, a bipartisan effort has been made to re-introduce the Securities Clarity Act. The act, initially presented in 2020, aims to demarcate a clear line between commodities and securities, thereby refining regulatory legislation concerning digital assets. If enacted, once an asset has been sold or transferred in the course of an investment contract, it is no longer considered to be a security. This applies to both tangible and intangible assets, including those in digital form. The bipartisan act comes at a pivotal moment, aiming to provide much-needed clarity in the rapidly evolving field of digital assets and their intersection with securities law.
EARNINGS RELEASE CALENDAR
FOR WEEK OF MAY 22nd
Market Recap and Look Ahead
Market Gex and Gamma Distribution:
Last week, the market struggled to hold its ground above the 4200 level. Bulls aimed for a final squeeze at the market close, as evidenced by a significant rise in call volumes. Surprisingly, the implied volatility (IV) of these calls reached a peak of 30%, even with less than half an hour remaining before expiration.
The direction of the market moving into the next week may be significantly influenced by the outcome of the ongoing debt ceiling negotiations. Without a deal in place, bullish investors could find themselves treading on thin ice. The probability of a market swing in the coming week is high, particularly with the passing of both VIX and options expiration (OPEX). These events typically signal the start of a potential weakening period.
Below is this week’s SPX chart:
Options Expiration (OPEX) Observations:
May 19, 2023, marked the monthly options expiration (OPEX). This is likely the reason we saw Gamma exposure edging closer to zero. The landscape continues to be dominated by options that expired today, as yield enhancement programs leverage these high-probability trades.
With the monthly expiration behind us, the coming week could reveal a shift in positioning, especially if the debt ceiling discussions produce unforeseen outcomes.
Here are the end-of-day (EOD) Gex and Gamma Distributions for the SPX:
MSI Indicator Insights:
In the period from May 4 to May 19, 2023, both the MSI and VIX signals seem to point to a decline in market fear and complacency, thus suggesting bullish sentiment and reduced volatility. However, given the current state of the MSI nearing zero and a record low VIX at 17 as of May 19, the market could be prone to abrupt changes.
On May 19, the VIX started to show early signs of volatility, with VVIX, VIX 1D, and VIX 9D all moving into the green zone. Given the current market position’s apparent bearish inclination, we advise maintaining a cautious stance for the week ahead.
Here’s the EOD Market Sentiment Index:
Looking forward, next week promises to be eventful. Keep an eye on debt ceiling developments, potential position shifts, and evolving market sentiment.