Tag: 60/40 Portfolio

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Commentary

Daily Brief For March 10, 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.

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Graphic updated 7:15 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.

Administrative

Yesterday’s newsletter put forth the writer’s discussion with Simplify’s Mike Green, fresh after he spoke at Exchange Miami. The letter covered a lot, albeit in a messy way, given some unforeseen obligations. Today, we clarify those narratives for you. Hopefully, you enjoy it, and take care!

Fundamental

In summary, Simplify’s Michael Green trades 60/40-looking portfolios on macroeconomic signals while using derivative exposures to reduce volatility and amplify profit potential (e.g., responding to economic data in real-time by trading options on the CME Group Inc’s [NASDAQ: CME] Eurodollar [FUTURE: /GE], a tool to express views on future interest rates).

His conversation with your letter writer covered a variety of topics including the reliability of data and what that means for his active management, derivatives trading, strength potential in markets, as well as what he’s optimistic about. Here’s what you need to know.

1 – Green explains that his preferred macro guides for decision-making are unclear. He explains that traditional adjustments “ranging from seasonality to the birth-death models used in smoothing employment reports” are in question, and he jokes that developed market data sets are approaching emerging market data sets in terms of quality.

2 – Green reflects on 2022 noting options, colloquially referred to as volatility, were a big underperformer. “One-year variance swaps or implied volatility on an at-the-money S&P 500 put option would trade somewhere in the neighborhood of 25 to 30%,” he explains. “That implies a level of daily price movement that is difficult to achieve.”

Having learned their lesson, in 2023 investors swapped long-dated volatility exposures for ones with bounded risk (e.g., Bear Put Spread) and less time to expiry (e.g., 0 DTE).

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

Though both may leave counterparties with less risk, if news shocks the market far one way, market movements may become exaggerated when investors, and counterparties accordingly, scramble to adjust their risk.

Major Wall Street players and clearing houses have, too, just announced an investigation into the risks such activity poses as well.

Up until now, however, the activity has manifested a push-and-pull, mean-reverting-type action; investors lean short volatility in the morning and long volatility in the afternoon which, combined, tends to mute price action.

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

Say one morning an “investor sells call options and a dealer receives them,” Green puts forth as an example. “The dealer will hedge their long call position by selling futures which will pressure the market and result in the options prices collapsing in value.”

To re-hedge falling options prices, “dealers have to buy back their futures exposure and this pushes the markets upward. This is the pattern that’s been playing out over and over again. It’s weakness in the morning followed by strength in the afternoon.”

Though this is a very smart exposure to have, Green says volatility that’s longer-dated is cheap and, when an eventual shock occurs, its payout may more than justify its cost, particularly as the outlook for equities, bonds, and commodities further blurs.

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via The Market Ear.

3 – Despite still-robust appearing economic data, Green sees clear signs the economy is starting to deteriorate. 

Graphic: Retrieved from Bloomberg. “If the unemployment data this week is very strong then you’ve got 50 basis points back on the table,” explained Bob Michele, the chief investment officer of JPMorgan Asset Management. “But that is a pretty high hurdle to get to once you’ve down-shifted to 25 basis points.”

“We’re seeing cracks in bubbles like commercial real estate” and risk assets including crypto, presently maintained by a lack of inventory or supply that’s tied up in the bankruptcy proceedings of FTX (CRYPT0: FTT) and Voyager Digital Ltd (ex-OTC: VYGVF), of all things.

Graphic: Retrieved from JPMorgan Chase & Co (NYSE: JPM) via The Market Ear. “Excess liquidity is being withdrawn at an accelerating pace.”

“The question is whether higher interest rates ultimately drive a fraction of the market into distress with forced transactions,” Green wonders, pointing to the likes of Blackstone Inc (NYSE: BX) and Brookfield Corp (NYSE: BN) handing in keys to properties. “It takes one person being in distress to set a new clearing price which, in turn, changes valuations for everybody, and makes it more difficult to qualify for things like mortgages.”

4 – Looking forward, over the short-term at least, Green says inflation is likely to trend higher for longer, particularly with monetary policy inspiring fiscal action and sparking off geopolitics.

“The world’s growing materially slower and manufacturing capacity, which is spreading around the world, requires labor and investment, which could be inflationary in the short-run,” Green puts forth. Traditionally, “lower rates and costs enable added capacity and a predictable rebound in consumption. However, we’re driving a stake through the vampire’s heart, now, and … there’s the multiplier effect driving fiscal policy, too.”

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool. The terminal (peak) rate sits at 5.50-5.75%.

5 – In response to uncertainty, investors can park cash in Treasury bonds, as well as allocate some capital to volatility “to introduce a degree of convexity,” risking only the premium paid. Alternatively, investors can take a more optimistic long view and position in innovations like artificial intelligence or next-generation energy production.

