Author: Renato L. Capelj

Categories
Commentary

Daily Brief For March 3, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 7:00 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

Lots of content today but a bit rushed at the desk. If anything is unclear, we will clarify it in the coming sessions. Have a great weekend! – Renato

Fundamental

Physik Invest’s Daily Brief for March 2 talked about balancing the implications of still-hot inflation and an economy on solid footing. Basically, the probability the economy is in a recession is lower than it was at the end of ‘22. For the probabilities to change markedly, there would have to be a big increase in unemployment, for one.

According to a blog by Unlimited’s Bruce McNevin, if the unemployment rate rises by about 1%, recession odds go up by 29%. If the non-farm payroll employment falls by about 2% or 3 million jobs, recession odds increase by about 74%. After a year or so of tightening, unemployment measures are finally beginning to pick up.

Policymakers, per recent remarks, maintain that more needs to be done, however. For instance, the Federal Reserve’s (Fed) Raphael Bostic, who generally carries an easier stance on monetary policy, mulled whether the Fed should raise interest rates beyond the 5.00-5.25% terminal rate consensus he previously endorsed. This commentary, coupled with newly released economic data, has sent yields surging at the front end. 

Graphic: Retrieved from TradingView.

Traders are wildly repricing their terminal rate expectations this week. The terminal rate over the past few days has gone up from 5.25-5.50% to 5.50-5.75%, and back down to 5.25-5.50%.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

Positioning

Stocks and bonds performed poorly. Commodity hedges are uninspiring also in that they do not hedge against (rising odds of) recession, per the Daily Brief for March 1. 

In navigating this precarious environment, this letter has put forward a few trade ideas including the sale of call options structures to finance put options structures, after the mid-February monthly options expiration (OpEx). Though measures suggest “we can [still] get cheap exposure to convexity while a lot of people are worried,” the location for similar (short call, long put) trades is not optimal. Rather, trades including building your own structured note, now catching the attention of some traders online, appear attractive now with T-bill rates surging.

Graphic: Retrieved from Bloomberg.

Such trades reduce portfolio volatility and downside while providing upside exposure comparable to poorly performing traditional portfolio constructions like 60/40.

As an example, per IPS Strategic Capital’s Pat Hennessy, with $1,000,000 to invest and rates at ~5% (i.e., $50,000 is 5% of $1,000,000), one could buy 1000 USTs or S&P 500 (INDEX: SPX) Box Spreads which will have a value of $1 million at maturity for the price of $950,000.

With $50,000 left in cash, one can use options for leveraged exposure to an asset of their choosing, Hennessy explained. Should these options expire worthless, the $50,000 gain from USTs, at maturity, provides “a full return of principal.”

For traders who are focused on short(er)-term movements, one could allocate the cash remaining toward structures that buy and sell call options over very short time horizons (e.g., 0 DTE).

Knowing that the absence of range expansion to the downside, positioning flows may build a platform for the market to rally, one could lean into structures like fixed-width call option butterflies.

For instance, yesterday, Nasdaq 100 (INDEX: NDX) call option butterflies expanded in value ~10 times (i.e., $5 → $50). An example 0 DTE trade is the BUTTERFLY NDX 100 (Weeklys) 2 MAR 23 12000/12100/12200 CALL. Such trade could have been bought near ~$5.00 in debit and, later, sold for much bigger credits (e.g., ~$40.00).

Such trade fits and plays on the narrative described in Physik Invest’s Daily Brief for February 24. That particular letter detailed Bank of America Corporation’s (NYSE: BAC) finding that “volume is uniquely skewed towards the ask early in the day but towards the bid later in the day” for these highly traded ultra-short-dated options.

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via Bloomberg. 

Even options insight and data provider SqueezeMetrics agrees: “Buy 0 DTE call.” The typical “day doesn’t end above straddle b/e, but call makes money,” SqueezeMetrics explained. “Dealer and call-buyer both profit. Gap down, repeat.”

Anyways, back to the bigger trends impacted by liquidity coming off the table and increased competition between equities and fixed income.

Graphic: Via Physik Invest. Net Liquidity = Fed Balance Sheet – Treasury General Account – Reverse Repo.

As this letter put forth in the past, if the “market consolidates and doesn’t break,” as we see, the delta buy-back with respect to dropping implied volatility (IVOL) or vanna and buy-back with respect to the passage of time or charm could build a platform for a FOMO-driven call buying rally that ends in a blow-off. 

Graphic: Retrieved from Piper Sandler’s (NYSE: PIPR) Danny Kirsch. Short volatility and short stocks was attractive to trade. As your letter writer put in a recent SpotGamma note: “With IV at already low levels, the bullish impact of it falling further is weak, hence the SPX trending lower all the while IV measures (e.g., VIX term structure) have shifted markedly lower since last week. If IV was at a higher starting point, its falling would work to keep the market in a far more positive/bullish stance.”

Per data by SpotGamma, another options insight and data provider your letter writer used to write for and highly recommends checking out, call buying, particularly over short time horizons, was often tied to market rallies. 

Graphic: Retrieved from SpotGamma via Bloomberg.

“0DTE does not seem to be associated with betting on a large downside movement. Large downside market volatility appears to be driven by larger, longer-dated S&P volume,” SpotGamma founder Brent Kochuba said in the Bloomberg article. “Where 0DTE is currently most impactful is where it seems 0DTE calls are being used to ‘buy the dips’ after large declines. In a way this suppresses volatility.”

Anyways, the signs of a “more combustible situation” would likely show when “volatility is sticky into a rally,” explained Kai Volatiity’s Cem Karsan. To gauge combustibility, look to the Daily Brief for February 17.

Technical

As of 6:50 AM ET, Friday’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 positively 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 $3,988.25. 

Key levels to the upside include $3,999.25, $4,012.25, and $4,024.75.

Key levels to the downside include $3,975.25, $3,965.25, and $3,947.00.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

Vanna: The rate at which the Delta of an option changes with respect to implied volatility.

Charm: The rate at which the Delta of an option changes with respect to time.

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.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Reduction in dealer Gamma exposure. Often, there is an increase in volatility after the removal of large options positions and associated hedging.

Options: Options offer an efficient way to gain directional exposure.

If an option buyer was short (long) stock, he or she could buy a call (put) to hedge upside (downside) exposure. Additionally, one can spread, or buy (+) and sell (-) options together, strategically.

Commonly discussed spreads include credit, debit, ratio, back, and calendar.

  • Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.
  • Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.
  • Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 
  • Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.
  • Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

Typically, if bullish (bearish), sell at-the-money put (call) credit spread and/or buy a call (put) debit/ratio spread structured around the target price. Alternatively, if the expected directional move is great (small), opt for a back spread (calendar spread). Also, if credit spread, capture 50-75% of the premium collected. If debit spread, capture 2-300% of the premium paid.

Be cognizant of risk exposure to the direction (Delta), movement (Gamma), time (Theta), and volatility (Vega). 

  • Negative (positive) Delta = synthetic short (long).
  • Negative (positive) Gamma = movement hurts (helps).
  • Negative (positive) Theta = time decay hurts (helps).
  • Negative (positive) Vega = volatility hurts (helps).

About

The author, Renato Leonard 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 accredited journalist with past works including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, 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. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For March 2, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 6:15 AM ET. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

A tight monetary environment resulted in a hesitation to take risks. With inflation high, in the face of exogenous events (e.g., geopolitics disrupting deflationary influences) and beyond, assets were sold.

Graphic: Retrieved from Topdown Charts.

With inflation still hot and the economy on solid footing (i.e., “stronger growth for longer” per Unlimited’s Bruce McNevin), traders price even “tighter monetary policy and a harder eventual landing to ease inflation pressure.” This is not good for assets.

Graphic: Retrieved from Unlimited.

In fact, for a moment yesterday, traders put the terminal rate at 5.50-5.75%, up from 5.25-5.50% prior to the market opening.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) via The Kobeissi Letter on March 1, 2023, at 10:55 AM.

For the Federal Reserve (Fed) to hit its inflation target, likely in the range of 2-4% per Oaktree Capital Management’s Howard Marks said the real Fed Funds rate has to be positive. This effort puts the economy at risk of recession, said the Federal Reserve’s Neel Kashkari.

“Typically when the Fed raises rates to cool down inflation, it leads to a recession,” Kashkari explained, adding that “getting inflation down is job number one.”

Per Unlimited’s McNevin, the probability the economy is in a recession is lower than it was at the end of last year. For probabilities to change, there would have to be a large increase in unemployment. For instance, if the unemployment rate rises by about 1%, recession odds go up by 29%. If non-farm payroll employment falls by about 2% or 3 million jobs, recession odds jump by 74%.

Graphic: Retrieved from Unlimited.

Positioning

Per last month’s remarks by Kai Volatility’s Cem Karsan, quoted in Physik Invest’s Daily Brief for February 17, 2023, if the market was to not breakdown sharply after February monthly options expiration (OpEx), as we see today, then options decay could build a platform for a FOMO-driven call buying rally that ends in a blow-off. 

Consequently, trades this letter put forth last month (e.g., call verticals sold to finance put verticals expiring months from now) would suffer greatly.

“We’ve had an intraday range of 33.5 [points] thus far. That’s not vol[atility] expansion, which is what I’d want to see if I was short,” volatility trader Darrin John put well. “If the market doesn’t do what you think it should, in a reasonable amount of time, then it’s best to [exit].”

