Categories
Commentary

Daily Brief For December 16, 2021

What Happened

After the Federal Reserve (Fed) announced it would accelerate its taper to bond-buying, clearing the way for interest-rate hikes, the equity market rallied, broadly. 

With all major U.S. equity index futures trading higher, overnight, it appears that participants’ fears regarding monetary policy have been assuaged

As forecasted, a collapse in event-related implied volatility brought in positive flows that ought to support the market into this week’s weighty “quad-witching” derivatives expiry.

Ahead is data on jobless claims, building permits, housing starts, and manufacturing (8:30 AM ET). Then, there are releases on industrial production, capacity utilization (9:15 AM ET), as well as Markit manufacturing and services PMI (9:45 AM ET). 

Graphic updated 6:15 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

Market hammered out a low, yesterday. 

This was after, to start the week, customers had been increasing their exposure to short-delta (call selling and put buying). The counterparty inventorying the opposite (long-delta) exposure sold (bought) futures into price discovery higher (lower).

Graphic: Customers increased their exposure to short-delta call exposure. “Last week was about selling index calls,” SpotGamma’s Brent Kochuba said on Twitter. “This is likely why the $SPX stopped at $4,700.00.”

This dynamic had the effect of pinning the market; was the S&P 500 to remain in consolidation, customers’ (dealers’) short-delta (long-delta) would have risen which would have made for even more pinning.

That didn’t happen, though.

Into Wednesday’s FOMC event, demand for protection expanded (as evidenced by a higher CBOE Volatility Index reading). That knocked most of the major indexes out of sideways trade.

However, as revealed Tuesday by SpotGamma’s (beta) Hedging Impact of Real-Time Options (HIRO) indicator, “participants saw lower prices as an opportunity to express their opinion of lower volatility into Wednesday’s Federal Open Market Committee (FOMC) update.”

From there on, as Ambrus Group’s Kris Sidial best explained, “vols were static in anticipation of the fed talk,” taking away from supportive flows (as a result of options sliding down their term structure [vanna]) and promoting sideways trade.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator, which is pink in color, was sideways to higher. This suggests positive options delta trades likely had dealers buying stock/futures into the close.

Context: Wednesday’s commentary really hit the nail on the head, so to speak. 

Therefore, I offer some light updates.

As expected, per Nordea, the Fed will “accelerate its tapering process, and is now set to conclude net purchases already by mid-March vs mid-June with the earlier pace.”

“The dot plot was revised significantly higher, and the plot now shows three hikes for next year, a further three for 2023 and another two for 2024.”

Graphic: “[T]he terminal rate being priced in by financial markets is closer to 1.5% vs. 2.5% for the Fed,” Nordea explained. “The market is now pricing that rate hikes could start already in the mid-March 2022 meeting.”

That said, today’s rates support validations better than in the ‘90s.

At the same time, equity markets tend to rally into the first hike; Moody’s Corporation’s (NYSE: MCO) forecast aligns with that – “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

This positive take is in the face of what has been markedly divergent breadth and extreme relative weakness, especially in rate-sensitive names. 

Why? Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive. 

Graphic: As U.S. stocks’ inflation-adjusted earnings yield turns negative, as seen near the peak of the tech bubble, via Bloomberg, “Investors in the Nasdaq increasingly seem to think that only a few companies have much of a chance. With a growing possibility of more aggressive attempts to prosecute antitrust issues, that’s a riskier position than it appears.”

With the equity market moving higher, here, into the end of the week, we ought to not discount participants’ increasing exposure to leveraged products.

This increases the speed with which volatility is realized and was cited as a risk in one of Moody’s recent commentaries.

So, despite having seasonally-aligned “passive buying support” and supportive positioning metrics, as well as expectations of “the strongest quarterly nominal [economic] growth in more than three decades,” offsides positioning ought to exacerbate underlying price movements.

So what? As stated, yesterday, the market is in a positive-gamma environment wherein the counterparties to customer options trades add market liquidity and temper realized volatility.

With participants’ fears surrounding monetary policy assuaged, there are positive flows that ought to support the market into this week’s weighty “quad-witching” derivatives expiry.

Graphic: VIX term shifts inward; as short-dated protection quickly was monetized or expired, volatility collapsed and dealers’ exposure to positive delta declined which meant they would cover their short futures hedges. This “vanna” flow bolstered an SPX rally into the end-of-day.

Into the end of the week, the expectation is that participants continue to step in and commit increased capital on lower directional volatility (as they had into this week).

With activity concentrated in shorter-dated tenors, counterparties will take on more exposure to positive gamma which they will offset by supplying the market with more liquidity, thereby pressuring the price discovery process.

Graphic: Via SpotGamma data, the above model’s tilt suggests dealers will increasingly sell into strength and buy into weakness, pressuring any price discovery into the end of this week.

Moreover, the decrease in dealer supply (short delta) post-OPEX, via the covering of short stock/futures hedges to put-heavy positioning, ought to bolster any attempt higher.

Below: Though book depth “in isolation is not the correct method to gauge liquidity,” it can help in assessing participants’ demand/supply as volatility (and stress, by that token) increases.

Graphic: Analysis of book depth for the E-mini S&P 500 futures contract, via CME Group Inc’s (NASDAQ: CME) Liquidity Tool. For more on the implications of participants’ options positioning and dealer hedging, read here.

