Categories
Commentary

Daily Brief For December 17, 2021

Daily commentary for U.S. broad market indices.

What Happened

Overnight, equity index futures auctioned sideways to lower.

This is alongside news that South Africa’s hospitalization rates plunged, Democratic leaders abandoned plans to pass a $2 trillion social spending and climate plan, and central banks looked to fight inflation with tighter monetary policies.

Ahead is Fed-speak at 8:30 AM ET and 1:00 PM ET. Today, also, is a large derivatives expiry.

Graphic updated 6:15 AM ET. Sentiment Neutral if expected /ES open is inside of 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. Learn the implications of volatility, direction, and moneyness. 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

After an open outside of prior-range and -value (i.e., levels at which 70% of the day’s volume was transacted), the S&P 500 Index took back the near-vertical post-Federal Open Market Committee price rise. 

As evidenced by the volume-weighted average price anchored from FOMC, the average buyer, since that event is in a losing position. Ouch!

There are some factors (outside of lackluster intraday breadth and market liquidity metrics) that pointed to a difficulty – at least on the index level – to expand directionally. Read more here!

The expectation, though, after this week is for an expansion of range amidst a reduction in the sticky options-related hedging forces that promote consolidation/pinning.

Graphic: Delta (i.e., committed 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.

Context: Keeping it brief, today.

For numerous days now, there has been no shortage in notes forecasting market moves the year ahead. What is common, among these notes, is a belief that markets ought to be bullish going into 2022. Later, though, there are threats that could dent performance.

What does that mean? In sticking to the ruling narrative, so to speak, participants are anchored to the Federal Reserve’s (Fed) intent in adjusting monetary policy.

Based on comments earlier this week, the Fed will accelerate its taper to bond-buying. Thereafter, “the plot now shows three hikes for next year.”

So, why does this matter to me?

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive. 

Couple that notion with some markedly divergent breadth and extreme relative weakness, especially in rate-sensitive names, pension rebalancings, increased exposure to leverage, among other things, it’s easy to lose sight of the positives

As stated, previously, though, today’s rates support validations better than in the ‘90s.

At the same time, equity markets tend to rally into the first hike; Moody’s Corporation’s (NYSE: MCO) forecast aligns with that – “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

In support is relentless, seasonally-aligned “passive buying support” in the face of expectations there will be “the strongest quarterly nominal [economic] growth in more than three decades.”

Graphic: Positively skewed return distribution amidst “natural, passive buying,” and supportive positioning metrics. Data SqueezeMetrics. Graph via Physik Invest.

That’s all good to know. However, tell me what I should know for right now.

Sure. 

As stated, yesterday, the market is in a positive-gamma environment wherein the counterparties to customer options trades add market liquidity and help temper realized volatility.

The expectation, into the end of this week, was that participants would continue to step in and commit increased capital on lower directional volatility (as they had into the start of this week).

The decrease in dealer supply (short delta) post-OPEX, via the covering of short stock/futures hedges to put-heavy positioning, ought to bolster any attempt higher.

Couple that with participants’ commitment of capital to strikes higher in price and out in time, the bullish thesis is emboldened. 

I end with a note from options modeling service SpotGamma: “There was a VIX low around November 5th, and using that as a barometer … the current VIX structure remains elevated above those Nov ‘blue sky’ levels (pre-Omnicron, pre-Taper concerns).”

“There is a fairly large expiration on 12/31, and we’d anecdotally note that implied vol often holds a bid into that expiration. The point here is that there is arguably a bit more ‘vanna fuel’ left in the tank, but it’s going to take ‘real buyers’ (i.e. not volatility short covering) to continue the Santa Rally.”

Expectations: As of 6:15 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,647.25 high volume area (HVNode) puts in play the $4,674.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $4,690.25 micro-composite point of control (MCPOC) and $4,709.00 untested point of control (VPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,647.25 HVNode puts in play the $4,615.00 VPOC. Initiative trade beyond the SIGNPOST could reach as low as the $4,597.25 regular trade low (RTH Low) and $4,581.00 VPOC, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

What People Are Saying

Definitions

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.

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.

Options Expiration (OPEX): Traditionally, 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) and the reduction dealer gamma exposure.

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.

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 Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s