Daily Brief For September 19, 2022

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!

Administrative

Slow start to the week with some color on statements made in last week’s detailed newsletters, like the one published on September 16, 2022. 

As an aside, some updates are coming to this letter’s format and you will be in the loop on what those are and why, shortly.

Fundamental

This is the season for volatility. The S&P 500’s (INDEX: SPX) monthly realized volatility, over a period spanning 1928 to 2021, has historically been high during this part of the year.

Adding to the volatility are uncertainties with respect to the macro environment. For example, last week we discussed the implementation of contractionary monetary policies for reducing inflation and growth. 

Read the Daily Brief for September 16, 2022, for detail on rates, quantitative tightening (and its impact on lending and market liquidity), as well as positioning and beyond.

Given the lagging data policymakers input into their decision-making, versus what non-lagging indicators are showing the likes of Catherine Wood and Elon Musk, “deflation is in the pipeline,” and the Fed may hike into a “deep recession,” as BlackRock Inc (NYSE: BLK) strategists put.

Per Andreas Steno Larsen, in the latest Consumer Price Index (CPI) report, which had traders pricing increased odds of a 100 basis point hike to interest rates, shelter costs did much of the “heavy lifting.”

The MoM shelter costs were up in excess of 0.7%. Notwithstanding, the “[c]ost of shelter is the most lagging variable in the basket,” all the while the “shelter index in the CPI basket lags the housing price development by up to 18 months.”

As a result, this means drops in rents and home prices could “take more than a year for the CPI methodology to” account.

These aforementioned comments, coupled with reports issued by the National Federation of Independent Business, boost the cases of those claiming inflation has peaked, such as Musk and Wood. 

Steno Larsen puts forth that “most analysts and newsletter-sellers … missed the most important inflation print of the week, namely the NFIB price plan survey” which bolsters the case for prices reaching their “new highs in YoY terms.”

Positioning

Pointing readers back to the September 16, 2022 letter for contexts on the positioning. 

Further, it is essentially the case that “2022 is a put-weighted regime [and] returns are negative into options expiration (OPEX) and positive after,” explained SpotGamma on Sunday.

The impact of OPEX is so staggering that “flipping to cash” the week of expiry nets far better returns than holding S&P 500 without any adjustments.

More on this, later!

Technical

As of 6:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside 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 $3,857.25 HVNode puts into play the $3,909.25 MCPOC. Initiative trade beyond the MCPOC could reach as high as the $3,935.00 VPOC and $3,964.75 HVNode, or higher.

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

Any activity below the $3,857.25 HVNode puts into play the $3,826.25 HVNode. Initiative trade beyond the latter could reach as low as the $3,770.75 HVNode and $3,722.50 LVNode, 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.

Considerations: A feature of this 2022 down market was responsiveness near key-technical areas (that are discernable visually on a chart). This suggested to us that technically-driven traders with shorter time horizons were very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

That’s changing. The key levels, quoted above, are snapping far easier and are not as well respected. That means other time frame participants with wherewithal are initiating trades. 

Those are the participants you should not fade.

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.