VIDEO: We are watching the VIX to get a sense when the “iffy Oct” period might end, both VIX falling below 17 and VIX term structure “uninverting.” As for Sept jobs report (Fri) we expect markets to react more positively if jobs is stronger.
Please click below to view our Macro Minute (duration: 5:33).
We are 3 trading days into October and it has been off to an “iffy” start with modest declines of -1.5% MTD. By the way, in 2024, 6 of the 10 months started off with declines, so that fact that we are down in the first 3 days is not entirely a signal for subsequent performance this year.
- This Friday is the Sept jobs report and the Street is looking for +150k jobs added. This is an improvement over the +142k in August and better than the 5-month avg of +135k. So, a beat would abate those concerns about a deteriorating labor market. Jobless claims have held steady at low levels of +221k or so, so the labor markets seem steady.
- As for market reaction, we think a “beat” (stronger jobs) is positive for stocks. Why? Given concerns about a “soft landing” and weakening labor market, stronger is a positive.
– if jobs >+150k, we expect stocks to “sigh” relief
– if jobs <+150k, we expect stocks to “gain” as Fed gets more “dovish”
– so short-term, Sept jobs likely positive - Over the past 2 years, the S&P 500 generally saw better 5-day returns if the jobs number “misses”:
– if actual > estimate, S&P 500 5-day return +1.5%
– win-ratio 58%
– if actual < estimate, S&P 500 5-day return +2.2%
– win-ratio 78% - But I am not sure the short-term rally from a good Sept jobs is enough to give a broader greenlight for stocks. The reason is the short-term headwinds which we have discussed. The 3 “headwinds” for this month are fairly intuitive. And we realize that consensus knows this and has talked about it. Thus, we just want to outline these risks, but we do not have strong conviction that these drive downside pressure to stocks:
– the East and Gulf Coast strike by ILA longshoremen.
– Iran launches a ballistic missile strike against Israel, a potential escalation
– Oct has “iffy” seasonality (Oct down 7 of 9 times when strong YTD) - The best proxy to watch, in our view, is the VIX spot and the VIX futures markets.
– VIX spot is 21 and should be below 17
– VIX future term structure inverted with 1M higher than 4M - For the past 6 trading sessions, the VIX has risen from 15 to 21 and this has naturally pressured the S&P 500. As highlighted below, a push above 20 happened in late July and late August and stocks came under pressure during those times.
- Similarly, the VIX term structure has been inverted for the past 5 trading days and this inversion is getting larger.
– like late July and late August, S&P 500 did not bottom
– until the term structure started “un-inverting” - Thus, the VIX is signaling that we are still in the midst of the “iffy October” period. That being said, the forward path of the VIX is unpredictable. Conditions could improve to cause the VIX to normalize quickly. So this is something we are watching.
- Ultimately, we think whatever dip emerges, investors will “buy this dip” and this has been the case for 2024. The S&P 500 has risen 8 of the last 9 months, a very strong market. And the best year since 2017 in terms of consistent gains.
- Importantly, the 3 tailwinds into year-end are even bigger and more durable than the headwinds. And that is why we think investors will buy this dip, like they did in all of 2024.
