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Commentary

Daily Brief For June 18, 2021

Daily commentary for U.S. broad market indices.

Editor’s Note: Happy Friday! In the coming days, there will be some additions to the newsletter helping you better identify the levels in play. Also, I will try to improve engagement with some visual effects.

Stay tuned,

Renato

Market Commentary

Index futures balance after violent downside discovery.

  • Inflation fears spark morning dips.
  • EU opened up travel with the US.
  • Indicies traded sideways to lower.

What Happened: U.S. stock index futures auctioned sideways to lower after violent downside discovery just days prior.

Ahead, there are no significant economic releases.

Graphic updated 7:48 AM ET.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity. 

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by sideways trade at and around the VWAP (blue in color on the below graphic) anchored from the time of Wednesday’s Federal Reserve event. This suggests the average buyer, since the event, is regaining strength. 

So, what is needed in the coming days? Ideally, the S&P 500 trades (and stays) above the blue VWAP line.

Volume Weighed Average Price (VWAP): The average price at which a stock is traded over a certain horizon.

Moreover, since the Federal Reserve’s signal of the faster-than-expected pace of policy tightening provided participants more clarity, major indices broke out of balance, but in different directions. 

The S&P 500, Russell 2000, and Dow Jones Industrial Average are trading relatively weak in comparison to the tech- and growth-focused Nasdaq 100 which quickly recovered FOMC losses to discover higher prices. This divergence, in conjunction with sectoral breakdowns, is concerning and may foreshadow increased volatility after the monthly options expiration (OPEX), into quarter-end. 

Options Expiration (OPEX): Option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.

According to SpotGamma’s models, up to 50% of the gamma in and across the S&P 500 complex is expiring. Here’s an explanation and visual to understand why that matters.

After those gamma exposures drop (and related hedging forces disappear), the market will be subject to more movement. That is when things will get interesting. 

Based on the price action across the biggest FANGMANT stocks, participants would think another run higher is likely. However, looking at the breakdowns in individual sectors – financials and transportation, for instance – a dip in certain breadth metrics, elevated skew, put/call ratios, and volatility spreads, the picture becomes less clear. 

Without going into things too deep, the odds favor volatility and sideways trade for today’s session.

Like yesterday, in the best case, the S&P 500 trades sideways or higher; activity above the $4,207.25 VWAP (blue in color on the below chart) puts in play the $4,227.25 HVNode. Initiative trade beyond that HVNode could reach as high as the $4,235.00 Virgin Point Of Control (VPOC), $4,249.00 low volume area (LVNode), and $4,258.00 overnight high (ONH).

Overnight Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

POCs: POCs (like HVNodes described above) are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

In the worst case, the S&P 500 trades lower; activity below the blue VWAP suggests a risk-off sentiment remains. In such a case, there is the potential to test lower, into the $4,182.50 overnight low (ONL) and $4,177.25 HVNode. Breaking $4,177.25 suggests a higher potential to trade to the HVNodes at $4,153.25, $4,122.25, and $4,069.25.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX), yesterday. On the other hand, in the cash-settled Nasdaq 100 Index (INDEX: NDX), participants were most interested in call strikes at and above current prices.

News And Analysis

Economy | Fed’s Bullar says inflation running hotter than expected. (REU)

Economy | EU opens up for Americans wanting to vacation abroad. (BBG)

Economy | Faster world recovery boosting prices, inflation will halt. (Fitch)

Economy | Fear during the COVID-19 comeback largely transitory. (Axios)

Economy | Inflation data holding key to Fannie Mae’s new forecast. (MND)

Politics | Pacific cable project sinks after warning against China bid. (REU)

Politics | Supreme Court rejects GOP challenge to Affordable Care. (BBG)

What People Are Saying

Innovation And Emerging Trends

FinTech | Mark Cuban wants stablecoin regulation amid token crash. (BBG)

Markets | Google to open first retail store steps away from Apple. (BBG)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing leaders such as John Chambers, founder, and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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