At the same time, with portfolio constructions like 60/40 not as attractive in this macroeconomic environment (i.e., asset headwind from monetary tightening, as well as slowing growth and inflation headwind to bonds and commodities), traders can look to Physik Invest’s Daily Brief for February 28, 2023, for ideas on how to navigate. In that letter, we talked about how traders can participate in the upside by about the same amount they would with a traditional construction (e.g., 60/40) while eliminating their downside risk exposure.

For instance, one can buy enough bonds/box spreads so that, at their maturity, the principal is returned. The cash remaining can be invested in leverage potential.

Ending with a supporting quote from Oaktree’s Howard Marks: “Investors can now potentially get solid returns from credit instruments, meaning they no longer have to rely as heavily on riskier investments to achieve their overall return targets.”

Technical

As of 6:00 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 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 $3,943.25. 

Key levels to the upside include $3,965.25, $3,975.25, and $3,988.25.

Key levels to the downside include $3,926.25, $3,908.25, and $3,891.00.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and 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.

Options Expiration (OPEX): Reduction in dealer Gamma exposure. There is usually an increase in volatility after the removal of large options positions and associated hedging.

About

The author, Renato Leonard 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 accredited journalist with past works including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, 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. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For March 1, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 9:25 AM ET. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

Pardon, the delay. Also, the levels in this letter are a little messy to the downside. Too many confluences. Will clear them up over the coming days. Have a great day!

Fundamental

In the face of contrarian economic indications, based on CME Group Inc’s (NASDAQ: CME) FedWatch Tool, traders’ activity in the Fed Fund Futures shows the terminal rate peaking at 5.25-5.50%. Expectations for easing are pushed out to 2024, though at a less steep rate. This context, coupled with the prospects of slower economic growth, presents uninspiring realities for investors.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool.

Consequently, the equity-bond correlation break is set to persist.

Graphic: Retrieved from Credit Suisse Group AG (NYSE: CS).

Quoting a Bloomberg analysis of Credit Suisse’s Global Investment Returns Yearbook, “[b]onds, equities and real estate tend to be negatively correlated with inflation,” while “only commodities had a positive correlation, making them the only true hedge.”

However, commodities are “often susceptible to deep and lengthy drawdowns … in periods of disinflation” and falling growth expectations. Though commodities are a hedge against inflation, they aren’t a hedge against (rising odds of) recession.

Graphic: Retrieved from Credit Suisse Group AG (NYSE: CS).

So, interest rates are likely to rise and stay higher for longer. 

Graphic: Retrieved from Bridgewater Associates LP. “Nominal spending on services has continued to grow at a rapid clip of about 6% annualized. Real and nominal demand for goods has been gradually weakening. This shift in the mix of demand has implications. Services spending is an upward pressure on employment and wages, while weak goods demand has a more pronounced impact on listed company sales.”

Equities, which are particularly sensitive to interest rates, are likely to weaken despite economic and earnings growth which is set to fall (i.e., close to zero earnings growth).

Graphic: Retrieved January 5, 2023, from Nasdaq Inc’s (NASDAQ: NDAQ) Phil Mackintosh.

Quantitative tightening or QT (i.e., the flow of capital out of capital markets and an asset headwind), which has been offset by the running off of the Treasury General Account and injecting liquidity into markets (i.e., TGA runoff increases the room banks have to lend and finance trading activities) in the face of the debt ceiling issue, is set to accelerate and compound the rising rate impact.

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.

In light of rates and QT risk asset headwind, as well as slowing growth and inflation headwind to bonds and commodities, how does one protect their portfolio? As The Ambrus Group’s Kris Sidial explains, “[e]ven if inflation continues, the rate at which it rises won’t be the same. Due to this, CTA exposures likely will not perform as well as they did in 2022, and that’s why you may see more opportunities in the volatility space … [where] we can get cheap exposure to convexity.”

Graphic: Retrieved from Bloomberg via Tier1Alpha. “[T]he correlation between bond yields and equities, has begun to turn higher from a negative level. Remember that a negative correlation between bond yields and equity prices means equities go lower as bond prices go lower, defeating the historical diversification benefits of a 60/40-type portfolio.  Historically, this rotation has been associated with a period of LOWER returns, but it’s important to emphasize that this is because these periods are associated with Fed-induced slowdowns. Whether 2023 follows the same pattern remains to be seen.”

Please refer to past letters for trade examples. Though such trades may not be as attractive to enter now, they are attractive to keep on for longer.

Graphic: Retrieved from Nomura Holdings Inc (NYSE: NMR). Downside trades are rather attractive now in the absence of hedging demands in longer-dated protection convex in price and volatility. Naive measures like the Cboe VIX Volatility (INDEX: VVIX), as well as the graphic above, allude to the little demands for convexity and a declining sensitivity of the VIX with respect to changes in share prices.

