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Commentary

Daily Brief For September 1, 2021

Daily commentary for U.S. broad market indices.

Market Commentary

Equity index futures trade sideways to higher overnight. VIX, bonds, dollar were all lower.

  • Inflows and options and peak growth, oh my!
  • Ahead: Employment and manufacturing data.
  • Indexes are positioned for directional resolve.

What Happened: U.S. stock index futures auctioned sideways to higher overnight as participants get past reports of European hawkishness, as well as position for directional resolve on the basis of new fundamental data.

Ahead is data on ADP employment (8:15 AM ET), Markit manufacturing PMI (9:45 AM ET), ISM manufacturing index, and construction spending (10:00 AM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Wednesday’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 potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on positive but weak intraday breadth and middling market liquidity metrics, the best case outcome occurred, evidenced by trade within Monday’s range. This is significant because it was a validation of Monday’s emotional price discovery.

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit). 
Graphic: Market Internals (Advance/Decline, Up-Volume/Down-Volume, Tick) displayed as Peter Reznicek at ShadowTrader teaches. Though positive, readings were weak and supportive of responsive trade, similar to what market liquidity (via Bookmap) was showing.
Gap Scenarios In Play: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

Further, the aforementioned responsive trade is happening in the context of peak growth and a moderation in the economic recovery, as well as some of the dynamics unpacked in-depth yesterday (e.g., non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition). 

The implications of these themes on price are contradictory; to elaborate, on one hand, yes, inflows and divergent sentiment are a green light with respect to the advance in equities (i.e., markets tend to climb a wall of worry given – all else equal – a decay in options skew and removal of hedges, among other things). 

“I use this analogy of a jet,” Kai Volatility’s Cem Karsan explained, referencing the three factors – the change in the underlying price (gamma), implied volatility (vanna), and time (charm) – that are well known to impact an options exposure to directional risk or delta. “As volatility is compressed, those jets will keep firing because … the hedging vanna and charm flows, and whatnot will push the markets higher.”

On the other hand, as Moody’s Corporation (NYSE: MCO) believes, “The Dow is forecast to have peaked and will gradually decline during the next year. Risks are heavily weighted to the upside, but peak growth, inflation and Fed tapering could weigh on equity markets.”

Graphic: Bloomberg data on S&P 500 seasonality.

Moreover, for today, given the increased potential for balanced trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,529.25 low volume area (LVNode) pivot puts in play the $4,542.25 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,556.25 and $4,592.25 Fibonacci extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,529.25 LVNode puts in play the $4,521.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,510.00 figure (which corresponds with a regular-trade high and small gap) and $4,481.75 HVNode.

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

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.

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.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET. Note the developing balance area (HVNode) surrounding just short of the ONH. 

News And Analysis

Home prices continue to gain, more double-digit growth.

There is no such thing as an independent central bank.

Beginning to see churn below the surface amid outlook.

Shell plans to install 50,000 U.K. on-street EV chargers.

China manufacturing slows first time since March 2020.

Wall Street traders driving record are loaded on hedges. 

China Evergrande says construction of projects stalled.

‘Forever Changed’: CEOs are dooming business travel.

SEC boss: Crypto platforms need regulation to survive.

‘Egregiously mishandled’: Afghanistan dents Biden team.

SEC boss: Banning Payment for Order Flow is on table.

Euro-area inflation may justify end to ECB’s crisis mode.

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with 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.

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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