Categories
Commentary

Daily Brief For April 27, 2022

The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Overnight, equity index futures probed higher, essentially negating Tuesday’s end-of-day, knee-jerk liquidation.

Tuesday’s selling came alongside Russia cutting gas to Poland and Bulgaria, Vice President Kamala Harris testing positive for COVID-19, and heavy selling in growth and tech stocks, amid doubts corporate profits can withstand the Federal Reserve’s bid to tame inflation.

As Jerome Schneider of Pacific Investment Management Co says, QT will “have a profound effect on the cost of liquidity and more importantly the cost of transacting business and reallocating assets from one avenue to another avenue.” 

“There might not necessarily be a rapid deceleration or decline in the stock market or other risk assets, but there’s going to be a changing cost of capital that this balance sheet is going to be part of.”

After the close, weakness continued. Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) missed on slowing sales growth and digital-ad spending. One of the biggest losers was Tesla Inc (NASDAQ: TSLA) which shed 12% or so on news that Elon Musk would use his fortune, much of which is tied up in Tesla, to buy Twitter Inc (NYSE: TWTR).

Germany’s passage of a bigger borrowing budget, coupled with China’s pledge to boost infrastructure bolstered an overnight advance that fed into price action at home. The S&P 500, in particular, for a brief moment, took back a key level, negating much of yesterday’s liquidation.

Ahead is data on international trade in goods (8:30 AM ET), as well as pending home sales and the rental vacancy rate (10:00 AM ET).

Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Positioning: Markets are positioned for continued volatility. 

Based on a reading of market gamma exposure (GEX) and buying support (DIX), the returns distribution is skewed positive. There’s buying in the context of an environment in which the hedging of options positioning implies selling into weakness and buying of strength.

Graphic: Via Barclays PLC (NYSE: BCS) research.

In the most simple way that I can explain: when positioning is stretched one way, that often tends to mark a turning point – the returns distribution is either skewed positive or negative.

Graphic: Via Physik Invest. Data via SqueezeMetrics. Updated March of 2022. A high DIX/GEX ratio often portends positive 1-month returns.

An updated read, after Tuesday’s weak close, tells us that we can (1) definitely expect larger ranges to continue and (2) potential for short-term bounces

Based on overnight activity, one of those is happening, now.

Graphic: Via Physik Invest. Data via SqueezeMetrics.

This is as participants are both well-hedged and using weakness as an opportunity to buy into a less highly valued market.

Well-hedged means that customers (i.e., you and I) own protection against long equity exposure. So, that could mean customers own puts and/or are short calls. One of the most dominant flows is the long put, short call.

Such trade offers customers positive, yet asymmetric (gamma), exposure to direction (delta). In other words, negative delta and positive gamma. 

The counterparty has exposure to positive delta and negative gamma. If the underlyings trade lower and volatility rises, all else equal, the position will lose. To hedge against these losses, the counterparties will sell underlying into weakness.

If prices reverse and move higher, these counterparties will re-hedge and buy underlying.

Normally, as seen over the bull run of 2020 and 2021, markets are in an uptrend and there’s a strong supply of volatility. Often, customers sell more calls than puts and, in an uptrend, those calls solicit more active hedging than the put options.

Recall that the customer is short the call. That means the counterparty is long the call (a positive delta and gamma trade) and will make money if prices rise, all else equal. 

The hedging of this particular exposure (i.e., sell strength, buy weakness), in an uptrend, occurs slower (i.e., counterparts will allow their profits to run), and that’s what can help the market sustain lower volatility trends for longer periods.

When prices reverse and underlyings trade lower, put options solicit increased hedging activity. Given the nature of counterparty exposure to those puts, that hedging happens quickly and can take from market liquidity as to volatility (i.e., buy strength, sell weakness).

See, below, E-mini S&P 500 book depth, a proxy for market liquidity, and how much it has declined since the end of last year when markets became more volatile and noise around the Federal Reserve’s intent to taper bond-buying and raise rates grew louder.

Graphic: Via CME Group Inc (NASDAQ: CME) Liquidity Tool. Note how in late March, book depth rose as markets rose and customer call activity solicited increased hedging of counterparty long-gamma exposure (i.e., buy weakness, sell strength), adding to market liquidity.

In the above environment, counterparty hedging matters; the market is more sensitive to the flow, so to speak. That sensitivity is expected to continue.

SpotGamma, an options data and analysis service, sees the early May period as pivotal. Then is the Federal Open Market Committee (FOMC) meeting and the potential Russian default, per Moody’s Corporation (NYSE: MCO).

As quoted: “Russia ‘may be considered in default’ if it does not pay two bonds in US dollars by end of a grace period on May 4.”

Graphic: Via Bloomberg.

Until those events are resolved, participants will likely continue to (remain) hedge(d). Upon resolve, customers likely monetize their protection to offset losses on underlying equity exposure. 