If, as Bridgewater Associates put it, there is another stage to tightening “marked either by an economic downturn or failure to meet the inflation target, prompting more tightening,” risk assets will perform poorly and this letter’s trade examples are likely to protect portfolios well until assets appear attractive enough to buy again.

Graphic: Retrieved from NDR via Macro Ops.

Positioning

SpotGamma explains that more of the same (i.e., back-and-forth consolidation and a grind higher or lower) can be expected until some macroeconomic catalysts solicit demand for upside or downside protection and, accordingly, counterparty hedging pressures catalyze a far-reaching movement. 

As an aside, “With IV at already low levels, the bullish impact of it falling further is weak, hence the SPX trending lower all the while IV measures (e.g., VIX term structure) have shifted markedly lower since last week. If IV was at a higher starting point, its falling would work to keep the market in a far more positive/bullish stance.”

Graphic: VIX Term Structure retrieved from VIX Central via The Market Ear.

Consequently, “if traders enter the market and demand protection, particularly that which is farther-dated, the bearish effect of rising IV will far outweigh the bullish effect of it falling. This will add to the underlying/fundamental pressure we see building via weak price action.”

Technical

As of 9:20 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a positively 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 $3,965.25. 

Key levels to the upside include $3,979.75, $3,992.75, and $4,003.25.

Key levels to the downside include $3,949.00, $3,927.50, and $3,908.25.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. 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, North Dakota Governor Doug Burgum, 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. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For February 28, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 6:30 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

A light letter, today.

Check out the Daily Brief for February 27, 2023, for how to take advantage of higher interest rates and define the outcome of your trading.

As an aside, the second to last positioning section paragraph in that letter talks about using short-dated bets like “butterflies, broken-wing butterflies, ratio spreads, back spreads, and beyond.” In the initial version of the letter, your letter writer accidentally wrote box spreads instead of back spreads. Apologies.

Positioning

Yields are ~5.00%, and this is around the S&P 500’s (INDEX: SPX) earnings yield (i.e., the 6-month Treasury yield is about equal to the SPX’s earnings yield of 5.2%).

Graphic: Retrieved from ustreasuryyieldcurve.com. 

A nod to rising rates and risk premiums, the likes of Morgan Stanley suggest the S&P 500 (INDEX: SPX) will come under further pressure.

Graphic: Retrieved from Morgan Stanley (NYSE: MS).

Since not all who read the letter are active in the same timeframe, in the interest of expanding the opportunity set if we will, your letter writer detailed ways to express one’s longer-term opinion on the upside or downside in a capital-protected way.

Essentially, traders can create their own structured notes, investing in a manner that returns principal only. The difference between the bond/box spread outlay and cash remaining is invested in leverage potential. At maturity, the worst-case is a return of principal.

Further, through such structures, traders can participate in the upside by about the same amount they would with a traditional construction (e.g., 60/40). However, you cut the downside.

Image
Graphic: Retrieved from IPS Strategic Capital’s Pat Hennessy.

Alternatively, traders can bias themselves short or non-directionally. In a short-bias situation, one can buy a put spread (and/or sell a call spread) with an outlay (or max loss) not exceeding the cash remaining after the purchase of a bond or box spread.

Through a short-biased setup, traders may participate in potential downside on the pricing of equity market headwinds.

Graphic: Retrieved from JPMorgan Chase & Co (NYSE: JPM).

The suggested downside trades are rather attractive now in the absence of hedging demands in longer-dated protection convex in price and volatility. Naive measures like the Cboe VIX Volatility (INDEX: VVIX), as well as the graphic below, allude to the little demands for convexity and a declining sensitivity of the VIX with respect to changes in share prices.

Graphic: Retrieved from Nomura Holdings Inc (NYSE: NMR).

Technical

As of 6:30 AM ET, Tuesday’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 the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,992.75. 

Key levels to the upside include $4,003.25, $4,012.25, and $4,024.75.

Key levels to the downside include $3,979.75, $3,965.25, and $3,949.00.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. 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, North Dakota Governor Doug Burgum, 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. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For February 27, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 7:45 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Positioning

In The Second Leg Down: Strategies For Profiting After A Market Sell-Off, there is one passage on the inaccuracy of normal distributions in markets and serial correlation, as well as the underpricing of rare events. In that same passage, Nassim Nicholas Taleb is credited for his advocacy on portfolio allocations to safe short-term government bonds and high-risk speculative bets through which “you could lose no more than your initial investment.”

Naturally, this leads to Exotic Options and Hybrids. Structured notes, to quote chapter two, are “composed of a non-risky asset providing a percentage of protected capital and a risky asset offering leverage potential.”

The structure, as a whole, is not risky in the absence of defaults. The bond, which is bought at a discount, increases in value until maturity. The difference between the initial value to allocate (100% of notional) and the bond purchase price is allocated to the leverage (e.g., options) component of the structure.