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via The Market Ear. Investors are not concerned with tail risk.

“I’m optimistic about human innovation and the rise of AI, … as well as higher energy prices creating the impetus for tremendous innovations in energy generation that have the potential to lift us out of this period of perceived scarcity if we allow ourselves to embrace it.”

Technical

As of 8:00 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 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 $3,947.00. 

Key levels to the upside include $3,965.25, $3,979.25, and $4,004.75.

Key levels to the downside include $3,921.75, $3,891.00, and $3,857.25.

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 (bottom middle) and market internals as taught by Peter Reznicek.

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, 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 9, 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.

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Graphic updated 8:30 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

Last year, Simplify Asset Management’s Michael Green, an active manager focused on creating portfolios mimicking traditional constructions like 60/40, albeit with less realized volatility (RVOL), thought a dot-com-type collapse was unfolding under the surface of the indexes.

In an interview for an upcoming Benzinga article, Green explained to your letter writer that he maintains today’s action is similar to the early 2000s.

Prior to 1999, “many of the early winners in the dot-com cycle had already started to falter and, as we came into the market peak for the Nasdaq (INDEX: NDX) in March of 2000, the Nasdaq was much higher and the market was much more narrow,” Green says. “This is 2021 into 2022.” Green adds that the S&P 500 (INDEX: SPX) correction didn’t begin until late-2000, and the homebuilder- and energy-type stocks were the ones that outperformed, as we saw in 2022.

Ultimately, a recession hit in 2001, and credit deteriorated, Green explains, revealing fraud among many high-flyers of the dot-com boom. Many were unprepared, Green adds, drawing parallels to 2022 events concerning the likes of FTX.

Graphic: Retrieved from WSJ Market Data Group.

In 2023 and beyond, Green thinks the economy and markets are set for a bumpy ride. He projects that rising interest rates cause pain for businesses that received a stay of execution in 2020 through PPP loans and subsidized borrowing.

“Many of them put in two- or three-year paper as a stopgap,” he explains. Now, due to the higher rate environment, “companies can’t refinance, so we’re seeing Blackstone Inc (NYSE: BX) and Brookfield Corp (NYSE: BN) hand in keys.”

As put in yesterday’s letter, the deterioration in markets has, in part, been “offset by a lack of inventory,” as well as the hesitancy to sell (i.e., lack of supply). However, the marginal impact of one new person “in distress … [may] set a new clearing price” that changes valuations for everybody. Green says that investors know supply will cause markets to weaken, and that is why products like Bitcoin (CRYPTO: BTC) are intact.

“If we tie up stuff in bankruptcy courts for the next three or four years, nothing will get done,” Green elaborates. “That’s part of what we’re seeing in the crypto space where part of the strength for Bitcoin is simply the absence of sellers as we navigate our way through bankruptcy on many of these entities.”

As an example, Voyager Digital Ltd (ex-OTC: VYGVF) claimants “desperately [sought] to submit a bid to prevent Bitcoin from having to be sold” because these sales would pressure prices and “increase the damage across the entire crypto universe.”

relates to Fed Minutes Show Three Weeks Is a Long Time
Graphic: Retrieved from Bank of America (NYSE: BAC) via Bloomberg.

Green went on to add his firm objection to Federal Reserve’s (Fed) policy choices noting that deterioration is threatening the “commercial real estate bubble … and residential real estate” currently afloat on a “lack of inventory.”

The “multiplier effect” will be a serious challenge for markets; monetary policy drives fiscal policy and this has an impact elsewhere on geopolitics, manufacturing, and so on (e.g., the cost of interest rates offset by credits to households, the relocation and addition of manufacturing at home and outside of China), which only serves to boost inflation over the short term and further complicate things for the Fed.

Positioning

With data very unreliable and markets fearful of a 2020-like decline, 2022 was a far more orderly year than expected.

“I think people were extremely well-hedged,” he explains. “There was a tremendous amount of exposure that had been purchased for deep out-of-the-money, relatively long-dated [put options], and that created conditions under which the volatility surface, beyond six months, was extremely elevated heading into 2022.”

Green says one-year variance swaps and implied volatility (IVOL) on at-the-money S&P 500 puts was “in the neighborhood of 25-30%, … which is very expensive … [and this] implies a level of daily price movement that is difficult to achieve.”

Consequently, investors’ hedges did not work. Green adds that “having learned their lesson from 2022, people have by and large abandoned those types of hedges and have instead moved, even as skew moves to near-record cheapness, … to spreads” and shorter-dated options (e.g., 0 DTE).

relates to Clueless Wall Street Is Racing to Size Up Zero-Day Options Boom
Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via Bloomberg.

