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Daily Brief For September 15, 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 900+ that read this report daily, below!

Graphic updated 7:45 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. 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.

Administrative

Apologies – yesterday the above graphic was not properly updated. The sentiment reading was incorrect, as were a couple of other figures. Separately, a lighter note, today, followed by more in-depth stuff currently being worked on in the coming sessions. Thanks!

Fundamental

First – going to refer everyone to yesterday’s letter, a conversation between Joseph Wang and Andy Constan, as well as some updates Cem Karsan of Kai Volatility made. That is, in part, a primer for what we will be talking more about, soon.

Next – we have futures markets pricing rate a peak in the overnight rate at ~4.6% in February of 2023. From thereon, rate cuts are implied.

Graphic: Via Charles Schwab Corporation’s (NYSE: SCHW) TD Ameritrade thinkorswim. Observed is the Eurodollar, the interest offered on U.S. dollar-denominated deposits held at banks outside of the U.S. (i.e., participants’ outlook on interest rates).

It’s becoming the consensus that “[f]or hikes to reduce inflation, they need to hurt growth,” Jean Boivin and Alex Brazier of BlackRock Inc (NYSE: BLK) explained.

“There is no way around this,” they add. “We estimate it would require a deep recession in the U.S., with around as much as 2% hit to growth in the U.S., and 3 million more unemployed, and an even deeper recession in Europe.”

It’s the impact of rising rates and quantitative tightening (the latter which will compound the impacts of the former) that are part of the toolkit used to cool the sticky inflation.

Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.

Ray Dalio, of Bridgewater Associates LP, said that rates rising “toward the higher end of the 4.5% to 6% range … will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it.”

Accordingly, equity prices could plunge upwards of 20%, as a result.

Graphic: Retrieved from Bloomberg via Michael J. Kramer. “What is amazing is how expensive this market is relative to rates. The spread between the S&P 500 Earnings yield and the 10-Yr nominal rate is at multi-year lows.”

Further, per Bloomberg’s John Authers, it’s the case that “[a]ll major global synchronized crises ended with moderate inflation and low growth; that hasn’t been reached yet.” Separately, a peak in inflation “doesn’t come close to guaranteeing equity gains.”

The pivot will come when there’s a “sustainable path to 2% (not 3 or 4%) inflation” and a “fed funds that is greater than CPI for a few quarters,” explained Alfonso Peccatiello of The Macro Compass.

“The timing mostly depends [on] the MoM CPI ahead,” he added, pointing to a graphic that suggests “there is no ‘pivot’ earlier than mid-2023, and it could well be later. Looking at the SOFR curve, that’s also what’s roughly priced in.”

Graphic: Retrieved from Bespoke Investment Group via Alfonso Peccatiello.

Positioning

Ahead of a multi-derivative expiry, markets are trading sideways to lower. Demands to protect equity downside (with puts), compounded macro-type selling earlier this week.

Now, with traders well hedged, Kai Volatility’s Cem Karsan put forth that there is a “race to monetize,” which is lending to “relatively flat” trade and “lack of follow-through.”

Graphic: Retrieved from Pat Hennessy. “Every large down move in SPX this year (quantified by <= -2 Zscore) has been followed by a relatively flat day/lack of follow through. Any ideas as to why this is?”

From hereon, as we said, a lot of the exposure demanded is short-dated. Should that exposure not be rolled forward in time, and allowed to expire, “SPX/ES dealers [who] are well hedged,” will unwind their hedges which may drive bullishness “through OpEx,” added Karsan.

Notwithstanding, this “has [the] potential to drive a tail post” OpEx. In [the] tech/meme market melt-up of 2020-2021, positioning was [the] exact opposite.”

Technical

As of 7:45 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced 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.

Any activity above the $3,965.75 HVNode puts into play the $4,001.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,018.75 and $4,069.25 HVNodes, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,965.75 HVNode puts into play the $3,925.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,867.75 LVNode and $3,829.75 HVNode, 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.

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.

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, ex-Bridgewater Associate Andy Constan, 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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