Graphic: Retrieved from Exotic Options and Hybrids.

This type of capital-protected structure is particularly attractive right now, given the interest rate environment. That’s because high-interest rates decrease the initial value of the bond. This means we can allocate more to leveraged bets, for example.

During the life of the structured note, the value of the non-risky part increases when interest rates decrease. At maturity, the value of the bond component is equal to 100% of the notional while the value of the riskier part of the note is “non-linear and fluctuates depending on many market parameters such as the underlying’s spot, interest rates, borrowing costs, dividend yield or volatility.”

Graphic: Retrieved from Exotic Options and Hybrids. For illustration only.

Last week, IPS Strategic Capital’s Pat Hennessy wrote a thread on how to apply this information. 

Basically, with interest rates near 5% at the front of the yield curve, and traditional portfolio constructions performing poorly, defined-outcome investing is attractive. 

With $1,000,000 to invest and rates at ~5% (i.e., $50,000 is 5% of $1,000,000), one could “purchase 1000 USTs [or S&P 500 (INDEX: SPX) Box Spreads] which will have a value of $1 million at maturity for the price of $950,000.”

Graphic: Retrieved from IPS Strategic Capital’s Pat Hennessy.

With $50,000 left in cash, one can use options for leveraged exposure to an asset of their choosing, Hennessy explained. Should these options expire worthless, the $50,000 gain from USTs, at maturity, provides “a full return of principal.”

In an example, Hennessy presented a structure providing 60% of the upside gain of the S&P 500 with full principal protection should markets fall. Though “you may initially scoff at 60%, [] keep in mind that historically 60/40 has captured between 60-70% of the upside of equities.”

Image
Graphic: Retrieved from IPS Strategic Capital’s Pat Hennessy.

If you’re bearish or unopinionated, Hennessy presented capital-protected structures that make money if the market moves lower (e.g., instead of buying a call option on the SPX, buy put options or a put options spread) or sideways (e.g., sell defined-risk option condor structures).

Image
Graphic: Retrieved from IPS Strategic Capital’s Pat Hennessy.

Markets have a tendency to move big and continue moving big in the same direction, over the very short term, hence the “fat tails in the distribution over short horizons,” to quote The Second Leg Down. Given this, your letter writer can use his analyses to capitalize big on underpricing and participate in upside or downside through a series of short-dated options bets (e.g., butterflies, broken-wing butterflies, ratio spreads, back spreads, and beyond) that, in time, may return in excess of ~10 times the initial investment. Should nothing happen, then he walks away with his principal. That’s trading made less stressful.

Have a great day. If you enjoyed today’s letter, consider sharing it with your friends!

Graphic: Via Banco Santander SA (NYSE: SAN) research, the return profile, at expiry, of a classic 1×2 (long 1, short 2 further away) ratio spread.

Technical

As of 7:40 AM ET, Monday’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 positively 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 $3,992.75. 

Key levels to the upside include $4,003.25, $4,012.25, and $4,024.75.

Key levels to the downside include $3,979.75, $3,965.25, and $3,949.00.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. 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, North Dakota Governor Doug Burgum, 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. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For February 24, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 8:25 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Positioning

Traders continue to balance the risks of owning risk assets versus less-risky bonds, for instance. In what can be construed as a fear-of-missing-out (FOMO), some have sought upside equity exposure in a way that limits downside: call options.

Consequently, implied volatility (IVOL) on the call side, particularly in options with less time to expiration, continues to be elevated by upwards of 10.00% or more.

Further, this week’s trading has been dominated by the expected post-options expiry (OpEx) weakness, as well as short-term catalysts and trading. Take yesterday, for example, the market opened higher signaling a potential trend change on upbeat earnings reports, as I detailed in a SpotGamma note. Under the hood, however, there was little optimism. The S&P 500 (INDEX: SPX) succumbed to this weakness before reversing at a key support SpotGamma’s modeling established and rising toward a key resistance into session-end. Noteworthy was the options activity heading into the decline. We observe this activity with tools including SpotGamma’s HIRO indicator measuring the real-time hedging impact of traders’ options activities. 

As the SPX traded lower, ultra-short-dated call buyers and put sellers synthetically bought the market. The hedging of this ultra-sensitive exposure portended a turn at the low. As the SPX resolved higher, this activity traded out, so to speak, as evidenced by ultra-short-dated call selling and put buying, hence mean-reversion into the close.

Graphic: Retrieved from SpotGamma.

SpotGamma’s founder said these “head-fakes” were to be expected. “Traders are uncertain and still are not committed to demanding longer-dated protection,” hence lower longer-dated IVOL.

In a Bank of America Corporation (NYSE: BAC) response to JPMorgan Chase & Co’s (NYSE: JPM) note on an ultra-short-dated options trading catastrophe looming, we learn that mean-reversion is, in part, a result of “traders buying short-dated options at the beginning of the day and unwinding those same positions late in the day,” I put in a SpotGamma note.