With a vast majority of these shorter-dated options exposures held short by investors, this creates conditions of suppressed volatility that can last; dealers own volatility and in hedging that, they promote mean reversion-type activity (i.e., instead of institutions writing calls against long exposure out one-month, they are writing calls against long exposure out one-day, and this supply of options has dealers pressuring the market on their initial hedging and supporting the market on later re-hedging) over the very short-term. In other words, when investors sell those calls, the dealer receives them and sells futures to hedge. This “pressures the market lower which causes … the delta of that option or replicating exposure to decline and, now, the dealers have to buy back that exposure and push the markets upward,” later, because the risk they are exposed to by that exposure has declined (i.e., lower delta). See the image below.

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

This options activity may become problematic. If there is a gap, investors’ “scramble to hedge those positions” may lead to even larger movement, given that the market “is not prepared to provide liquidity,” generally speaking.

Green suggests that investors can side-step a lot of the turmoil by allocating some or all of their portfolio to bonds. Any cash remaining could be used to amplify portfolio returns in a fixed-risk manner (e.g., buy bond and SPX options and options spreads).

More detail to come in the next sessions. Hope you enjoyed this (rushed) letter.

Technical

As of 8:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the 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 $3,988.25. 

Key levels to the upside include $3,999.25, $4,013.00, 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.

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 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 January 9, 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.

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Graphic updated 7:50 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Levels may have changed since initially quoted; 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) measure reflects the attractiveness of owning volatility. Green means that owning volatility is attractive.

Administrative

In last week’s letters, we discussed, mainly, fundamental and positioning contexts. Today’s letter will add to the discussion on the positioning.

Positioning

Last week, for an article published on Benzinga.com over the weekend, your letter writer spoke with The Ambrus Group’s co-chief investment officer Kris Sidial. Shared were the things to look out for in 2023 and tips for newer traders. The article can be viewed here, at this link.

In short, there are four big takeaways. 

First, though options prices could stay under pressure, naive measures like the VVIX, which is the volatility of the VIX, or the volatility of the S&P 500’s volatility, are printing at levels last seen in 2017. This means “we can get cheap exposure to convexity while a lot of people are worried.”

Graphic: Retrieved from TradingView. Cboe Volatility Index (INDEX: VIX) is on the top. The volatility of the VIX itself (INDEX: VVIX) is at the bottom.

Second, on the other side of the growing S&P 500 and VIX complexes is a small concentrated group of market makers taking on far more exposure to risk. 

Graphic: Retrieved from Ambrus’ publicly available research.

During moments of stress, these market makers may be “unable to keep up with the demands of frenetic investors,” Sidial said, pointing to GameStop Corporation (NYSE: GME) where “there was this reflexive dynamic” that helped push the stock higher in 2021.

“That same dynamic can happen on the way down”; market makers will mark up options prices during intense selling. As the options prices rise, options deltas (i.e., their exposure to direction) rise and this prompts so-called bearish vanna hedging flows.

Graphic: Retrieved from Ambrus’ publicly available research.

“Imagine a scenario where [some disaster happens] and everybody starts buying 0 DTE puts. That’s going to reflexively drive the S&P lower,” Sidial said. “Take, for example, the JPMorgan collar position that clearly has an effect on the market, and people are starting to understand that effect. That’s just one fund. Imagine the whole derivative ecosystem” leaning one way.

Graphic: Retrieved from Ambrus’ publicly available research.

The third is in reference to liquidity. As private market investors’ “deals are getting marked down, [t]o source liquidity, they may have to sell some of their holdings in the public equity markets.” Benn Eifert, the CIO at QVR Advisors, recently put forth that “late-stage technology is a great example where public comps are down 80-90% but privates marked down 20% or not at all. It is possible to imagine large institutions engaging in forced selling of liquid public equities to meet capital calls in private fund investments.”

And, lastly, investors often go “back and forth” and do not stick to a strict process. In trying to pick what will work at one specific time, investors can “miss what is going to work in the future.” Consequently, Sidial says investors should have an outlook and process to express that outlook. “It’s not as easy as saying: ‘Buy volatility because it’s cheap or sell it because it is expensive.’” 

As a validation, in the Benzinga article, your letter writer wrote about 2017 when volatility was at some of its lowest levels. Back then, the correct trade was to sell volatility, in some cases, due to volatility’s bimodality; if you sold volatility back then, you made money due to its clustering.

Graphic: Retrieved from TradingView. Cboe Volatility Index (INDEX: VIX) is on the top. Cboe Realized Volatility (INDEX: RVOL) is at the bottom.

So, “if you’re trading volatility, let there be an underlying catalyst for doing so.” That said, from a “risk-to-reward perspective, … it’s a better bet to be on the long volatility side,” given “that there are so many things that … keep popping up” from a macro perspective.