That means selling volatility which reduces counterparty exposure to short puts (negative gamma and positive delta). To re-hedge, underlying is bought back and that may support a price rise.

Graphic: VIX term structure via VIX Central. Expansion (higher) solicits counterparty selling which pressures the market lower. Compression (lower) solicits counterparty buying which bolsters attempts higher.

Whether that price rise has legs depends on what the fundamental situation is, then. See the below section titled Considerations for a full technical picture and the most likely turning points.

Technical: As of 7:00 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher; activity above the $4,217.25 overnight high (ONH) puts in play the $4,267.75 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,303.75 ONH and $4,337.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,217.25 ONH puts in play the $4,193.25 spike base. Initiative trade beyond the spike base could reach as low as the $4,136.50 regular trade low (RTH Low) and $4,101.25 overnight low (ONL), or lower.

Considerations: Spikes mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

Additionally, the indexes continue to trade below their 20-, 50-, and 200-day simple moving averages, confirming the trend change and bearish tone (further validated by poor breadth).

Graphic: Market Internals as pioneered by (a mentor of mine) Peter Reznicek. Notice the indicator in the top right, weighted S&P sectors (histogram) versus unweighted (blue line). During late last week, participants sold the entire market, heavily (as supported by the difference between the volume flowing into stocks that are up versus those that are down).

All indexes remain, as stated, yesterday, below their volume-weighted average prices (VWAPs) anchored from the start of this year (or their respective peaks). 

VWAPs are a metric highly regarded by chief investment officers (CIOs), among other participants, for quality of trade. Liquidity algorithms, too, are benchmarked and programmed to buy and sell around VWAPs.

The Invesco QQQ Trust Series 1 (NASDAQ: QQQ) just tested a major VWAP, yesterday, anchored from the lows of March 2020. That’s a fair price to pay for Nasdaq 100 exposure.

Graphic: Invesco QQQ Trust Series 1 (NASDAQ: QQQ) with anchored VWAPs.

Notwithstanding, notice the flat-to-declining AVWAP that’s black in color. So long as prices remain below this level, the index is likely a sell. 

Should that level flatten (and begin to rise), and if the QQQ was able to trade above it for a sustained period, there is potential for sustained upside.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

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, 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.

Categories
Commentary

Daily Brief For April 4, 2022

The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

Editor’s Note: Hey team, thanks again for your reading of this daily newsletter. Due to travel commitments, I will not be writing reports consistently for the rest of this month.

Don’t expect any updates until Monday, April 11, 2022. Thereafter, coverage may be sporadic for the rest of the month.

What Happened

Overnight, equity index futures were higher after exploring lower, briefly. Commodities were mixed while bonds were lower and implied volatility measures were bid.

In terms of news, the European Union said it was interested in penalizing Russia, further, for its actions in Ukraine. This is as China battles new COVID-19 sub-strains. 

Ahead is data on factory and core capital equipment orders (10:00 AM ET). 

Graphic updated 5:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: In the face of geopolitical tension, supply pressures, and inflation, consumer sentiment is at or below pandemic levels, prompting the Federal Reserve (Fed) to destimulate.

Graphic: Via S&P Global Inc (NYSE: SPGI) research. “Confluence Of Risks Halts Positive Credit Momentum.

“It has entered 2008-09 territory and is not far from all-time lows in the ‘80s when inflation and interest rates hit double digits,” ARK Invest’s Catherine Wood explained in a Twitter discussion on yield-curve inversions and aggressive action by the Federal Reserve, as well as inflation.

“The economy succumbed to recession in each of those periods. Europe and China are also in difficult straits. The Fed seems to be playing with fire.”

In accordance, the Macro Compass’ Alfonso Peccatiello explains that his credit impulse metrics, which lead economic activity and risk asset performance, imply a slowdown in earnings.

Graphic: Via The Macro Compass.

Still, in spite of these metrics, on average, recessions happen 12 to 24 months after the first yield curve inversions, according to Jefferies Financial Group Inc (NYSE: JEF).

Post-inversion S&P 500 performance, actually, is often positive.

Graphic: Via Jefferies Financial Group. Taken from The Market Ear.

Bolstering the call for positive equity market performance are strong seasonality trends during Fed-rate-hike episodes, a contraction in equity risk premia, and “still accommodative” monetary policy, per explanations by rates strategist Rishi Mishra. 

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “Equities are a real asset as they make a claim on nominal GDP. In the post-financial crisis era, weak economic activity and lower inflation pushed down nominal GDP, raising the equity risk premium and reducing the bond term premium. So as long as economies grow, revenues and dividends should also grow. The dividend yield can be thought of as a real yield. Equity risk premia have started to decline in the post COVID cycle but remain higher than in the pre-financial crisis era.”