To quote BAC directly, half of all SPX ultra-short-dated options activity is “single-leg auto-execution.” Options IVOL is “at levels that are likely inconsistent with a market that has been overrun by option sellers,” contrary to JPM’s opinion, ZeroHedge said in one recap. “75% of trades occur near the bid or the ask – more than for any other tenor, and volume is uniquely skewed towards the ask early in the day but towards the bid later in the day.”

Consequently, a takeaway is that, as this letter has put forth in the past, ultra-short-dated options activity does not have a long-lasting impact. Rather, what is impactful is participants’ desire to carry exposure to options/protection that are farther-dated.

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via SpotGamma.

As put in yesterday’s letter, the contexts for a far-reaching rally are weak. A change in the bearish context is likely to coincide with charged options values (i.e., wound IVOL or big put delta) or some fundamental, macro-type catalyst. In the latter, a caveat is that IVOL compression, alone, likely does little to inspire a far-reaching rally.

Technical

As of 7:30 AM ET, Friday’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, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,992.75. 

Key levels to the upside include $4,003.25, $4,012.25, and $4,024.75.

Key levels to the downside include $3,979.75, $3,965.25, and $3,949.00.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. 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, North Dakota Governor Doug Burgum, 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. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For February 23, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 6:30 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

Bloomberg’s John Authers summarized well the release of the Federal Open Market Committee (FOMC) meeting minutes. He said that almost all officials “supported a step down in the pace of tightening by 25 basis points, while a ‘few’ favored or could have supported a bigger 50 basis-point hike. Nobody wanted to stop straightaway.”

“Participants observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2%, which was likely to take some time,” the minutes said.

Graphic: Retrieved from Royal Bank of Canada (NYSE: RY). 

Notwithstanding hits to markets like housing, which news has concentrated on, the S&P 500 (INDEX: SPX) is trading about 18x forward price-to-earnings, Bank of America Corporation (NYSE: BAC) said, the highest since March 2022 and 20% above the last decade’s average P/E. 

Graphic: Retrieved from Bloomberg.

Per Savita Subramanian, “the traditional Rule of 20 … holds that the multiple should be whatever number results by subtracting the inflation rate from 20 — which with inflation at 6.4% would imply that the P/E needs to fall to 13.6.”

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via Bloomberg.

Recall yesterday’s letter discussing the “risk-reward of holding bonds [looking] better than equity (earnings yield).”

Graphic: Retrieved from Bloomberg’s Lisa Abramowicz. “Yields on 12-month T-bills have risen to their highest since 2001. Most of this has to do with Fed rate hike expectations.”

Positioning

The SPX’s decline is orderly and contained. 

However, the break below $4,000.00 SPX did open the door to a “liquidity hole,” SpotGamma explained. New information has traders anticipating more equity market downside; traders are “reset[ing] to lower equity valuations” on the higher-for-longer rate narrative all the while “vanna and gamma hedging serve to pull markets lower.”

The contexts for a far-reaching rally are weak. A change in the context is likely to coincide with charged options values (i.e., wound implied volatility or big put delta).

Technical

As of 6:30 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 positively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 (FUTURE: /MES) pivot for today is $4,012.25. 

Key levels to the upside include $4,024.75, $4,034.75, and $4,045.25.

Key levels to the downside include $4,003.25, $3,992.75, and $3,981.00.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

Delta: An option’s exposure to the direction or underlying asset movement.

Gamma: The sensitivity of an option’s delta to changes in the underlying asset’s price.

Vanna: The rate at which the delta of an option changes with respect to implied volatility.

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, North Dakota Governor Doug Burgum, 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. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For February 22, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 7:15 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

We look beyond all the doom-and-gloom narrative to the bond-equity divergence which JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic wrote about recently.

Essentially, regressions suggest the move in interest rates since the Federal Reserve’s (Fed) meeting earlier this month should have resulted in a 5-10% sell-off in the rate-sensitive Nasdaq. It didn’t. Per Kolanovic, “this divergence cannot go much further.”

Recall interest rates matter to discounted future cash flows. The higher rates are the, worse that is for equities, says Damped Spring’s Andy Constan well in an interview. 

Interest rates matter elsewhere as well. When interest rates increase, “a mortgage goes down in price by a greater amount than the bond because the expected maturity of the mortgage becomes longer. The magnitude of this unbalanced price volatility characteristic is measured by a financial statistic called ‘convexity.’” Managing this convexity can be problematic and force feedback loops, just as we talk about with options per the below. See here for more.

Graphic: The “Biggest tail risk to SPX isn’t any macro data/virus/war but its own options market.”