For Ambrus’ publicly available research, click here. Also, follow Sidial on Twitter, here. Consider reading your letter writer’s past two conversations with Sidial, as well. Here is an article on 2021 and the meme stock debacle. Here is another article talking more about Ambrus’ processes.

Technical

As of 7:50 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 prior-range and -value, suggesting a potential for immediate directional opportunity.

Our S&P 500 pivot for today is $3,926.50. 

Key levels to the upside include $3,943.25, $3,960.25, and $3,979.75.

Key levels to the downside include $3,908.25, $3,891.00, and $3,874.25.

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

As a disclaimer, note the S&P 500 could trade beyond the levels quoted in the letter. Therefore, you should load the key levels on your browser.

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 long periods of time, it will be identified by low-volume areas (LVNodes). 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 HVNodes for favorable entry or exit.

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

POCs: 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: 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

In short, an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

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.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For January 6, 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 8:30 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 this letter. Levels may have changed since initially quoted; 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. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

Hey team, hope you had a great week! Please consider reading our letters for January 3 and 4. In those letters, we discussed the potential drivers of long-lasting inflation that may not be good for traditional portfolio constructions like 60/40. 

In today’s letter, we talk about some positioning contexts, leaning into this letter writer’s interview with The Ambrus Group’s Kris Sidial for a Benzinga article to be published either this weekend or next week.

This letter will serve as a primer. Next week, we will go into further depth. Have a great weekend!

Positioning

In a conversation with your letter writer prior to 2022, and on YouTube, Sidial and some other Ambrus members said markets were increasingly fragile and traditional portfolio constructions such as 60/40 (i.e., 60% of holdings held in stocks and 40% of the holdings held in bonds) would not perform as well as history would imply. 

Instead, options (colloquially referred to as volatility) may “potentially outperform the market” and limit losses.

Pursuant to Ambrus’ warnings, 60/40 logged one of its worst stretches as inflation and interest rates rose. On the other hand, Ambrus, which is a volatility arbitrage fund, managed to end the year unscathed.

“That does not mean all volatility funds ended the same way,” Sidial said in a nod to his team’s unique approach to leveraging options’ multi-dimensionality in reducing the cost of protection they own for investors.

Here’s more on Ambrus’ approach from a previous conversation your letter writer had with Sidial for a Benzinga article.

Graphic: Text retrieved from Benzinga.com.

This approach is limiting, though, Sidial notes. Increasing assets under management can eat into the firm’s own alpha.

Anyways, Sidial went on to discuss the performance of volatility in 2022 and its potential to outperform in 2023 and beyond. 

“It caught everybody by surprise that long volatility underperformed,” he said in reference to a high spot-vol beta (i.e., volatility’s sensitivity to underlying prices) in 2021 suggesting volatility was likely to come to life in 2022, and “there would be more follow-through.”

However, there was no follow-through, and Sidial believes this was the result of allocations to commodity trading advisors or CTAs, and the “consensus trade,” or the sales of volatility on expectations markets would grind and chop lower for the entirety of 2022. 

As this letter has put forth in the past, traders proactively hedged heading into 2022. The unwind or supply of some of these hedges, coupled with investors’ expectation markets would continue to grind far lower, prompted more volatility sales (a pressure on options prices), masked by the persistently high, albeit tame Cboe Volatility Index (INDEX: VIX) and metrics like the put-to-call ratio appearing inflated, potentially the result of stock loan desks replacing short stock with in-the-money puts given high-interest rates.

Though the price of volatility could move toward the extremes (i.e., clustering/mean-reverting), trends may be near exhaustion.

Naive measures like the VVIX, which is the volatility of the VIX (i.e., the volatility of the S&P 500 volatility), are printing at levels last seen in 2017. This suggests “we can get cheap exposure to convexity while a lot of people are worried.”

Therefore, “even if inflation continues, the rate at which inflation 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.”

Moving on, though not catalysts or reasons for Ambrus to initiate trades per se, risks Sidial said could result in volatility performing well include the concentration of market makers and private markets’ sourcing of liquidity (or raising cash) through sales of public equity markets.

“During moments of market stress, the market makers are unable to keep up with the demands of frenetic investors. If you think of GameStop Corp (NYSE: GME), which we talked about before, there was this reflexive dynamic that happened when investors rushed into the stock one way.”

“That same dynamic can happen on the way down”; market makers mark up volatility during stress which can pressure markets. As the price of volatility rises, option deltas rise and this prompts bearish vanna hedging flows, as they are called. 

Your letter writer will pause the commentary at this point while he further unpacks his discussion with Sidial, but at least you got a sneak peek ahead of next week’s article release. Take care!

Technical

As of 8:30 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Our S&P 500 pivot for today is $3,834.25. 

Key levels to the upside include $3,845.25, $3,857.00, and $3,867.75. 

Key levels to the downside include $3,813.25, $3,793.25, and $3,776.75.

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

Note that early morning news may result in quoted levels not performing well. Please make sure to use the link to view the real-time chart for more levels that may be in play.

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 long periods of time, it will be identified by low-volume areas (LVNodes). 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 HVNodes for 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.

About

In short, an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

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.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For September 27, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 950+ that read this report daily, below!

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Graphic updated 6:45 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. 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.

Fundamental

Top of mind, yesterday, was the drop in Britain’s currency (GBP) and a surge in bond yields on the back of new fiscal plans and pledged tax cuts, alongside a more easy pace of interest rate hikes by the Bank of England (BoE). See the Daily Brief for September 26, 2022, for context.

Graphic: Retrieved from Bloomberg.

Knowing that the fiscal stimulus and an easy-moving BoE would add to inflation that is already high and sticky, traders began pricing emergency rate hikes, all the while conversation around the impacts of the UK’s rising rates on mortgage lending and the “dollar doom loop” surfaced.

In response, the BoE’s Governor Andrew Bailey said they were “monitoring developments in financial markets,” and at the “next scheduled meeting of the impact on demand and inflation from the Government’s announcement, and the fall in sterling, … [t]he MPC [won’t] hesitate to change interest rates by as much as needed to return inflation to the 2% target.”

Per Citigroup Inc (NYSE: C), however, “[m]onetary policy will struggle to save FX when fiscal policy is the culprit.”

Lawrence Henry Summers, a former US Secretary of the Treasury, also commented that he “would not be amazed if British short rates more than triple in the next two years and reach levels above 7 percent.”

That’s “because US rates are now projected to approach 5 percent and Britain, [which] has much more serious inflation, is pursuing more aggressive fiscal expansion and has larger financing challenges.”

Graphic: Retrieved from Bloomberg.

On the topic of rising yields and lenders’ disinterest to issue mortgages, among other things, it is the case that bond buying, via tools such as quantitative easing (QE), left room for confidence to eventually run out and the bond market to revolt.

Read our monetary policy explainers published on September 19 and 20.

Per statements authored by Bloomberg’s John Authers, the “UK appears to be the first case of a true disorderly bond selloff, where the moves are so swift that they affect the functioning of the financial system. It’s been triggered by a combination of inflation and rash fiscal policy.”

Accordingly, the actions by policymakers abroad serve to reinforce the earlier discussed “dollar doom loop”; the rising USD, though reducing the impact of inflation in the US, ultimately hurts most dollar-denominated debt servicing (see Latin America in the 1980s).

Graphic: Retrieved from Bloomberg.

Positioning

Seasonally speaking, the week after September options expiry (OPEX) is one of the worst on record. The weakness often persists into October.

To quote Kai Volatility’s Cem Karsan:

So, “less support from Vanna and Charm, less support through QT, and less buyback,” presents a “fragile moment” with the next week representing the most “dangerous period” on record.

Graphic: Retrieved from SpotGamma. “SPX prices X-axis. Option delta Y-axis. When the factors of implied volatility (Vanna) and time change (Charm), hedging ratios change. The graphic is for illustrational purposes, only.”

For context, it is the impacts of quantitative tightening (QT) which is manifesting itself as “$4.5 billion less in demand for assets per day,” as well as the blackout period for buybacks (which were consistently “supporting the market”) and options repositioning bolstering the weakness.

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.

Separately, a hot topic concerns the money that is piling into money funds where “the vast bulk now earns upwards of 2%, with pockets paying 3%, 4% or more.”

Graphic: Retrieved from Bloomberg. “Money funds, banks, and others are so flush with cash these days that they’re shoveling record amounts into the Fed’s overnight reverse repurchase agreement facility, a short-term instrument that, following the central bank’s 75 basis point hike last week, now pays a rate of 3.05%.”

The theory is as follows: if “cash is yielding 4%, why not just sit in cash while the macro environment clarifies a little bit?”

With traditional 60/40 upended, and the gap “between what banks are paying on deposits and what money-market funds are offering” widening, “money funds are likely to attract more inflows going forward as a result, pushing [the] usage of the RRP facility even higher.” 

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

This is all, however, money that is waiting to be deployed, “should market sentiment improve, or asset prices tumble to levels too attractive to pass up.”

Should you, too, desire to pursue guaranteed rates of return, last week Box Spreads were put forth as a solution. These trades “allow market participants to create a loan structure similar to a Treasury bill.” Upon maturity, the Box Spread earns a competitive interest rate.

Price some trades at boxtrades.com.

Graphic: Retrieved from boxtrades.com.

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 middle 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.

Any activity above the $3,688.75 HVNode puts into play the $3,722.50 LVNode. Initiative trade beyond the LVNode could reach as high as the $3,771.25 and $3,826.25 HVNode, or higher.

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

Any activity below the $3,688.75 HVNode puts into play the $3,638.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,610.75 and $3,554.75 HVNode, or lower.

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

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.

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

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

About

After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For July 6, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

Subscribe
Graphic updated 6:25 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. 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: Impressive was the strength of the Nasdaq 100 (INDEX: NDX), relative to the S&P 500 (INDEX: SPX), yesterday. 

Graphic: Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim. Retrieved by Physik Invest.

This is as traders are now paring back their bets on monetary tightening, given the deterioration in the U.S. economic outlook. The NDX, which has been most sensitive to changes in monetary policies, accordingly, responded best as that index is comprised of assets that have the most to lose in a high-rate, aggressive quantitative tightening (QT) environment.

Graphic: Via Bloomberg. “In less than two weeks, the market has dropped its prediction for a peak rate brought forward the moment of the first cut, and forecasts a far more aggressive cutting program that will start next spring.”

For context, QT is the central banking authorities’ removal of balance sheet assets via sales or the non-reinvestment of the principal sum of maturing securities. Accordingly, if bonds are sold, their values fall and yields rise. This pushes yield-hungry investors into less risky categories.

Graphic: Retrieved from @patrick_saner. “A 60/40 portfolio is now worth less than before the pandemic.”

“As you look at where to park your cash for the next six months, you could do worse than to look at a mix of oversold treasuries and stocks – offering both compelling yield and a good degree of value protection,” explains Toggle CEO Jan Szilagyi in a note.

Graphic: Via Toggle.

These are comments, however, in the face of what has been a “multiple compression,” as we talked about last week. The upcoming earnings season is likely to shed clarity with respect to corporates’ ability to weather or pass on higher costs, among other things.

In the case of a so-called “earnings compression,” some commentators suggest the market is not priced correctly and another leg lower may be initiated.

Adding, expected are the Federal Open Market Committee (FOMC) meeting minutes, today. 

They are likely to “indicate that policymakers were worried about the un-anchoring of inflation expectations, … justifying the Fed’s shift in placing more focus on headline inflation measures rather than just core measures,” according to Bloomberg’s chief U.S. economist Anna Wong.

Graphic: Via Bloomberg. “After surging consistently to hit an all-time high in the two years after the March 2020 shutdown, the [Commodity Research Bureau Raw Industrials index] turned sharply southward.”

Positioning: Data shows net gamma exposure increasing which may increasingly feed into smaller ranges if prices continue to rise.

Further, continued are gaps between volatility measures for the rates and equity markets. This is, in part, due to the supply of volatility, as we’ve talked about in past commentaries.

The Ambrus Group’s Kris Sidial adds: “Another reason why equity vol on the index level has been so well offered is due to the structured products market continuing its dominance.”

“Investors are turning to alternatives in this market & these solutions continue to gain attention which leads to index level vol selling.”

Graphic: Via The Ambrus Group’s Kris Sidial. “[S]ome dealers will opportunistically look to sell vol in some buckets in the front of the term structure.”

Given this, the relationship between realized volatility (RVOL) has crept and, at times, exceeded that which the market has implied (IVOL). This, coupled with naive metrics for skew, suggests to us that it still makes sense to be a buyer of volatility, albeit via more complex structures.

Graphic: Via Pat Hennessy. “Tomorrow’s SPX expo (Jul1) is wildin… 26 vol for any strike with a 37 or 38 handle with a ridiculous curvature in the tails. God speed to all the 1dte theta gang. Selling OTM puts/calls for the same vol as ATM seems… umm… not good.”

Technical: As of 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the mid-to-upper part of a balanced overnight inventory, inside of prior-range and -value, suggesting a potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher.

Any activity above the $3,821.50 LVNode puts into play the $3,857.25 ONH. Initiative trade beyond the ONH could reach as high as the $3,883.25 LVNode and $3,909.25 MCPOC, or higher.

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

Any activity below the $3,821.50 LVNode puts into play the $3,793.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,755.00 VPOC and $3,727.75 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
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, former Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For June 21, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

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What Happened

Overnight, the equity index and commodity futures were bid, all the while bonds and the dollar edged lower. This is after a week-long or so de-rate on tougher monetary policies.

Big headlines include the White House’s mulling of a U.S. gas tax suspension, Russia’s status as a top exporter of crude to China, Goldman Sachs Group Inc’s (NYSE: GS) recession warning, Elon Musk’s intent to cut Tesla Inc’s (NASDAQ: TSLA) workforce, and falling Iron ore prices on China’s building downturn.

Interesting reads from over the weekend include Dr. Pippa Malmgren’s letter on the market’s “nosedive” which is likely to be “followed by a newfound understanding of what is possible,” and how that plays into economic strength and military superiority. 

Adding, timely was a Sohn 2022 conversation with Stanley Druckenmiller on his experiences and the current market environment. 

Ahead is data on the Chicago Fed National Activity Index (8:30 AM ET), existing-home sales (10:00 AM ET), as well as Fed-speak by Loretta Mester (12:00 PM ET) and Tom Barkin (3:30 PM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above 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: Keeping this letter brief, today.

The sale of both bonds and equities worsened in part due to the implications of inflation and the Federal Reserve’s (Fed) response to that inflation.

Graphic: Via Nordea Bank’s (OTC: NRDBY) research. “We suspect that the real economy will be less sensitive to a rise in interest rates this time, which means that the Fed could have to move rates more-than-expected before policy gets restrictive. The strongest argument is that the household balance sheets are in a much better shape to sustain their level of spending as the massive injections of money and credit through both monetary and fiscal stimulus have changed household balance sheets dramatically.”

We talked about this in the weeks prior. 

Essentially, as Joseph Wang, who was a trader at the Fed, puts it, “[b]onds are not acting as a hedge and appear to be becoming less ‘money’ like due persistent declines in price and elevated rate vol.”

“Investors in both bonds and stocks are reaching for cash by selling their assets, driving further asset price declines. For non-bank investors, ‘cash’ means bank deposits.” 

Graphic: Via Bloomberg.

Ultimately, an increase in the RRP (reverse repo) and QT (which is a direct flow of capital to capital markets) “would drain the pool of bank deposits by ~$1t by year-end,” and this may prompt investors to “continue to lower their selling prices to compete for the cash they want.” 

Graphic: Via CrossBorder Capital.

Positioning: Detailed was Friday, June 17’s commentary that honed in on some of the implications of pre- and post-Federal Reserve meeting positioning. 

Essentially, with the June monthly options expiration (OPEX), there was a roll-off of a large amount of customer negative delta exposure (via put options they owned). 

Graphic: Via SpotGamma’s S&P 500 Index (INDEX: SPX) Gamma Model. Updated June 17, 2022.

With expiration, liquidity providers (who were short these put options, as well as underlying to hedge) re-hedged (bought back some of their static short-delta), and this removes pressure.

“The SPX index quarterly option notional is higher than usual, but the market is below the concentration of risk given the recent selloff,” said Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence, who we quoted last week.

“Price action will reflect the economic context, but flows from expiring in-the-money hedges may support the market.”

Accordingly, markets are off their lows. However, in the above text, we made little mention of participants’ rolling forward of their options bets to lower strikes, further out in time, as well as the impact of customers still maintaining a “sizable short put position,” a dynamic we’ve talked about before.

Graphic: Via SpotGamma. “Options flow, last week, was unsurprisingly dominated by index puts (red lines). Most interesting was index puts bought to cover (third chart) indicating there was a fairly sizable short put position heading into last week.”

Taken together, coupled with what SpotGamma observes is “anemic” call buying (viewed as the blue line in the top chart above), participants are hedged and volatility remains well-supplied. 

Graphic: Via Nomura Holdings Inc (NYSE: NMR). Taken from The Market Ear. “The ‘muted’ VIX narrative goes on. The VIX vs SPX gap remains rather wide here. The second chart shows just how ‘depressed’ VIX remains vs the underlying px action. Most people have been stopped out/de-grossed risk, so there isn’t much demand to hedge exposure.”

Despite being stretched from a technical perspective, positioning-wise, lower prices are sticky and the context for a far-reaching bounce, all else equal, is not there.

We shall provide updates to this, later in the week. Read the Daily Brief for June 17, 2022, for more on how to position in light of the above information.

Technical: As of 6:30 AM ET, Tuesday’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, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher; activity above the $3,735.75 HVNode puts in play the $3,749.00 ONH. Initiative trade beyond the ONH could reach as high as the $3,773.25 HVNode and $3,821.50 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $3,735.75 HVNode puts in play the $3,722.50 LVNode. Initiative trade beyond the $3,722.50 LVNode could reach as low as the $3,690.25 HVNode and $3,639.00 RTH Low, or lower.

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

Definitions

Volume Areas: 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.

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

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 March 16, 2022

Editor’s Note: 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!

Subscribe

What Happened

Stock index futures were higher after positive developments, abroad.

According to some reports, the talks between Russia and Ukraine are making progress. This is while China vows to stabilize markets with a promise “to ease a regulatory crackdown, support property, and technology companies and stimulate the economy.”

On the China news, the Hang Seng China Enterprises Index (INDEX: HSCEI) rose ~13% (in the context of a ~30% 1-month drawdown).

At home, in the U.S., the Federal Reserve is expected to increase rates by a quarter-point, the first since 2018. Markets are pricing up to seven hikes this year.

Ahead is data on retail sales and import prices (8:30 AM ET). The NAHB home builders index and business inventories (10:00 AM ET). As well as the Federal Open Market Committee (FOMC) announcement (2:00 PM ET) and press conference (2:30 PM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above 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: The 60/40 portfolio is headed for its worst performance since the financial crisis of 2008 as assets are hurt by a mix of slowing economic growth and inflation.

Graphic: Via Morgan Stanley (NYSE: MS). Stocks and bond relationship upended. Adding, per a Bank of America Corporation (NYSE: BAC) survey, participants believe the markets would have to fall 24% (from peak to trough) – $3,636.00 SPX – to solicit a Fed pivot.

Further, this letter has talked about the “bonds down, equities down” phenomenon before. To borrow from letters published over the past two months, in short, over the past 40 or so years, monetary policy was used as a crutch to support the economy. 

Graphic: Via tastytrade. Asset correlations matrix.

This promoted deflation, innovation, and the subsequent rise in valuations.

With rates lifting, that’s a headwind; coupled with participants’ increased exposure to rate and equity market risk, which can play into cross-market hedging and de-leveraging cascades, 60/40 turns into somewhat of a poor hedge.

Why? Let’s back up for a moment.

For an investor to take on additional risk for return, they must receive in excess of the risk-free rate (as provided by the Treasury). This excess is the risk premium.

As Investopedia details well, therefore, “the total return on a stock is the sum of two parts: the risk-free rate and the risk premium.”

Moreover, higher rates and risk premiums increase the required rate of return.

Higher interest rates, basically, decrease the present value of future cash flows, making stocks, especially those that are high growth, less attractive.

So, at higher rates, shares should fall. At lower rates, shares should rise. Some strategists estimate that annual returns for 60/40 will be less than 5% over the next decade, as a result.

Graphic: Via Bloomberg. The FOMC is likely to signal more hikes.

This conversation has me bringing up a conversation I had with Karan Sood, the CEO and Managing Director, Head of Product Development at Cboe Vest Financial LLC.

“Bonds have been giving you really good returns because interest rates have been going down since the 1970s when they peaked at about 11%,” Sood explained to me. 

“That’s changing now; we’re at the zero bound, and it’s unlikely that will be as a strong of a tailwind. Worse, it could be a headwind if interest rates start to rise.”

Graphic: Via Bloomberg. Federal Reserve to raise rates for the first time in years.

In regards to the Federal Reserve’s balance sheet, Bloomberg explains that participants ought to receive updates on the pace of buying, as well as the sale of assets.

“That may include setting out caps on how many billions of dollars worth of Treasuries and mortgage-backed securities will be allowed to mature every month without reinvestment, something that Powell told Congress earlier this month would be discussed at this meeting.”

Graphic: Via Bloomberg. S&P 500 participants proactively price in the Federal Reserve’s intent to cut support. It is monetary frameworks and max liquidity that enabled markets to diverge from fundamentals.

Positioning: Based on a comparison of present options positioning and buying metrics, the returns distribution remains skewed positive.

Graphic: Via Physik Invest. Data via SqueezeMetrics.

Pursuant to the buying support remark, JPMorgan Chase & Co (NYSE: JPM) strategists say pension and sovereign wealth funds, in rebuilding risk-on positions, may boost markets by as much as 10%. 

“It’s the biggest rebalancing since 2020 in terms of buying equities,” JPMorgan strategist Nikolaos Panigirtzoglou said. An inflow of at least $100 billion and as much as $230 billion could trigger gains of between 5% and 10% to global stocks, he said.

Graphic: Via Bloomberg. “[D]eclines have driven down the value of targeted allocations for the world’s biggest funds, many of which hew to a traditional mix of 60% stocks and 40% bonds. To address the shortfall, they have to buy equities.”

At the same time, expected is further compression of volatility (via the passage of FOMC), as well as the removal of customer puts (and associated hedging pressures) via OPEX (options expiration).

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). 

To note, there is the potential, according to SpotGamma, for some “path dependency,” as “the expiration and/or covering of a large swath of these put hedges may place the market back into an ‘underhedged’ position.” 

In such a case, new demand would add fuel to weakness.

Technical: As of 6:30 AM ET, Wednesday’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, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades higher; activity above the $4,285.25 high volume area (HVNode) puts in play the $4,326.25 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,346.75 HVNode and $4,375.00 untested point of control (VPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,285.25 HVNode puts in play the $4,249.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,219.00 VPOC and $4,177.25 HVNode, or lower.

Considerations: Push-and-pull, as well as responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

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

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.

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 is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor developing insights around impactful options market dynamics.

Disclaimer

Physik Invest does not carry the right to provide advice.

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.