“[T]he 3ms2s vs 2s10s spread (or the 3m2s10s fly) is the widest it has been since the end of 1994. The widening of this fly is indicative of the fact that while the Fed shifted its guidance from dovish to extremely hawkish, the policy is still accommodative.”

Graphic: Via Bloomberg. Taken from Rishi Mishra.

Positioning: The equity market’s ferocious end-of-March rally, which placed the S&P 500 back above a key go/no-go level – the 200-period simple moving average – may have been in part the result of institutional investors purchasing equities ahead of quarterly reporting.

“Remember that stocks settle T+2, meaning that shares are actually owned by buyers two business days after they are purchased in the market,” says Interactive Brokers’ Group Inc (NASDAQ: IBKR) Steve Sosnick. 

“That means that institutions who wanted to show stock positions on their quarterly reports would have needed to purchase those shares no later than Tuesday the 29th. The sharp end-of-day runups that we saw on Monday and Tuesday had the hallmarks of aggressive institutional buying.”

According to Deutsche Bank AG (NYSE: DB) analyses, “[a]ggregate equity positioning has now risen off the lows but only to the 22nd percentile and is still well below neutral.”

That said, quarter-end rebalances and options expirations (OPEX) likely do little to upset the balance of trade. Based on a lot of the insights shared in this letter, barring some exogenous event, the market is in a position to drift or balance.

This, as a result, may solicit a “stronger impulse to chase the rally,” at which point JPMorgan Chase & Co (NYSE: JPM) strategists say they would “generally be more concerned.”

A collapse (or convergence) in volatility metrics for different asset classes (like the Merrill Lynch Options Volatility Estimate [INDEX: MOVE] and Cboe Volatility Index [INDEX: VIX]) would bolster the “drift or balance” thesis.

Graphic: Via Physik Invest.

Technical: As of 5:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively 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; activity above the $4,527.00 untested point of control (VPOC) puts in play the $4,562.50 spike base. Initiative trade beyond the spike base could reach as high as the $4,583.00 VPOC and $4,611.75 low volume area (LVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,527.00 VPOC puts in play the $4,501.25 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,469.00 VPOC and $4,438.25 HVNode, or lower.

Considerations: Spikes often mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike). 

In a spike up (down) situation, trade below (above) the spike base, negates the buying (selling).

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.

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

What People Are Saying

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, 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.

Categories
Commentary

Daily Brief For October 4, 2021

Market Commentary

Equity index futures were sideways to lower with bonds and the dollar.

  • Nordea: Macro backdrop worsens.
  • Ahead is a relatively light calendar.
  • October is volatile while Q4 bullish.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside reports that China was showing little interest in a direct bailout of Evergrande and U.S. political leaders remain at odds on the debt limit.

Ahead is data on factory orders and core capital goods orders (10:00 AM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on a strengthening of intraday breadth, among other metrics including positioning measures, the best case outcome occurred, evidenced by a recovery of Thursday’s $4,365.00 untested point of control (VPOC). 

Given the overnight response at the top of Friday’s value area – the bulk of where trade was conducted – it looks as though participants are interested in slowing the pace of downside discovery. 

Still, the S&P 500 is well below its 20- and 50-day simple moving averages and multiple distribution profile structures denote emotion, as well as a lack of commitment

Graphic: S&P 500 daily chart with 20-, 50-, and 200-day simple moving average.

Further, the aforementioned trade is happening in the context of a traditionally volatile October and a fraying in the buy-the-dip psychology.

According to Nordea, despite a calm, upward-sloping term structure, there has been “a slightly upward tilting trend” in futures tracking the S&P 500 volatility index, likely warranted by several macro reasons including a worsening in liquidity, a slowdown in growth, cost/margin problems, and risks to the Fed put.

Graphic: Fed’s GDPNow estimate lowers expectations for U.S. economic growth, via The Market Ear

LPL Research adds that aside from October, no other month has seen more 1% moves, and the fourth quarter is “historically the best for stocks, with the third quarter the worst.”

Graphic: LPL Research unpacks S&P 500 seasonality. 

Moreover, for today, given expectations of heightened volatility, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,332.25 low volume area (LVNode) puts in play the $4,363.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,410.25 LVNode and $4,437.75 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,332.25 LVNode puts in play the $4,299.00 VPOC. Initiative trade beyond the VPOC could reach as low as $4,260.00 overnight low (ONL) and $4,233.00 VPOC, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

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.

Responsive Buying (Selling): Buying (selling) in response to prices below (above) an area of recent price acceptance.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level).

News And Analysis

EM bond markets continue to grow, as do vulnerabilities.

There’s is no inflation without income; there’s no income.

Action on Evergrande to avoid financial, social instability.

Global growth steady as delta spurs big regional swings.

Doomsday clock for U.S. debt ticks on political clashings.

Global Credit Conditions Q4: supply strain, inflation pain.

What People Are Saying

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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.