Kolanvoic ends: The “risk-reward of holding bonds at this level of short-term yields looks better than equity (earnings yield) than any time since the great financial crisis (i.e., the spread between 2y and equity earnings yield is at the lowest point since 2007).”

Graphic: Retrieved from JPMorgan Chase & Co (NYSE: JPM).

Positioning

This letter said there would be movement after last week’s options expirations (OpEx). 

To quote the February 15 letter, ignoring the “excellent” liquidity and traders buying S&P 500 (INDEX: SPX) “hand over fist,” OpEx would result in a decline in counterparty exposure to positive gamma (i.e., positive exposure to movement). Support from an options positioning perspective would decline, and counterparties would “do less to disrupt and more to bolster movement.”

That’s along the lines of what’s happening, though the movement appears orderly.

Per SpotGamma, “The selling appears contained, as evidenced by an upward trending [implied volatility or IVOL] term structure and light bid in topline measures of [IVOL] like the [Cboe Volatility Index (INDEX: VIX)].” Notwithstanding this light bid at the front of the term structure, there is no rush to protect, as would be evidenced by longer-dated IVOL shifting “materially higher as traders reset to lower equity valuations.”

Graphic: Retrieved from SpotGamma. “SPX term structure today vs 2/13 (day prior to CPI). Traders had higher vol expectations for CPI vs today’s FOMC minutes, but [the] term structure is now more elevated. Makes sense as SPX [is] -3% lower. However, the loss of stabilizing OPEX positioning, elevated IV, & flat gamma may lead to higher relative vol today.”

With there being many options positions concentrated near the $4,000.00 SPX area, markets may be at risk of accelerated selling. Below $4,000.00 traders desire to own predominantly puts, and this leaves counterparties “short puts and [] positive delta, as well as negative gamma and vega, meaning they lose money in an increasing way as the market trades lower and volatility increases.” To hedge, counterparties could sell futures or stocks into the decline. This accelerates selling.

Graphic: Retrieved from SpotGamma.

So, with a break of that big $4,000.00 level increasing risk that selling accelerates, the desire to protect will bid IVOL and the marginal impact of its expansion can do more damage than good that any marginal compression can do.

Graphic: Retrieved from SpotGamma. “IV has now compressed to levels associated with recent market tops. If realized vol (RV) declined, then IV could go lower. But, realized isn’t declining.”

In light of this, your letter writer leans negative delta, as well as positive gamma and vega. If the market trades lower, such a setup would make money in short.

Technical

As of 7:15 AM ET, Wednesday’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 negatively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,998.25. 

Key levels to the upside include $4,015.75, $4,034.75, and $4,052.25.

Key levels to the downside include $3,981.00, $3,965.25, and $3,949.00.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

Gamma: The sensitivity of an option’s Delta to changes in the underlying asset’s price.

CPOCs: Denote areas where two-sided trade was most prevalent over all sessions. Participants will respond to future tests of value as they offer favorable entry and 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.

MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Inversion Of VIX Futures Term Structure: Longer-dated VIX expiries are less expensive; is a warning of elevated near-term risks for equity market stability.

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, North Dakota Governor Doug Burgum, 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. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For February 21, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 9:05 AM ET. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

Some big ideas/themes to mull as we leg into this week’s letters. Have a great day!

Investors are facing a big adjustment as a consequence of post-pandemic geopolitics and the race for control of physical things. Typical responses, like adjusting demands structurally to meet supply, are no longer optimal. Bailouts and zero-interest policies are what entered us into this cycle of inflation and geopolitical instability. What’s more optimal are fiscally-funded policies.

“The outcome of [quantitative easing or QE] was obvious and inevitable,” economist Dr. Pippa Malmgren explained in a letter. “The decline of interest rates to nothing and the return of inflation … destabilize[d] emerging markets and cause[d] governments to race for control over supply chains of food and energy.” As Credit Suisse Group’s (NYSE: CS) Zoltan Pozsar said in December, “whoever encumbers commodities and controls the factories rules inflation, whoever rules inflation controls interest rates, and whoever controls interest rates controls the level of the stock market and financial wealth more generally.”

Accordingly, policymakers’ new way to push cash into the economy is defense spending. Malmgren explained that this new fiscally funded QE if we will, is not subject to audits and falls under the guise of “civilian tech” innovation which “we are seeing the results of” in the air, space, and sea. Take, for instance, headlines on undersea internet cable and gas line disruptions, as well as the likes of Amazon Inc (NASDAQ: AMZN) and Starlink heading to space to provide satellite-based WiFi (which can be used for “strategic support” during operations), and China pulling satellites out of orbit.

