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Commentary

Daily Brief For October 18, 2021

Daily commentary for U.S. broad market indices.

Market Commentary

In sync with bonds, equity index futures were sideways to lower, overnight. Commodities were mixed. Volatility expanded.

  • More support for an EOY run-up.
  • Ahead is a light day for releases.
  • Positioned for sideways balance.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside conflicting narratives.

Ahead is data on industrial production and capacity utilization (9:15 AM ET), as well as the National Association of Home Builders Index (10:00 AM ET).

Graphic updated 6:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. Sentiment Risk-On if expected /ES open is above the prior day’s range. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. 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. 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 6:00 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by an expansion of range above the $4,437.75 micro composite point of control (MCPOC), to a new overnight high (ONH) at $4,469.75.

Coupled with that dynamic is the presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering); participants will likely look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes). 

Graphic: Unsupportive delta (i.e., non-committed buying and selling 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).

Zooming out, we saw the Nasdaq 100 firming, relative to its peers, last week, a significant change in tone.

Given where the S&P 500’s price is in relation to the yellow anchored volume-weighted average price (VWAP), the average buyer, since the all-time high, holds a winning position; sideways-to-higher trade, above the upward sloping trendline, as well as the 50.00% and 61.8% retracements, likely puts in play a recovery of the all-time high.

Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right.

Further, the aforementioned trade is happening in the context of improving breadth amidst a seasonally bullish cycle of contributions, rebalancing, and earnings, as well as the risks associated with a taper in asset purchases and a hike in rates.

Graphic: S&P 500 seasonality via @topdowncharts

According to a TS Lombard note featured by The Market Ear, the odds are that a tightening in monetary policy should not douse the bullish narrative:

“Tightening monetary policy cycles have historically been positive for stocks. The exceptions were in the 1970s, when inflation was counter-cyclical and the Fed tightened despite slowing growth. In ‘regular’ cycles the Fed raises rates only when the economy (and corporate earnings) warrants a tighter policy stance. What is interesting is that positive returns happen despite falling P/E multiples. Higher rates tend to lead to falling valuations, but earnings growth is typically strong enough to compensate for the derating. Since multiples are still much higher than normal, favouring Growth (faster EPS growth) over Value (slower EPS growth) is a good strategy at this stage.”

Graphic: TS Lombard’s analysis of tightening cycles, via The Market Ear.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was higher, overnight, while the VIX futures term structure was in contango; supply at the front end of the curve, alongside the long-gamma environment, signals a potential for near-term equity market stability.

To note, according to SpotGamma models, last week’s near-vertical price rise was responsively sold as dealers looked to hedge their increasing positive directional market exposure; going forward, hedging pressures may dampen volatility, potentially setting the market up for balance (i.e., sideways trade) as participants muster the conviction to initiate the next leg.

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,437.75 MCPOC puts in play the $4,463.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,481.75 high volume area (HVNode) and $4,510.00 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,437.75 MCPOC puts in play the $4,425.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,393.75 HVNode and $4,349.00 VPOC, or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 5:15 AM ET.

Definitions

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

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Inversion Of VIX Futures Term Structure: Longer-dated VIX expiries are less expensive; is a warning of elevated near-term risks for equity market stability.

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).

More On Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive). In conjunction with the rapid recovery, lower rates may solicit hawkish commentary as policymakers look to inhibit inflation.

News And Analysis

Forbearances declining faster, plans drop by 10%.

Morgan Stanley CEO is calling for Fed rate hiking.

Analysts warn that 60/40 portfolio will be battered.

Moody’s: Fundamental siding with Fed on inflation.

S&P Global: Data on job gains has come up short.

Global energy turning to fossil fuels amid demand.

How the asset management industry got disrupted.

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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