Categories
Commentary

Daily Brief For September 9, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 850+ that read this report daily, below!

Graphic updated 8:00 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. 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

As much as it may be a so-called chart crime to overlap past market environments and project or forecast what may happen, it’s quite eerie that today’s path of returns appears similar to that of 1394-1937, 2005-2008, and 1997-2001, for example.

Graphic: Retrieved from Deutsche Bank AG (NYSE: DB).

Moreover, this time around, it’s the case that markets have fallen on participants’ pricing of higher interest rates and quantitative tightening (QT). 

Graphic: Retrieved from The Market Ear. Via Guggenheim Partners.

Some argue there is more to go on the pricing of a potential economic slowing happening here, in the U.S., abroad in China, and beyond.

Graphic: Retrieved from Bloomberg. “Earnings are related to the economic cycle, but not tightly, and expectations for next year are intertwined with macroeconomic concerns.”

Notwithstanding, and we will end the fundamental section with this, today, Credit Suisse Group AG’s (NYSE: CS) Jonathan Golub puts forth the following: 

“Although revisions are negative, projected EPS growth rates remain positive for the remainder of 2022-23. While 3Q growth has fallen to 4.7%, EPS should expand 9-10%, assuming similar beats as experienced in 2Q. Historically, earnings hold up best when inflation is elevated. Many investors are interpreting the recent decline in estimates as a harbinger to recession. Our work shows that in high inflationary periods (1973, 1980, 1981) earnings peak just 2 months prior to a recession’s onset. With EPS growth projections still positive, revisions would have to fall much more to signal an economic contraction.”

Positioning

Referring traders to a recent case study (HERE) on how to play this market environment, as well as the impacts of implied volatility (IVOL) compression September 8 (HERE).

After a period of sideways-to-lower, markets are rebounding, boosted by IVOL compression and traders’ re-positioning ahead of potential including inflation and monetary policy updates.

Notwithstanding, as Kai Volatility’s Cem Karsan well explained to Charles Schwab Corporation’s (NYSE: SCHW) TD Ameritrade Network, traders must look out for the “window of real risk.”

The energy for a downside move “is significant” after this year’s decimation of “skew and volatility,” he said. “Hedging for convexity is in the 5th percentile.”

This is because participants hedged heading into the decline, and sold skew as the markets explored lower. After the current period of volatility supply passes, Karsan added, and markets were to trade lower, there is the risk of a reach for protection and a fatter tail.

Graphic: Merrill Lynch Options Volatility Estimate (INDEX: MOVE), a measure of volatility for the US Treasury market, versus the Cboe Volatility Index (INDEX: VIX), a measure of volatility for the equity market, diverged this year. This is, in part, due to the supply of volatility in equities.

Should nothing happen, then the unwind of the recent speculation amongst “family offices and institutions front-running the speculative hedges that are more than 50 units,” will add support.

Graphic: Retrieved from SentimenTrader on September 7, 2022.

Technical

As of 6:40 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 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 $4,069.25 HVNode puts into play the $4,107.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,136.75 MCPOC and $4,189.25 LVNode, or higher.

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

Any activity below the $4,069.25 HVNode puts into play the $4,018.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,991.00 VPOC and $3,952.75 LVNode, 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.

Considerations: 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.

Graphic: Updated 9/8/2022. The daily chart of the SPDR S&P 500 ETF Trust (NYSE: SPY).

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.

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.

Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

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 March 21, 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!

What Happened

Overnight, equity index futures auctioned sideways to lower with commodities and bonds.

There are no overnight fundamental catalysts to make note of. However, it bears mentioning that implied volatility metrics – via the Cboe Volatility Index (INDEX: VIX) – are back to levels seen before Russia’s invasion of Ukraine. One may conclude that concerns are easing.

Ahead is data on the Chicago Fed national activity index (8:30 AM ET) and Fed-speak by Chair Jerome Powell (12:00 PM 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. 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 spite of uncertainties with respect to economic growth and the implications of tighter monetary policy to rein in inflation, as well as geopolitical conflicts abroad, the pricing of equity market risk – via the VIX – is back at levels before Russia’s invasion of Ukraine.

Graphic: Via Bloomberg.

That leads us to question whether the de-rate (or pricing in of uncertainties) has played out? 

Potentially. With greater clarity on the Federal Reserve’s commitment to raising borrowing costs (as discussed March 17 in detail), strategists like JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic suggest it is time to add risk in beaten-down, high-beta positions

“While the commodity supercycle will persist,” Kolanovic said, “the correction in bubble sectors is now likely finished, and geopolitical risk will likely start abating in a few weeks’ time (while a comprehensive resolution may take a few months).”

Graphic: Via Bloomberg. “Officials on the Federal Open Market Committee voted 8-1 [] to lift the target range for their main policy rate to 0.25%-0.5% and forecast a sequence of increases that would raise it to 1.75%-2% by year-end. The projections, known as the dot plot, also showed that almost half of the 16 current policymakers wanted to move faster.”

Complicating Kolanovic’s outlook is uncertainty with respect to the Fed’s decision to hike and taper asset purchases faster, as some Fed members say they are “very open to.”

At a high level, higher rates make borrowing more costly (i.e., higher rates on mortgages and business loans, as well as credit cards, among other things, disincentivize borrowing, and this funnels into less growth and inflation).

These higher rates compound the challenges of limited supply, for instance, in housing.

Graphic: Via Bloomberg. “The slide in sales reflects a market still constrained by a lack of inventory, which in February was the second-lowest on record. Buyers are bidding up prices on the few homes available. Meantime, affordability is showing signs of worsening, especially among first-time buyers … [which] accounted for 29% of sales last month, down from 31% a year earlier. [A]t current rates, monthly mortgage payments are up 28% from February last year.”

There’s also the topic of using quantitative tightening (QT) to fight inflation, too. 

Recall that quantitative easing (QE) is a policy to expand the Federal Reserve’s balance sheet “to provide monetary accommodation, typically when interest rates are at a zero-lower bound (when nominal interest rates are at, or near, zero),” as JH Investment Management explains.

With QT, central banks remove assets (e.g., government bonds they bought from the private sector) from their balance sheet “either through the sale of assets they had purchased or deciding against reinvesting the principal sum of maturing securities.”

With that, we note that when bonds rise in value, their yields decline; “when the Fed embarks on bond-buying program[s] to support the U.S. economy, … [it nudges] the prices of these assets higher while pushing yields lower, which also has the effect of driving yield-hungry investors into relatively riskier asset categories that promise high returns.”

As a result, participants’ demand for risk assets prompts their divergence from fundamentals. As liquidity is removed and funding costs increase, this may prompt risk assets to converge with fundamentals.

This is as, for investors 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.

At present, according to commentary by Damped Spring’s Andy Constan, “Additional risk premium expansion pressures from these levels is not likely from news emanating from” Fed meetings.

“However, if, in the unlikely event, details of QT do emerge suggesting a start of QT before June and at a greater size than expected, we would no longer be willing to hold [risk] assets as that would cause an end to any risk premium contraction possibilities.”

Positioning: According to Morgan Stanley’s (NYSE: MS) trade desk, institutions (e.g., volatility targeting funds and trend following commodity-trading advisers) dumped nearly $200 billion in global equities over the first two months of 2022. 

Hedge funds’ net leverage, too, “fell 7.5 percentage points over the two weeks through March 11, the largest decrease over any comparable period since at least January 2016,” according to Goldman Sachs Group Inc (NYSE: GS). 

“Institutional traders, major money managers, asset managers, and hedge funds, their moves have to do with the current market conditions — a lot of volatility, a lot of uncertainty, inflation concerns, geopolitical concerns,” says Bloomberg’s Jackson Gutenplan. 

“As the market continues to downtrend, institutions selling out of positions are overwhelming any retail buying pressure.”

Given this, as mentioned in the prior fundamentals section, strategists like JPM’s Kolanovic suggest these are some of the reasons to boost risk. 

“Current risk positioning is very light. This is a result of high and persistent volatility, and risk aversion caused by global geopolitical developments,” Kolanovic says. “And for this reason, risks are skewed to the upside.”

And so, alongside the buying of futures and stock to offset the decay of counterparty positive delta (post-FOMC and through OPEX), retail investor buying remained undeterred last week.

But, as Zephyr’s Ryan Nauman says, “even though retail has gained a lot of momentum over the past two years, institutional money still outweighs the retail money, and it’s still going to move markets.”

Graphic: Via TD Ameritrade. Taken from Bloomberg. “There’s a little bit of what I think is a retrenchment going on, where they weren’t just buying everything across the board,” Shawn Cruz, senior market strategist at TD Ameritrade Inc said. “As much as there is some pulling back, and there’s a lot of volatility going on, you’re seeing some selling in the more highly valued areas and the buying is very targeted.”

That is in the face of lackluster options activity. According to SpotGamma, call-buying, a feature of sustained bull markets “was at lows going back to 2020,” last week. 

Graphic: Via SpotGamma. “Here’s options data from the OCC. These plots show the premium per trade aggregated each week, with calls in blue and puts in orange. This is only customer flow (i.e. retail, hedge funds). Starting with equities, call buying this past week was at LOWS going back to ’20 (top right).”

Maybe you get to an extreme bearishness, and that’s usually where you bottom out,” adds Liz Young of SoFi Technologies Inc (NASDAQ: SOFI) in a statement on mom-and-pop investors eventually following institutional selling trends.

As this commentary has said before, a way to participate in the upside (while lowering debit risk) is through complex options structures, such as the ratio spread. Note, ratio spreads may carry margin risk, depending on the structure, resulting in undefined losses, potentially.

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

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

In the best case, the S&P 500 trades higher; activity above the $4,438.25 high volume area (HVNode) puts in play the $4,466.00 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,499.00 untested point of control (VPOC) and $4,526.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,438.25 HVNode puts in play the $4,409.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,395.25 HVNode and $4,355.00 VPOC, 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

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.