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Commentary

Daily Brief For June 24, 2021

Daily commentary for U.S. broad market indices.

Market Commentary

Equity index futures exit balance, auction higher overnight.

  • Nike, FedEx, Carnival will report.
  • Europe targets travel on variants.
  • Ahead: A heavy events calendar.
  • Indices trade sideways to higher.

What Happened: U.S. stock index futures auctioned higher ahead of a busy day.

Of interest? Data on weekly initial jobless claims, first-quarter U.S. GDP, durable good orders, manufacturing, Fed speak, the Bank of England’s monetary policy decision, and updates on a bipartisan infrastructure plan. Participants are also on the lookout for the Federal Reserve’s latest bank stress test results, after market close.

Adding, some areas of Europe are calling for tougher travel rules to fight COVID-19 variants. 

Graphic updated 7:25 AM ET.

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

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by sideways trade above the $4,229.00 VPOC. This is significant because it signaled acceptance (i.e, defense of higher prices). 

Point of Control (POCs): POCs 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.

The most recent price rise, followed by sideways-to-higher trade, has a lot to do with how participants are positioned in the options market. According to some metrics, the market is trading in a so-called “long-gamma” environment.

What does this mean? Most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection. 

As a result of this activity, options dealers are long upside and short downside protection. This exposure must be hedged; dealers will sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value. 

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints — like the one the market is currently in — followed by rapid de-risking events as the market transitions into “short-gamma.” 

Further, last week, coming into the large June monthly options expiration (OPEX), participants saw good odds, in conjunction with fundamental developments (e.g., Federal Reserve policy outlook), the market would resolve directionally. Well, not much has happened. With overwriting now back in favor – alongside a crush in implied volatility, among other things – expect more of the same: pinning.

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.

In other areas, we see breadth metrics taking a hit; the ratio between advancing and declining issues is coming off its highs, a signal that underlying strength is easing. 

Further, for today, participants can trade from the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,251.25 high volume area (HVNode) puts in play the $4,258.00 overnight high (ONH). Initiative trade beyond the ONH puts in play the Fibonacci-derived price targets near $4,294.00. 

Volume Areas: A structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

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

In the worst case, the S&P 500 trades lower; activity below the $4,237.25 HVNode puts in play the $4,229.00 VPOC. On a break of the $4,228.25 HVNode, participants ought to look for a response near the HVNode at $4,213.00.

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 committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), yesterday. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside. Noting, similar to the day prior, there was interest in farther-dated put strikes at and above current prices. This may denote opportunistic hedging or speculation on the downside.

News And Analysis

Politics | Chinese COVID-19 gene data was removed from NIH database. (WSJ)

Economy | The BOE lifts inflation forecast but keeps rates, QE unchanged. (G)

Markets | China boosts short-term cash injection to ease liquidity worries. (BBG)

Economy | Fed’s Bostic sees 2022 rate liftoff, taper call in a few months. (BBG)

COVID | Pfizer and Moderna’s vaccine likely linked to heart inflammation. (REU)

COVID | Brazil sets a single-day record for COVID-19 coronavirus cases. (REU)

Politics | President Biden’s push for infrastructure deal nears the goal line. (BBG)

Markets | Credit Suisse’s chairman sends a chill through investment bank. (BBG)

Markets | Fannie, Freddie plunged as SCOTUS deals a blow to investors. (BBG)

What People Are Saying

Innovation And Emerging Trends

Space | In overtaking U.S., China plans crewed missions to Mars by 2033. (FT)

FinTech | On lower fees, Vanguard steps up its push into financial advice. (FT)

Energy | Unpacking the past and present transitions in energy systems. (REU)

FinTech | The battle forming in the European financial technology scene. (F)

Markets | Gensler highlighting disclosures and payments for order flow. (MM)

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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