The long-anticipated market correction has finally materialised with both the QQQ and the SX5E mean reverting to the middle of their ranges. Uncertainty appears to have been eased by Fed member William's dovish remarks, swinging Dec25 25bp rate cut odds back to c.80% from 43% a week ago.
Several technical indicators point to an overdone sell-off namely: 1) members of the QQQ below RSI30; 2) spike in put volumes; 3) inversion of the VIX curve; 4) QQQ reversion to the mean; and 5) Bitcoin’s relative underperformance vs. the QQQ. For now, this merely appears to have been a deleveraging event rather than a structural change in the previously bullish market narrative, given the strength in the underlying US economy remains intact. SP500 3Q earnings growth continues to tick higher, having now increased to 13.4% YoY from 13.1% last week, with 95% of the SP500 companies having reported.
The uncertainty in markets now lies in the potential continuation of CTA sell flows, however, the rapid decline in volatility since last Friday will likely revert some of the expected sell flow for the cohort. With November’s OPEX now behind us, deep negative dealer gamma will likely no longer be a headwind for equities with bids from corporate buybacks, pension month-end rebalancing and retail flow positioning for a year-end rally likely to provide further support.
In terms of key events for the week, data includes September US PPI, US retail sales and November Consumer confidence on Tuesday and US PMI, US durable goods and Q3 GDP on Wednesday. In Europe key data for the week are the German IFO index and inflation, while in the UK market will focus on the long-awaited Budget
Following todays sell-off in Novo Nordisk, on the back of unfavourable results in the Alzheimer Evoke trials, we buy back the sold Jun26 400 call leg in our last Novo Nordisk trade idea given spot is now back at our initial mapped out price range effectively converting the trade idea in Jun26 risk reversal.