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Fundamental
To kick off this week, we’ll do a short recap of last week and, then, go into more depth over the coming days. Thanks for tuning in (and subscribing if you’re new). Have a great rest of your day!
As a recap, markets were strong last week with follow-on strength, in part, coming from the options complex; implied volatility (IVOL) shifting lower and the trade of short-dated options were likely two big market boosters. Trades that worked really well included structures long call options closer to current market prices and short call options farther from current market prices.
Investors were optimistic about the fact that “[i]nflation was coming down, the US was slowing down faster than Europe, and rates would soon be nudging down as the Federal Reserve [or Fed] aimed to ease the economy into a reasonably ‘soft’ landing,” Bloomberg’s John Authers said. However, “on Friday morning, the facts changed.”
Data is pointing to job creation, and this is likely to put upward pressure on inflation. Accordingly, traders are pricing higher rates, again; “the unemployment data, on its face, implied that rates short and long would have to rise because money remains too cheap,” Authers added. This news bolstered the selling heading into Monday.
As The Macro Compass’ Alfonso Peccatiello summarized, “a bear market rally starts by squeezing out shorts [and] it extends through some narrative that seems to validate price action (2001: worst is behind; 2023: soft landing). In the end though, to morph into a new bull market it needs fundamentals and/or the Fed, [but it appears] you have neither in 2023.”
Positioning
Notwithstanding the equity market’s potential to stay strong into the mid-February timeframe as some strategists think (which we summarized in last week’s letters), with longer-dated SPX IVOL cheap, still “attractive trades include selling rich call verticals to finance put verticals.”
Technical
As of 7:45 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 the prior day’s range, suggesting a potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,122.75.
Key levels to the upside include $4,136.75, $4,147.00, and $4,165.75.
Key levels to the downside include $4,100.25, $4,079.00, and $4,052.25.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.
POCs: 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
The author, Renato Leonard Capelj, works in finance and journalism.
Capelj spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. Separately, Capelj is an options analyst at SpotGamma and an accredited journalist.
Capelj’s past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.
Connect
Direct queries to renato@physikinvest.com or find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram.
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Disclaimer
Do not construe this newsletter as advice. All content is for informational purposes.
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