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Commentary

Daily Brief For February 9, 2022

Daily commentary for U.S. broad market indices.

Editor’s Note: The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Overnight, equity index futures broke the confines of tight consolidation. 

As stated some commentaries ago, the odds pointed to a continued counter-trend rally; volatility compression, coupled with metrics that point to buying support, was to bolster follow-through.

Ahead is data on Wholesale Inventories (10:00 AM ET), as well as Fed-speak by Governor Michelle Bowman (10:30 AM ET) and President Loretta Mester (12:00 PM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above 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

Fundamental: Equity indices resolve higher in the face of hawkishness from the Federal Reserve (Fed) and data showing slowing growth at home and abroad.

“Fiscal policy is turning more restrictive, the Q4 inventory boost is now behind us, and the financial conditions impulse will go from sharply positive in 2021 to (at least) modestly negative in 2022,” Goldman Sachs Group Inc (NYSE: GS) strategists explain. 

“For these reasons, our 2022 GDP forecast of 2¼% on a Q4/Q4 basis is 0.8pp below the latest Bloomberg consensus and 1.8pp below the FOMC’s last published forecast (as of the December meeting).”

Graphic: Via Goldman Sachs. Retrieved through The Market Ear.

At the same time, according to Moody’s Corporation (NYSE: MCO), the Fed has not pushed “against market expectations for three to four rate hikes this year.” 

Instead, Chair Jerome Powell “signaled the central bank will have zero tolerance for any upside surprises in inflation.”

To note, though, the consensus expectation – five rate hikes or more – is ahead of itself, according to Andreas Steno Larsen of Heimstaden. 

“Direct transfers and fiscal deficits are behind the current inflation spikes,” he explains. “If they were the root causes of inflation, they will also turn into the root causes of disinflation again during H2-2022.”

Steno Larsen adds that the 20y1y and 2y1y curve is inverted, “as it was when the 2015-2018 hiking cycle was very mature,” and only three hikes occurred after inversion.

Graphic: “Good luck hiking 6-7 times this year, … 3-4 max,” via Steno Larsen

The net effect, according to Steno Larsen, is that long bond yields will likely not rise over the next quarters; rate-sensitive technology and innovation products may rebound while cyclical assets may suffer.

In line with the above comments is the average S&P 500 trend into Fed tightening cycles. 

Graphic: Retrieved from Callum Thomas’ Weekly S&P 500 ChartStorm newsletter.

Positioning: Ranges compressed as participants committed capital to bets on lower volatility.

Such bets (expressed via the selling of protection on both sides of the market) left counterparties warehousing the other side (long puts and calls). 

In hedging this exposure on a move higher, the counterparties increased +delta exposure is offset via the addition in -delta (sell futures)

In hedging this exposure on a move lower, the counterparties increased -delta exposure is offset via the addition of +delta (buy futures).

Moreover, as (1) participants continue to bet on lower ranges and (2) time and volatility trend to zero for the expiries most open interest is concentrated in, gamma, the sensitivity of options to changes in underlying price (delta) increases. 

What that means is that counterparties’ near-the-money exposure to options delta rises and portends increased liquidity (e.g., the counterparty will buy futures into weakness and sell futures into strength).

Given a lower liquidity environment, these hedging flows therefore have a bigger impact.

Graphic: Via SpotGamma, “gamma flows increasingly important in a lower liquidity environment. If the counterparty is taking on more exposure to positive gamma, then their addition of liquidity to hedge may suppress ranges.”

The resolve of this consolidation, coupled with decaying out-of-the-money protection and supportive hedging flows with respect to time (charm) and volatility (vanna), and buying proxies, point to “[m]odest bullishness on the 1-month timeframe.”

Graphic: Data via SqueezeMetrics. Graph via Physik Invest.

Technical: As of 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Balance-Break + Gap Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) is occurring.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 

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. 

Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades higher; activity above the $4,555.00 untested point of control (VPOC) puts in play the $4,586.00 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,631.75 and $4,647.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,555.00 VPOC puts in play the $4,526.25 HVNode. Initiative trade beyond the $4,526.25 HVNode could reach as low as the $4,473.00 VPOC and $4,438.25 HVNode, or lower.

Consideration: All equity index products have resolved tight consolidation’s higher. The Nasdaq 100 and Russell 2000 are the furthest away from clear areas of resistance. 

On the other hand, the S&P 500 and Dow Jones Industrial Average have little in the way of higher prices.

Graphic: Updated 2/8/2022. Anchored Volume Weighted Average Price (VWAP) analysis via Physik Invest. Notice Dow Jones Industrial Average (bottom right) and S&P 500 (top left) strength, as well as Nasdaq 100 (top right) and Russell 2000 (bottom left) weakness. Key pivots marked off.
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.

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.

About

After years of self-education, strategy development, mentorship, 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.

Capelj is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor developing insights around impactful options market dynamics.

Disclaimer

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.

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