– Fed launches easing cycle + “no landing”
– China PBOC “bazooka” = positive inflection
– Post-election and cash on sidelines dynamics
BOTTOM LINE: Expect investors to buy this October dip
We ultimately expect investors to buy this dip. Keep in mind, the positive tailwinds for stocks (above) are very strong:
- Since 1950, when S&P 500 is up >10% in the first half
- The second half average gain is 9.8%
- The win ratio is 83% and the only down years were during the years when Paul Volcker was Fed chair
- This implies S&P 500 reaching 6,000 by the end of 2024
We highlight 19 SMID Granny Shots and 9 Large-cap stocks positively leveraged to an upside move in FXI. The following methodology is used:
- Stock is a SMID Granny Shot and/or Top 40 largest stock held
- Operates within the top 20 GICS most positively correlated to China
The following are the stocks:
SMID Grannies – Leveraged to China “bazooka”
- Semiconductor Materials & Equipment: ACLS -1.15% , VECO 0.93% , AMKR 2.03% , FORM 0.75% , UCTT 5.42%
- Electronic Equipment & Instruments: NSSC 0.34% , DAKT -1.58%
- Semiconductors: PI 0.60% , CRUS 1.69%
- Application Software: PLTR 2.90% , APP 0.54% , AGYS -1.03% , SPNS 0.14% , MSTR 1.24% , AVPT 0.61%
- Interactive Media & Services: CARG -1.21%
- Movies & Entertainment: SPOT -0.17%
- Industrial Machinery & Supplies & Components: MLI -1.06% , FLS 1.95%
Top Large-cap Stocks – Leveraged to China “bazooka”
- Semiconductors: NVDA 2.08% , TSM 2.69% , AVGO 1.90% , AMD 0.03% , INTC -0.84%
- Footwear: NKE -6.63%
- Interactive Media & Services: META -0.48% , GOOGL -0.55%
- Movies & Entertainment: DIS 0.12%
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42 SMID Granny Shot Ideas: We performed our quarterly rebalance on 7/16. Full stock list here -> Click here
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Key incoming data October:
10/1 9:45 AM ET: Sep F S&P Global Manufacturing PMITame10/1 10:00 AM ET: Sep ISM Manufacturing PMITame10/1 10:00 AM ET: Aug JOLTS Job OpeningsTame10/3 9:45 AM ET: Sep F S&P Global Services PMITame10/3 10:00 AM ET: Sep ISM Services PMIMixed10/3 10:00 AM ET: Aug F Durable Goods OrdersTame- 10/4 8:30 AM ET: Sep Non-Farm Payrolls
- 10/7 9:00 AM ET: Aug F Manheim Used Vehicle Index
- 10/8 6:00 AM ET: Sep Small Business Optimism Survey
- 10/8 8:30 AM ET: Aug Trade Balance
- 10/9 2:00 PM ET: Sep 18 FOMC Meeting Minutes
- 10/10 8:30 AM ET: Sep CPI
- 10/11 8:30 AM ET: Sep PPI
- 10/11 10:00 AM ET: Oct P U. Mich. Sentiment and Inflation Expectation
- 10/14 11:00 AM ET: Sep NY Fed 1yr Inf Exp
- 10/15 8:30 AM ET: Oct Empire Manufacturing Survey
- 10/17 8:30 AM ET: Sep Retail Sales Data
- 10/17 8:30 AM ET: Oct Philly Fed Business Outlook
- 10/17 9:00 AM ET: Sep M Manheim Used Vehicle Index
- 10/17 10:00 AM ET: Oct NAHB Housing Market Index
- 10/17 4:00 PM ET: Aug Net TIC Flows
- 10/23 10:00 AM ET: Sep Existing Home Sales
- 10/23 2:00 PM ET: Oct Fed Releases Beige Book
- 10/24 8:30 AM ET: Sep Chicago Fed Nat Activity Index
- 10/24 9:45 AM ET: Oct P S&P Global Manufacturing PMI
- 10/24 9:45 AM ET: Oct P S&P Global Services PMI
- 10/24 10:00 AM ET: Sep New Home Sales
- 10/25 10:00 AM ET: Oct F U. Mich. Sentiment and Inflation Expectation
- 10/25 10:00 AM ET: Aug F Durable Goods Orders
- 10/28 10:30 AM ET: Oct Dallas Fed Manuf. Activity Survey
- 10/29 9:00 AM ET: Aug S&P CoreLogic CS home price
- 10/29 10:00 AM ET: Oct Conference Board Consumer Confidence
- 10/29 10:00 AM ET: Sep JOLTS Job Openings
- 10/30 8:30 AM ET: 3Q A 2024 GDP
- 10/30 10:00 AM ET: 3Q24 Treasury Quarterly Refunding Press Conference
- 10/31 8:30 AM ET: Sep PCE Deflator
- 10/31 8:30 AM ET: 3Q Employment Cost Index
Economic Data Performance Tracker 2024:
Economic Data Performance Tracker 2023:
