The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 970+ that read this report daily, below!
Administrative
Apologies, team, if the quality was lacking these past few days. Extremely busy on my end and I look forward to some detailed letters in the near future! – Renato
Fundamental
“Great powers are waging hot wars involving the flow of technologies, goods, and commodities.”
That’s according to Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar who believes that the pillars forming the context for a low-inflation world are changing, and this is setting the stage for longer-lasting structural inflation.
In short, inflationary impulses are incoming from non-linear geopolitical and economic conflicts.
Just yesterday, Europe was investigating attacks on pipelines from Russia; there were “major leaks into the Baltic Sea from two Russian gas pipelines at the cent[er] of an energy standoff.”
“The word sabotage springs to mind,” Javier Blas of Bloomberg, said. “In a single day, the conduits, which link Russia with Germany under the Baltic Sea, have suffered not one, not two, but three separate major leaks.”
Per reports by Refinitiv, seismologists nearby registered “powerful blasts” that “do not resemble signals from earthquakes.” Instead, the explosions likely correspond with hundreds of “kilos (kg) of dynamite.”
Given that Nordstream 1 and 2 are not operational, now, the “leaks are more likely a message: [if truly the culprit], Russia is opening a new front on its energy war against Europe.”
Accordingly, gas prices were higher but “below this year’s peaks,” Refinitiv reported. Generally, across some benchmarks, prices read “more than 200%, higher than in early September 2021.”
Separately, the Bank of England (BoE) is delaying quantitative-tightening (QT) bond sales and opting to purchase longer-dated government bonds in an attempt to restore stability, which we discussed was at risk on Monday and Tuesday.
As a result, after a near-vertical drop (visible below) in Gilts and British corporate bonds (which impacted mortgage lending, for one), UK yields saw some of their biggest drops on record.
The actions over the past few days complicate the Monetary Policy Committee’s (MPC) objective to reach a return to 2% inflation in the medium term.
At home, here, in the US, yields on the 10-year topped 4.00%. There is a heightened chance of a Federal Reserve (Fed) bump in rates that brings the target rate to 375-400 basis points, while the UK, in stemming its inflationary pressures, is expected to bump by double that amount.
The action to stem inflation is feeding through to demand. Apple Inc (NASDAQ: AAPL) said it would ease plans to boost iPhone production “after an anticipated surge in demand failed to materialize,” a Bloomberg report said.
“The supply constraints pulling down on the market since last year have eased and the industry has shifted to a demand-constrained market,” said Nabila Popal, research director at IDC.
“High inventory in channels and low demand with no signs of immediate recovery has OEMs panicking and cutting their orders drastically for 2022,” a fear we said ARK Invest’s Catherine Wood shared, not too long ago.
Positioning
The beginning of the week was characterized by a sideways-to-lower S&P 500 (INDEX: SPX) and implied volatility (IVOL) metrics, such as the Cboe Volatility Index (INDEX: VIX), rising.
Per IVOL the term structure, demand for options protections seems to be concentrated in options that are shorter-dated and far more sensitive to changes in direction and volatility.
That means for large shifts in price and/or volatility, hedging ratios (e.g., Delta) shift markedly, too. This prompts “hedging feedback mechanisms in both market directions,” per SpotGamma.
Moreover, the risks are skewed to the upside, SpotGamma added.
“For pumped-up options far from the money to retain their value, there essentially needs to be an adverse move (in price and volatility). Should nothing bad happen, the probability of these options paying out will fade, as will their exposure to direction (or Delta). [In] re-hedg[ing] decreased exposure to Delta, liquidity providers [] may provide the market with a boost.”
At the same time, there appears to be some “dealer disintermediation” amid “less incentive to make deep, tight markets” due to “capital constraints,” potentially, explained SqueezeMetrics, the creator of the DIX (Dark Pool Index).
This comes after months of high average readings in DIX (likely as market-makers assembled “basket[s] of S&P 500 stocks to create ETF shares, or to hedge away the exposure of a futures contract[s]”). Typically, high DIX readings are associated with stronger 1-month market returns, particularly when put flows are strong (i.e., lower Gamma exposure readings, like now).
Overall, the trend change is “suggestive of some second thoughts from the [buy-the-dip] crowd, and perhaps (likely!) some deleveraging from elsewhere,” SqueezeMetrics ended.
Technical
As of 8:20 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper 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 higher.
Any activity above the $3,638.25 LVNode puts into play the $3,688.75 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,722.50 LVNode and $3,771.25 HVnode, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $3,638.25 LVNode puts into play the $3,610.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,554.75 and $3,506.25 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.
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, 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.