“[W]e cannot see what’s going on in the graveyard of space,” Malmgren added, noting that the 200-foot balloons drifting over the West reveal the US is “already at war” and knocks the notion leaders “could be at war without the public needing to know about it.” China understands what Malmgren called leverage ratios. Flyovers with jets may work in Taiwan but not in the US. It “would invite an overwhelming response, … [while] balloons seem so innocuous,” just as the Japanese Sky Lanterns appeared during WWII, Malmgren detailed in another letter. In the Sky Lantern case, though many of the balloons “were found unexploded,” some blew; one took out power to “the very nuclear reactor that happened to generate the plutonium that would later be used in the Nagasaki nuclear bomb.”

Perhaps the Chinese balloons are intended to deliver payloads and, “like in the 1940s, we are already at such an advanced stage of confrontation amongst the superpowers that the job of the military is not so much to respond to the balloons as it is to prevent public panic.” As validation, one may look to the very little alarm over military activities in the Pacific, as well as “China and the US … trying to move on from the [balloon] dispute,” Bloomberg reported last week.

“It is as if the Western military establishment learned a great lesson from having underestimated President Putin” who just suspended the New START treaty with the US. Now, with reports that China is readying for an attack on Taiwan by 2027, the US “has shifted from holding exercises to engaging in mission rehearsals … [which] increase confidence in the twenty-year-olds who will be actually conducting warfighting.”

Anyways, a product of “The Invisible War,” as Malmgren calls it, is this painful divorce and will intensify the decoupling after the world hit a “limit of economic integration in 2006 or 2007,” Noah Smith put in a recent letter. With estimates that two years of global GDP growth could be wiped by a decoupling, Smith added, “we should be thinking about how to shape the next wave of globalization in a way that encourages global economic growth while also providing security to ourselves and our allies.” Malmgren ends: “The markets won’t like all this.”

Though there may be a dip in inflation in the interim resulting in a pivot and relief in markets, the prospects of inflation resurfacing, potentially with vengeance, are up, and this has negative implications on traditional portfolio constructions as this letter started with, today. Therefore, investors should consider adding exposure to cash, bonds, and commodities, as this letter quoted Pozsar explaining before.

Technical

As of 9:00 AM ET, Tuesday’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 $4,052.25. 

Key levels to the upside include $4,071.75, $4,083.75, and $4,104.25.

Key levels to the downside include $4,034.75, $4,015.75, and $3,998.25.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

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, North Dakota Governor Doug Burgum, 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. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For February 17, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 6:30 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS via MND. Click here for the calendar.

Administrative

The plan was to have a talk about big geopolitical themes but, in tying some loose ends and keeping with the spirit of the options-induced armageddon narrative, we push this to next week. Have a great weekend!

Positioning

Despite maintaining that markets are potentially due for weakness, Kai Volatility’s Cem Karsan brought up some interesting points, yesterday.

Essentially, despite liquidity coming off the table and increased competition between equities and fixed income, hence big bond inflows and equity outflows, if the “market consolidates and doesn’t break,” the delta buy-back with respect to dropping implied volatility (IVOL) or vanna and buy-back with respect to the passage of time or charm could build a platform for a FOMO-driven call buying rally that ends in a blow-off.

Graphic: Retrieved from Bloomberg. “US stocks have a new competitor: cash. For more than a decade, the only real virtue of leaving money on deposit has been optionality. It means you can jump quickly on opportunities as they arise. But now it offers a competitive yield.”

The signs of this “more combustible situation” would likely show when “volatility is sticky into a rally,” adds Karsan. To gauge combustibility, look to the options market.

Remember calls trade at a lower IVOL than puts. As the market trades higher, it slides to a lower IVOL, and that’s reflected by broad IVOL measures. If broad IVOL measures are sticky/bid, “that’s an easy way to say that fixed-strike volatility is coming up and, if that can happen for days, that can unpin volatility and create a situation where dealers themselves are no longer [own] a ton of volatility; they start thinning out on volatility themselves, and that creates a more combustible situation.”

To explain the “thinning out” part of the last paragraph, recall participants often opt to own equity and downside (put) protection financed, in part, with sales of upside (call) protection. If there’s more demand for calls, that will result in counterparties taking on more exposure against movement (i.e., negative gamma) hedged via purchases of the underlying. Once that exposure expires and/or decays, that dealer-based support will be withdrawn. If the assumption is that equity markets are expensive now, then, after another rally, there may be more room to fall, all else equal (a simplistic way to look at this), hence the increased precariousness and combustibility.

Technical

As of 6:30 AM ET, Friday’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, far outside of the prior day’s range (i.e., a lot of shock and range expansion already happened), suggesting a higher than normal potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,071.75. 

Key levels to the upside include $4,083.75, $4,104.25, and $4,122.75.

Key levels to the downside include $4,052.25, $4,034.75, and $4,015.75.

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.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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.

Gamma: The sensitivity of an option’s Delta to changes in the underlying asset’s price.

Vanna: The rate at which the Delta of an option changes with respect to implied volatility.

Charm: The rate at which the Delta of an option changes with respect to time.

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.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes.