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Commentary

Daily Brief For April 4, 2022

Daily commentary for U.S. broad market indices.

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!

Editor’s Note: Hey team, thanks again for your reading of this daily newsletter. Due to travel commitments, I will not be writing reports consistently for the rest of this month.

Don’t expect any updates until Monday, April 11, 2022. Thereafter, coverage may be sporadic for the rest of the month.

What Happened

Overnight, equity index futures were higher after exploring lower, briefly. Commodities were mixed while bonds were lower and implied volatility measures were bid.

In terms of news, the European Union said it was interested in penalizing Russia, further, for its actions in Ukraine. This is as China battles new COVID-19 sub-strains. 

Ahead is data on factory and core capital equipment orders (10:00 AM ET). 

Graphic updated 5:45 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

Fundamental: In the face of geopolitical tension, supply pressures, and inflation, consumer sentiment is at or below pandemic levels, prompting the Federal Reserve (Fed) to destimulate.

Graphic: Via S&P Global Inc (NYSE: SPGI) research. “Confluence Of Risks Halts Positive Credit Momentum.

“It has entered 2008-09 territory and is not far from all-time lows in the ‘80s when inflation and interest rates hit double digits,” ARK Invest’s Catherine Wood explained in a Twitter discussion on yield-curve inversions and aggressive action by the Federal Reserve, as well as inflation.

“The economy succumbed to recession in each of those periods. Europe and China are also in difficult straits. The Fed seems to be playing with fire.”

In accordance, the Macro Compass’ Alfonso Peccatiello explains that his credit impulse metrics, which lead economic activity and risk asset performance, imply a slowdown in earnings.

Graphic: Via The Macro Compass.

Still, in spite of these metrics, on average, recessions happen 12 to 24 months after the first yield curve inversions, according to Jefferies Financial Group Inc (NYSE: JEF).

Post-inversion S&P 500 performance, actually, is often positive.

Graphic: Via Jefferies Financial Group. Taken from The Market Ear.

Bolstering the call for positive equity market performance are strong seasonality trends during Fed-rate-hike episodes, a contraction in equity risk premia, and “still accommodative” monetary policy, per explanations by rates strategist Rishi Mishra. 

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “Equities are a real asset as they make a claim on nominal GDP. In the post-financial crisis era, weak economic activity and lower inflation pushed down nominal GDP, raising the equity risk premium and reducing the bond term premium. So as long as economies grow, revenues and dividends should also grow. The dividend yield can be thought of as a real yield. Equity risk premia have started to decline in the post COVID cycle but remain higher than in the pre-financial crisis era.”

“[T]he 3ms2s vs 2s10s spread (or the 3m2s10s fly) is the widest it has been since the end of 1994. The widening of this fly is indicative of the fact that while the Fed shifted its guidance from dovish to extremely hawkish, the policy is still accommodative.”

Graphic: Via Bloomberg. Taken from Rishi Mishra.

Positioning: The equity market’s ferocious end-of-March rally, which placed the S&P 500 back above a key go/no-go level – the 200-period simple moving average – may have been in part the result of institutional investors purchasing equities ahead of quarterly reporting.

“Remember that stocks settle T+2, meaning that shares are actually owned by buyers two business days after they are purchased in the market,” says Interactive Brokers’ Group Inc (NASDAQ: IBKR) Steve Sosnick. 

“That means that institutions who wanted to show stock positions on their quarterly reports would have needed to purchase those shares no later than Tuesday the 29th. The sharp end-of-day runups that we saw on Monday and Tuesday had the hallmarks of aggressive institutional buying.”

According to Deutsche Bank AG (NYSE: DB) analyses, “[a]ggregate equity positioning has now risen off the lows but only to the 22nd percentile and is still well below neutral.”

That said, quarter-end rebalances and options expirations (OPEX) likely do little to upset the balance of trade. Based on a lot of the insights shared in this letter, barring some exogenous event, the market is in a position to drift or balance.

This, as a result, may solicit a “stronger impulse to chase the rally,” at which point JPMorgan Chase & Co (NYSE: JPM) strategists say they would “generally be more concerned.”

A collapse (or convergence) in volatility metrics for different asset classes (like the Merrill Lynch Options Volatility Estimate [INDEX: MOVE] and Cboe Volatility Index [INDEX: VIX]) would bolster the “drift or balance” thesis.

Graphic: Via Physik Invest.

Technical: As of 5:45 AM ET, Monday’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, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher; activity above the $4,527.00 untested point of control (VPOC) puts in play the $4,562.50 spike base. Initiative trade beyond the spike base could reach as high as the $4,583.00 VPOC and $4,611.75 low volume area (LVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,527.00 VPOC puts in play the $4,501.25 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,469.00 VPOC and $4,438.25 HVNode, or lower.

Considerations: Spikes often mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike). 

In a spike up (down) situation, trade below (above) the spike base, negates the buying (selling).

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 also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

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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