In anticipation of higher prices, low cost, complex options structures like call-side calendars, butterflies, and ratio spreads are top of mind.

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.

Expectations: As of 6:15 AM ET, Thursday’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.

Balance-Break + Gap Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) is occurring.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 

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. 

Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,712.00 balance area boundary (BAH) puts in play the $4,732.50 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,740.50 minimal excess high and $4,767.00 extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,712.00 BAH puts in play the $4,690.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,674.25 HVNode and $4,657.00 balance low (BAL), 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. Learn about the profile.
Graphic: V-pattern recovery in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, portends continuation. The red, black, and yellow-colored lines are anchored volume-weighted average price levels (VWAPs), 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.

Definitions

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.

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.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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.

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.

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

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

About

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

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, 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.

Categories
Commentary

Daily Brief For December 6, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher after Friday’s liquidation had the S&P 500 undercutting its 50-day simple moving average (SMA), a visual go/no-go level.

Strength shifted, again, to the Russell 2000 while the tech-heavy Nasdaq 100 was underwater. This comes as policymakers look to temper inflation with the tightening of monetary policy.

In regards to news, China’s central bank looked to boost liquidity for its slowing economy. It was also found that a new virus variant was not fueling a surge in hospitalizations; the U.S.’s adviser on the issue, Anthony Fauci, said there wasn’t “a great degree of severity to omicron.”

That didn’t stop the economists at Goldman Sachs Group Inc (NYSE: GS) from cutting their forecasts for U.S. GDP next year; the estimates were revised down on an expectation the omicron strain would drag growth.

Ahead are no important releases on fundamental data.

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

On weak intraday breadth and divergent market liquidity metrics, the worst outcome occurred; there was an expansion of range, to the downside, and participants spent the majority of the session building value at lower prices (i.e., levels at which 70% of that day’s volume occurred).

The lower bound of Friday’s range was $4,500.00 or so, at which the 50-day SMA corresponded with a large base of resting liquidity. 

To note, the 50-day is visual level at which short-term, technically-driven participants were likely buying in response to probes below developing balance. 

Successfully auctioning beneath the 50-day is a concern. Those short-term participants lack the wherewithal (both emotional and financial) to defend retests.

Continuation lower, in such a case, is likely.

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: The Fed’s intent to moderate stimulus and uncertainty with regards to how a new COVID-19 variant will impact the global recovery.

According to Bloomberg, “the Fed is seen responding to the inflation fears stalking businesses by leaning toward an older playbook of prioritizing the fight against price pressures — even if that risks weaker growth over the longer term.”

In line with the aforementioned, traders already started pricing in potential rate overshoots with the “December 2024 eurodollar yields [rising] above December 2025 contracts, a curve inversion that signals expectations the central bank may consider cutting rates in 2025.”

The result is that the U.S. may realize the swiftest tightening in financial conditions since 2005 if the Fed was to hike rates three times next year.

Graphic: Via Bloomberg, trades price in a rapid increase in the real Fed rate.

This development carries weight; now, more than during the tech-and-telecom bubble, low rates support current valuations.

Graphic: Low rates support current valuations better than the ‘90s, according to Nasdaq.

The reason being? 

“Lower interest rates lead to future cashflow discounting less – leading to higher valuations. From another perspective, a company with a 5% profit margin is a much more attractive investment when long-term borrow costs are less than 2%, as they are now than when it costs 5%-7% to borrow money back in the ‘90s.”

The Fed’s intent to taper faster, and eventually hike rates, just as liquidity conditions have deteriorated, pushed “the orange dot [in the above graphic] toward the right during the year.”

Notwithstanding, “growth in earnings is so far stronger than the multiple compression caused by rising rates (blue line),” and that is helping support this year’s rally.

The intent to moderate stimulus is likely to serve as a headwind; there’s always a possibility of unanticipated policy adjustments, in the face of a resurgent COVID-19 digging further into the economy’s growth.

That’s partially why we saw Goldman Sachs cut their forecasts for GDP. 

Graphic: Via The Market Ear. Goldman Sachs cut its forecast for GDP.

But, for every negative view, there is a positive (either by the same institution or a competitor).

We see JPMorgan Chase & Co (NYSE: JPM), among others, doubling down on their bullishness.

“We are calling for another year of positive earnings surprises, relative to current consensus estimates.”

Similarly, the market may shrug off omicron just as it did beta and delta

Graphic: Via The Market Ear, the market shrugs off COVID-19 variants with ease.

And, despite the market’s trade in short-gamma (a “negative [gamma] implies the opposite [selling into lows, buying into highs], thus magnifying market volatility”) destabilizing demand for downside protection is concentrated in shorter-dated options

Graphic: A roll lower in the VIX term structure brings in supportive flows. Via The Market Ear.

Once that short-dated protection rolls off the table (and/or is monetized), counterparties will quickly reverse and support the market, buying to close their existing stock/futures hedges.

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant, and the positive effects of pro-cyclical inflation, economic growth, and improvements in global trade.

Such development plays into a thesis held by Moody’s Corporation (NYSE: MCO). 

“The forecast is that the Dow Jones Industrial Average increases this quarter and peaks in early 2022. However, the rest of the contours of the forecast didn’t change. We expect the DJIA to steadily decline throughout 2022, but because it will now peak later than previously thought, the level of the DJIA will be higher at the end of next year and over the near-term forecast.”

Similarly, here are some views by Morgan Stanley (NYSE: MS), compiled by The Market Ear. 

“The Morgan Stanley’s Global Risk Demand Index (GRDI) [fell] to a 10Y low reading of -4.2SD, last Friday (currently -3.SD). Historically, such a level has proved to be a solid buy signal over the next 3m. Other signs that investor sentiment has overshot to the downside include the VIX > 30, a steep put-call skew, and the AAII survey where 42% of respondents are bearish (90th percentile reading). Over the last decade, MSCI ACWI has risen 98% of the time over the next 3m post this signal and by an average of 10%.”

Expectations: 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 positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the developing balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,523.00 untested point of control (VPOC) puts in play the $4,551.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,574.25 high volume area (HVNode) and $4,590.00 balance area high (BAH), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,523.00 VPOC puts in play the $4,492.25 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,471.00 and $4,425.00 VPOC, or lower.

Click here to load today’s updated 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. Learn about the profile.

What People Are Saying

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

Liquidation Breaks: The profile shape suggests participants were “too” long and had poor location.

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, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For December 3, 2021

What Happened

Overnight, equity index futures auctioned in-sync, within the confines of yesterday’s recovery. 

This is as participants position themselves for Friday’s data dump that may shed light on how fast the Federal Reserve (Fed) intends to tighten monetary policy.

Ahead is data on nonfarm payrolls, the unemployment rate, and average hourly earnings (8:30 AM ET). Later is Fed-speak by James Bullard (9:15 AM ET), Markit services PMI (9:45 AM ET), as well as ISM services, factory orders, and core capital goods orders (10:00 AM ET).

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. 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

In the face of strong intraday breadth, the best case outcome occurred, evidenced by the recovery of Wednesday’s value (i.e., the prices at which 70% of that day’s volume occurred).

This action negated the knee-jerk selling that coincided with COVID-19 variant news.

As a result, the S&P 500 is back inside of a short-term consolidation; participants had no interest in transacting the S&P 500 on prices advertised below the balance area.

Context: The Fed’s intent to moderate stimulus and uncertainty with regards to how a new COVID-19 variant will impact the global recovery.

In the face of it all, according to Bloomberg, “The market is again pricing June 2022 as the most likely timing for the first Fed rate hike, same as on Nov. 24. At various stages over the intervening days traders looked at July, or even as late as September.”

This is as an emerging trend from the Fed, confirmed by Chair Jerome Powell’s Congressional testimony – for weeks into this most recent equity – resulted in a re-pricing of bond market risk. 

That fear – demand for protection in the bond market – failed to appear in the equity market. 

Instead, there was an insatiable appetite for stocks, according to Bloomberg, with investors pouring more cash in 2021 than in the past 19 years, combined. 

That appetite for risk fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA), and, more recently Apple Inc (NASDAQ: AAPL). At the same time, the broader market was weakening, evidenced by a decline in breadth. 

With indices pinned, heading into the November monthly options expiration (OPEX), as a result of sticky and supportive hedging flows, correlations declined. 

Think about it. If heavily weighted index constituents are higher and the indices are pinned, then something has to give! 

After OPEX, the removal of certain hedging flows had the market succumb to fundamental forces. The addition of participants’ underexposure to downside put protection, according to SpotGamma, resulted in more rampant two-way volatility.

The reason being? The market quickly entered into an environment known as short-gamma. 

“What the heck is that? Please explain to me like I’m ten.” Okay, hold my beer.

Basically, funds holding long equity, in the interest of lower volatility returns, hedge. The S&P 500 is a benchmark and one of the best places to hedge, given liquidity, and so on.

These participants will sell calls against their long equity exposure. The proceeds from that sale will be put toward downside protection. Long equity, short call, long put. Get it?

The counterparty to this dominant positioning is a buyer (seller) of upside (downside) protection, a carry trade (i.e., long delta). 

This exposure is hedged, yes! However, this exposure will also decay, in time, all else equal. 

Volatility will slide down its term structure (vanna) and time will pass (charm); “as volatility ebbs and time passes, the unwind of these hedges brings in positive flows that can lead to lengthy sprints.” – Cem Karsan of Kai Volatility.

Now, within a certain range, said counterparties are, long-gamma also. Gamma is basically “the rate of change of delta per 1-point move in the underlying,” according to SqueezeMetrics.

As volatility and time to expiration decline, the gamma of at-the-money options rises; “option market-makers will hedge their positions in a fashion that stifles volatility (buying into lows, selling into highs).”

There are times, also, when the market is in a short-gamma; a “negative [gamma] implies the opposite (selling into lows, buying into highs), thus magnifying market volatility.”

With participants underexposed to downside protection, post-OPEX demand kicked the market into short-gamma; the conditions worsened when much of the activity was concentrated in shorter-dated tenors where the sensitivity of options to direction is higher, as stated.

Graphic: VIX term structure 11/25. Backwardation signaled an entry into an unstable environment with activity concentrated at the front-end of the curve.

Once that short-dated protection rolls off the table (and/or is monetized), counterparties will quickly reverse and support the market, buying to close their existing stock/futures hedges.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator on 12/2 shows positive options delta trades firing off, which likely had dealers buying stock/futures into the close.

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant, and the positive effects of pro-cyclical inflation and economic growth, improvements in global trade, and continuity at the Fed, among other dynamics, play out.

We see participants opportunistically buying the dip, already, via metrics like DIX that’s derived from liquidity provision on the market-making side.

Graphic: Earnings are rising and helping support historic PE multiples, via Nasdaq

Notwithstanding, the market is still in short-gamma and unless participants began betting on the upside (i.e., committing increased capital to calls at strikes higher in price and out in time), and we cross over to long-gamma, volatility ought to remain.

To assuage fears, though, here is a quote from Goldman Sachs Group Inc (NYSE: GS): 

“We find that the market has already priced in a significant downgrade in the growth outlook off the back of Omicron concerns. While we don’t believe that the most extreme downside scenarios are fully reflected in current market pricing, there are clearly still scenarios that could prove better than anticipated by the sharp shift in pricing in recent weeks, in our view”.

Expectations: As of 6:45 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper 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 sideways or higher; activity above the $4,574.25 high volume area (HVNode) puts in play the $4,590.00 balance area high (BAH). Initiative trade beyond the BAH could reach as high as the $4,629.00 untested point of control (VPOC) and $4,647.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,574.25 HVNode puts in play the $4,551.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,526.25 HVNode and $4,497.75 regular trade low (RTH Low), or lower.

Click here to load today’s updated 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. Learn about the profile.

What People Are Saying

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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.

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For December 1, 2021

What Happened

Overnight, equity index futures traded sideways to higher, led by the once-weak Russell 2000. 

The shift in relative strength is one obvious change in tone in the face of hawkish news from the Federal Reserve (Fed) and COVID-19 uncertainty. 

Ahead is data on ADP employment (8:15 AM ET), Markit manufacturing PMI (9:45 AM ET), ISM manufacturing index, construction spending, as well as testimony by Federal Reserve’s Jerome Powell and Treasury Secretary Janet Yellen (10:00 AM ET). 

Later is a release of the Beige Book (2:00 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

On lackluster breadth and supportive market liquidity metrics, the worst-case outcome occurred, evidenced by an expansion of the S&P 500’s range, as well as increased participation at lower prices, as evidenced by lower value (i.e., the prices at which 70% of the day’s volume occurred).

Though yesterday marked a willingness to continue the trend lower, there are some caveats.

The first of which comes back to simple market profile principles. Value ended on the day overlapping lower. This suggests balance and an unchanged perception of value from Friday. 

This dynamic ties into what was discussed yesterday. Given a push-pull environment between the big indices (i.e., strength in Nasdaq 100 versus weakness in Russell 2000), in the face of lackluster breadth and market liquidity metrics, there were increased odds of sideways trade; “participants were likely to base for a directional move in anticipation of new information.”

Second, according to SpotGamma, “in the face of a massive -$8bn market-on-close order, dealers likely were covering their hedges to customers’ short-delta options exposure.”

The implications of the latter are staggering. Let’s unpack, below.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator shows positive options delta trades firing off, which likely had dealers buying stock/futures into the close.

Context: The Fed’s Powell changed his tone around inflation, yesterday, becoming more open to a faster taper in bond-buying and rate hikes. 

As Bloomberg’s John Authers put it: “This looks like inconsistency, and it also looks to some as if Powell has lost his nerve — just as he did three years ago, when the stock market’s horrified reaction to his statement that the Fed’s balance sheet would be reduced ‘on autopilot,’ meaning ever tighter money, prompted a U-turn. In market lore, the ‘Christmas Eve Massacre’ of a cathartic stock sell-off was followed by the ‘Powell Pivot.’”

Graphic: S&P 500 performance in tightening cycles via Ned Davis Research. 

Stocks have recovered markedly, since the news. 

At the outset, as we typically see with news, selling appeared knee-jerk; a b-shaped profile distribution suggested long liquidation (i.e., [1] participants who bought the dip, Friday, were unable to gather the financial and/or emotional wherewithal to defend a retest of local lows and [2] capitulation on the part of larger other time frame participants, potentially).

In regards to the latter, if funds were to sell the market, they would do so methodically, into strength, throughout a session.

Couple the aforementioned with a decline in volatility (despite S&P 500 prices reaching lower lows), it’s clear as to why I started off the commentary suggesting an “obvious change in tone.”

Last week, we saw the market enter into a destabilizing environment characterized by counterparties to options trades selling into weakness and buying into strength. 

Note: Options are so important. Volatility is a growing asset class. Its implications can’t be discounted (e.g., index pinned in the face of single-stock volatility and declining correlations).

After a brief exit from that environment, on Tuesday the market made another attempt lower. With options activity most concentrated in shorter-dated tenors where the sensitivity of options to direction is higher, then the expectation was that we would realize more volatility. 

That happened.

However, volatility, despite spiking, failed to breach Friday levels; in such a case, the short-dated, out-of-the-money protection participants were initially demanding bled.

Given decreased exposure to risk, at least for those participants (e.g., dealers) warehousing this risk, associated hedging flows (i.e., the buy-back of short stock/futures hedges) came onto the market. 

This is clearly visualized by SpotGamma’s HIRO indicator, above. 

In conclusion, should participants continue to markdown volatility, as well as commit more capital to the call side, fears will have been assuaged.

In such a case, the odds of a seasonally-aligned rally, into Christmas, are supported.

Expectations: 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, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Developing Balance Scenario: Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter HVNode could reach as high as the $4,674.25 micro composite point of control (MCPOC) and $4,691.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, or lower.

Click here to load today’s updated 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. Learn about the profile.

Charts To Watch

Graphic: (NYSE: SPY). (S~$454, R~$463). S is for support. R is for resistance.

What People Are Saying

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.

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.

Definitions

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For November 30, 2021

What Happened

Overnight, equity index futures auctioned sideways to lower. The Russell 2000 led the decline while the Nasdaq 100 buoyed the S&P 500 as yields were a touch lower.

Though volatility is bid, related metrics suggest the removal of fear and added market stability. 

In short, conditions aren’t as bad as they were, Friday. 

Ahead is data on the S&P Case-Shiller Home Price Index (9:00 AM ET), Chicago PMI (9:45 AM ET), Consumer Confidence (10:00 AM ET). Scheduled also is testimony by Federal Reserve and Treasury members (10:00 AM and 1:00 PM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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

On lackluster intraday breadth and divergent market liquidity metrics, the best case outcome occurred, yesterday, evidenced by a decisive move away from intraday value (i.e., the price levels at which 70% of the day’s volume occurred), into an area of resting liquidity that coincided with a volume-weighted average price (VWAP), anchored from the start of the decline. 

To note, VWAPs are metrics 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.

Moreover, given the divergences (one is pictured below), we can surmise that Monday’s recovery was responsively sold. 

Given the push and pull between the big indices, as well as lackluster breadth and market liquidity metrics, there is increased potential for sideways trade; participants are likely to base for a directional move in anticipation of new information in regards to dynamics like COVID-19, monetary policy evolution, and the like.

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is attempting to bracket/balance).

Context: Keeping it to the point, today.

There is less fear coming into Tuesday’s session than there was Friday. 

This dynamic is most clearly visualized with the VIX futures term structure which is much less flat, so to speak, than it was. 

Graphic: VIX term structure.

Though one could surmise that there is less risk of instability, as a result, rather, we should think about it as the demand for protection through time. The demand has cooled.

In building on that, we saw the market enter into a destabilizing environment characterized by counterparties to options trades selling into weakness and buying into strength. 

After a brief exit from that environment, Monday, an overnight liquidation has us on the cusp of re-entry. With options activity most concentrated in shorter-dated tenors where the sensitivity of options to direction is higher, if we will, then the expectation is that we realize more volatility.

That’s not to say that the market must trade lower. No. Instead, sideways trade as investors seek more information (in regards to COVID-19, monetary policy moderation, and the like) to base a directional move is just as likely. 

In that case, the short-dated, out-of-the-money protection that was demanded will quickly evaporate; associated hedging flows (i.e., the buy-back of short stock/futures hedges) ought to support the market. 

Should participants’ fears be assuaged, the aforementioned flows could play into a seasonally-aligned rally into Christmas. 

For that thesis to not play out, there would have to be increased participation below $4,600.00 in the S&P 500 (i.e., value, internals, market liquidity must support downside price discovery).

Graphic: Daily changes in the CBOE Volatility Index (INDEX: VIX) greater than 50% precede positive S&P 500 performance.

Expectations: 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 lower part of a negatively 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 sideways or higher; activity above the $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter HVNode could reach as high as the $4,674.25 micro composite point of control (MCPOC) and $4,691.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, or lower.

Click here to load today’s updated 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. Learn about the profile.

Charts To Watch

Graphic: (NYSE: SPY). (S~$453, R~$465). S is for support. R is for resistance.

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.

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

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

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For November 29, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher as participants looked to take back nearly all of Friday’s shortened holiday trading range. 

According to some metrics, the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, experienced one of its most illiquid days, Friday.

At the same time, the CBOE Volatility Index (INDEX: VIX) closed up nearly 50% while the VIX futures term structure settled in backwardation amidst a re-pricing of tail-risk, so to speak.

Moreover, ahead is data on Pending Home Sales (10:00 AM ET).

Graphic updated 5:50 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

Despite the lackluster intraday breadth and divergent market liquidity metrics, the worst-case outcome occurred, Friday, evidenced by downside expansion of range and separation of value.

Coming into the session, the experiences associated with ‘Volmageddon’ came to mind; the VIX was up nearly 40.00%, a concern given the exuberance of past weeks and options positioning, as well as a decline in correlations, and unsupportive breadth.

Tempering the fall were divergences; the Russell 2000 was down nearly 4.00% before Friday’s U.S. open while the S&P 500 was off about 2.00% or so, buoyed by the Nasdaq 100 which was only down about 1.00% amidst an 8% dip in the ten-year yield.

The divergence persisted with the S&P 500 closing firmly below its 20-day simple moving average, a visual level often acted on by short-term, technically-driven participants who generally are unable to defend retests.

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index.

Context: A resurgence in the COVID-19 coronavirus as an improvement in macroeconomic conditions prompts a hawkish shift from the Federal Reserve (Fed). 

“Many risky asset tailwinds in 2021 are turning into at least mild headwinds in 2022,” Nordea says. “Economic growth should decelerate, liquidity conditions are deteriorating, profit margins should be under pressure from rising costs and question marks regarding the Fed/ECB put will arise due to elevated inflation indicators. To us, this spells higher volatility.”

Moreover, for the past two years, almost, equities rallied amidst an acceleration in growth, which is typically correlated with equity outperformance over bonds.

Graphic: Accelerating growth correlates with equity outperformance over bonds.

At the same time, there’s been an insatiable appetite for stocks, according to Bloomberg, with investors pouring “almost $900 billion into equity exchange-traded and long-only funds in 2021 — exceeding the combined total from the past 19 years.”

This appetite for risk fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA) with customers, at least in the past weeks, opting to aggressively sell puts and buy calls heading into the November monthly options expiration (OPEX).

Graphic: Per The Market Ear, participants were hating on downside protection for weeks.

Unfortunately, (1) after OPEX, the absence of sticky and supportive hedging flows freed the broader market for directional resolve, and (2) according to SpotGamma, in light of recent exuberance, “participants [were] underexposed to downside put protection.”

Graphic: Customers took on significant leverage in their purchase and sale of options, via SpotGamma.

What this meant was that after OPEX’s unpinning and increase in correlation, fundamental contexts were to matter more.

Therefore, the Fed’s “increased openness to accelerat[e] the taper pace” and hike rates, alongside fresh travel restrictions on a new COVID-19 variant, as well as holiday illiquidity, resulted in a rough re-pricing of tail risk as participants sought after those highly “convex” options which had counterparties exacerbating underlying price movement.

Graphic: According to Bloomberg, markets price “a full quarter-point rate hike into the June Fed meeting with a second by September and a third by December.”

To elaborate, in short, was volatility to pick up, those participants (who were once exuberant) were likely to reach for protection forcing dealers to reflexively hedge in a destabilizing manner. 

Dealers is the term used to describe those participants that take the other side and warehouse customer options risk, at least in the case where orders can’t be matched between customers.

With that, as volatility rose and customers demanded protection, counterparties hedged by selling into weakness. The conditions worsened when much of the activity was concentrated in shorter-dated tenors where the sensitivity of options to direction is higher if we will.

Graphic: VIX term structure. Backwardation signals an entry into an unstable environment.

Once that short-dated protection rolls off the table (and/or is monetized), dealers will reverse and support the market, buying to close their existing stock/futures hedges.

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant, and the positive effects of pro-cyclical inflation and economic growth, improvements in global trade, and continuity at the Fed, among other dynamics, play out.

We see participants opportunistically buying the dip, already, via metrics like DIX that’s derived from liquidity provision on the market-making side.

Expectations: As of 6:00 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 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 sideways or higher; activity above the $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter HVNode could reach as high as the $4,674.25 micro composite point of control (MCPOC) and $4,691.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, or lower.

Click here to load today’s updated 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. Learn about the profile.

Charts To Watch

Graphic: (NYSE: SPY). (S~$460 and $453). S is for support.
Graphic: (NASDAQ: QQQ). (S~$389 and $381). S is for support.
Graphic: (NYSE: IWM). (S~$222 and $216). S is for support.

What People Are Saying

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.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For Black Friday 2021

What Happened

Ahead of a shortened holiday session, equity index futures auctioned lower alongside the narrative of a resurgence in the COVID-19 coronavirus. 

Most affected appears the Russell 2000 which was down nearly 4.00%, at the time of this writing. The S&P 500 was off about 2.00% or so, buoyed by the innovation- and tech-heavy Nasdaq 100 which was only down about 1.00%. 

This shift in relative strength comes as the ten-year yield sits lower about 8.00%. The CBOE Volatility Index (INDEX: VIX) was up over 40.00% and the implications of this are staggering, given the underhedged market I talked about over the past sessions.

Moreover, there are no scheduled economic releases, today.

Graphic updated 6:00 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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

On Wednesday’s lackluster breadth and market liquidity metrics, the best case occurred. 

The S&P 500 recovered its $4,697.50 spike base, below which selling activity appeared to be the result of weaker-handed participants liquidating as a result of poor location and news.

Overnight, however, the tone shifted. The S&P 500 initiated back through its $4,647.25 high volume area (HVNode) which had corresponded with the 20-day simple moving average.

The 20-day presented participants with a clear way to measure risk, given the mechanical responses in prior trade. As explained, Wednesday, should participants manage to break past the 20-day, then conditions have changed and follow-through was likely

Reason being? Those visual levels are acted on by short-term, technically-driven participants who generally are unable to defend retests.

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings were supportive of responsive trade (i.e., rotational trade that suggests current prices did not offer favorable entry and exit; the market was in balance).

Context: The aforementioned trade is happening in the context of an “insatiable appetite for stocks this year,” as Bloomberg explains

“Investors have poured almost $900 billion into equity exchange-traded and long-only funds in 2021 — exceeding the combined total from the past 19 years.”

This appetite fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA) with customers opting to aggressively sell puts and buy calls heading into the November monthly options expiration (OPEX).

Graphic: Customers took on significant leverage in their purchase and sale of options, via SpotGamma.

Unfortunately, (1) after OPEX, the absence of sticky and supportive hedging flows freed the broader market for directional resolve, and (2) according to SpotGamma, in light of recent exuberance, “participants [were] underexposed to downside put protection.”

The implications of the latter are staggering.

In short, should volatility continue to pick up, those participants (who were once exuberant) are likely to reach for protection forcing dealers to reflexively hedge in a destabilizing manner. 

As volatility rises and customers demand protection, counterparties are to hedge by selling into weakness. The conditions worsen when much of the activity is in shorter-dated tenors where options gamma is more sensitive if we will. This is what we’re seeing.

Graphic: The CBOE Volatility Index (INDEX: VIX) was higher, while demand came in most predominantly across the entire area of the VIX futures term structure. That, alongside the market’s entry into short-gamma, suggests participants’ hedging has destabilizing implications.

Note that I said short-dated

Once that exposure rolls off the table (and/or is monetized), dealers/counterparties will reverse and support the market, buying-to-close their existing stock/futures hedges to negative gamma positions. 

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas.

As stated on November 23, 2021: “This last part is educated conjecture. It’s what I also feel as though would frustrate the most amount of participants. Basically, a quick wash (or sideways to lower), followed by a move higher into year-end. Be nimble and responsive!”

Expectations: As of 6:00 AM ET, Friday’s regular session (9:30 AM – 1:00 PM ET), in the S&P 500, will likely open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios Are In Play: 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 sideways or higher; activity above the $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter HVNode could reach as high as the $4,674.25 micro composite point of control (MCPOC) and $4,691.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,596.75 overnight low (ONL) and $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, or lower.

Click here to load today’s updated 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. Learn about the profile.

Charts To Watch

Graphic: (ETF: IWM). (Key VWAP support at ~$223)
Graphic: (ETF: SPY). (Key VWAP support at ~$460)
Graphic: (ETF: QQQ). (Key VWAP support at ~$388)

What People Are Saying

Definitions

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

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.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

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, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For November 18, 2021

What Happened

Overnight, equity indices auctioned sideways to higher as the bellwether S&P 500 continues to encounter difficulty in overcoming the forces associated with the large derivatives expiry, Friday.

One headline worth mentioning concerns JPMorgan Chase & Co’s (NYSE: JPM) prediction the Federal Reserve (Fed) will raise interest rates next September, earlier than expected. 

Ahead is data on jobless claims and the Philadelphia Fed manufacturing index (8:30 AM ET), leading economic indicators (10:00 AM ET), as well as Fed-speak scattered throughout the day.

Graphic updated 6:00 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. 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

On lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by a Gaussian profile, as well as the balance and overlap of value in the S&P 500.

This activity, which denotes participants positioning themselves for directional resolve, is adding structure, a technically stabilizing dynamic, in short.

Graphic: Lackluster delta (i.e., non-committed buying/selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: Amidst a rather large monthly options expiration (OPEX) this Friday, participants are having difficulty directionally resolving the S&P 500.

This is most visible by the S&P 500’s failure to move away from the $4,695.25 high volume area (HVNode), a level at which there is concentrated participation in the options market. 

As noted before, according to SqueezeMetrics, this level ought to be a magnet given hedging.

“As realized volatility falls from its peak around a year ago, more sold SPX options cluster at strikes nearer to spot. And as implied volatility falls with it, the gamma of those options increases. More dealer long gamma means more liquidity. More liquidity means less movement.”

Moreover, yesterday, there was a note about the market’s reaction to what SpotGamma labels a Call Wall, the strike with the largest net positive gamma in the underlying stock. 

This Call Wall is a reflection of participants’ commitment to higher prices. Should that level continue to move up, then that confirms a willingness to do business, higher, so to speak. 

Since participants were able to roll their exposure to positive options gamma, higher in price and out in time, dealers have to hedge. This maintains that positive (stabilizing) dealer flow we talk so often about, which has bolstered this equity bull market.

Graphic: Via SHIFT, we see participants rolling call exposures to strikes out in time.

That leads us to a dynamic I briefly mentioned last week. After being brought to my attention again, yesterday, there is obviously more to unpack there. However, in keeping it short, I’ll hit on the basics.

The bond market’s pricing of risk, according to Bloomberg, based on an “erratic … handling [of] large transfers of risk” – as evidenced by the Merrill Lynch Option Volatility Estimate (INDEX: MOVE) – has diverged from the pricing of equity market risk via the CBOE Volatility Index (INDEX: VIX).

Fear in one market tends to feed into the fear in another; regardless of the cause, equity and bond market participants are not on the same page.

What does that mean?

At its core, the fear is in tandem with “broad uncertainty about the direction of the economy and monetary policy amid surging prices, labor shortages and yields that are holding well below the rate of inflation,” according to Bloomberg.

In combating high inflation, policymakers ought to raise rates, right? 

Well, that’s at least what economists at institutions like JPM believe may happen as soon as next September, earlier than once forecasted.

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive to own.

As the market is a forward-looking mechanism, the implications of this seem staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Eventually, fear on the part of bond market participants may feed into equity market positioning.

Graphic: Via The Market Ear, in spite of earnings growth, buybacks, and seasonality, among other factors, Bank of America Corp (NYSE: BAC) sees large tech outflows. Fade as big tech starts to look relatively cheap?

Expectations: As of 6:00 AM ET, Thursday’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, just 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 sideways or higher; activity above the $4,695.25 high volume area (HVNode) puts in play the $4,711.75 regular-trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,695.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 untested point of control (VPOC), or lower.

Click here to load today’s updated 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. Learn about the profile.

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.

VPOCs: 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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For November 17, 2021

What Happened

Overnight, equity index futures were divergent. This comes as there were no significant news catalysts and there is a weighty CBOE Volatility Index (INDEX: VIX) expiration today.

Ahead is data on building permits and housing starts (8:30 AM ET). Numerous Federal Reserve members are scheduled to speak today.

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

What To Expect

When analyzing the composite (i.e., overnight and day time frame) volume profile, yesterday’s double distribution suggests participants initiated from one area of acceptance to another.

Amidst divergent intraday breadth and market liquidity metrics, the S&P 500 came back into range and participants defended the $4,695.25 high volume area (HVNode). This level corresponds with what options analysis provider SpotGamma says is a Call Wall.

Given an implosion in volatility over the past sessions, the Call Wall is a near-term magnet due to associated hedging.

“As realized volatility falls from its peak around a year ago, more sold SPX options cluster at strikes nearer to spot. And as implied volatility falls with it, the gamma of those options increases. More dealer long gamma means more liquidity. More liquidity means less movement.” – SqueezeMetrics

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: The aforementioned trade is happening in the context of what Goldman Sachs Group Inc’s (NYSE: GS) CEO David Solomon says is a market environment dominated by greed. 

“[T]here have been periods of time when greed has far outpaced fear — we are in one of those periods,” he said. “My experience says those periods aren’t long-lived. Something will rebalance it and bring a little bit more perspective.”

This comes as markets surge alongside historic amounts of stimulus, improvements in fundamentals (i.e., earnings), supply chain demand/supply imbalances, inflation, and more. 

Further, as stated over the past few commentaries, economic structures are different and we are not in the 1970s. That said, there are a few big dynamics that are of concern.

The first is that we see supply pressures beginning to ease as at-home inventory build-ups are expected to take away from consumption during the holidays (for which businesses are scrambling to stock). Ultimately, this may pressure commodity inflation.

Graphic: Via The Market Ear, Bridgewater shows supply returning to pre-COVID-19 levels as demand explodes, “creating an imbalance of a magnitude that we haven’t seen since the 1970s. What happened in the ’70s truly was a supply shock: supply collapsed, and demand stayed relatively steady. Today, demand is surging, and supply is also growing, but it just can’t keep up with demand.”

The second is this concept of the velocity of money slowing as participants extend moneyness to nonmonetary assets. This is primarily because of monetary policies and an environment of debt and leverage that ultimately cuts into asset price volatility. Overall, this dynamic adds to the prevailing risks of carry when volatility does rise and the demand for money pushes deflation.

Solomon adds: “Chances are interest rates will move up, and if interest rates move up that in of itself will take some of the exuberance out of certain markets.”

With prevailing monetary frameworks and max liquidity promoting a divergence in price from fundamentals, as well as the growth of passive investing and derivatives trading, we ought to have some concern for pending monetary evolution, so to speak. 

As Kai Volatility’s Cem Karsan once told me: “A lot of the processes that enforce these bubbles are embedded in the volatility market.”

“There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed, or there’s a supply of volatility.” However, “At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Note: This structural positioning in the S&P 500 can be construed as customer long equity, long put, short call. This sort of positioning tends to leave the market in long-gamma whereby dealers buy into weakness and sell into strength. Amidst the decay in protection, dealers are to unwind their hedges (supply less liquidity), and this is a force that bolsters market price rises.

Even the slightest reduction in liquidity has the potential to prick the bubble, prompting a reaction that exacerbates underlying price movements; the response by customers, as well as the dynamics of dealers’ risk exposure to direction and volatility, ought to cut into liquidity and aid in an unraveling.

“It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

Case in point, the market’s reaction to prices near SpotGamma’s Call Wall. If participants were unable to roll that exposure to positive options gamma higher in price and out in time, dealers would not have to hedge. This cuts into dealers’ need to unwind hedges to customers’ options positions. This removes one positive (stabilizing) flow that has bolstered this equity bull market.
Graphic: Via SHIFT, we see participants potentially rolling call exposures.

We have seasonally-aligned inflows and earnings growth, among other things, bolstering the most recent rally to new highs. With this week’s implosion in implied volatility most noticeable at the front end of the VIX futures term structure, given the decay in shorter-dated customer protection, it may be an opportune time to hedge.

As The Market Ear stated yesterday, “Playing the term structure (i.e., [buying the] short end of the curve vs [selling] the longer part of the term structure curve) is becoming a rather cheap way to hedge some risks here.”

Expectations: As of 5:45 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

We shall monitor for acceptance (i.e., more than 1-hour of trade) outside of the prior day’s balance area (i.e., the price levels at which 70% of the day’s volume occurred). Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,695.25 high volume area (HVNode) puts in play the $4,711.75 regular-trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,695.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 untested point of control (VPOC), or lower.

Click here to load today’s updated 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. Note that the S&P 500 is pinning at $4,695.25 amid what looks to be a cave-fill (i.e., the widening of the area deemed favorable to transact in by an increased share of participants). Learn about the profile.

What People Are Saying

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For November 16, 2021

What Happened

Equity index futures auctioned sideways alongside no new fundamental catalysts.

Ahead is data on retail sales and import prices (8:30 AM ET), industrial production and capacity utilization (9:15 AM ET), the NAHB home builders’ index, and business inventories (10:00 AM ET), as well as Fed-speak at 12:00 and 2:30 PM ET.

Graphic updated 6:10 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

On minimally divergent intraday breadth and unsupportive market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas in the S&P 500.

This activity, which marks a potential willingness to continue balance, is adding strength to poor structure, a dynamic that is helping clear the market of technical instabilities.

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: According to Morgan Stanley (NYSE: MS), the S&P 500 ought to be weighed down by slower earnings growth and rising yields. The firm’s chief U.S. equity strategist explains that risk and reward for broad indices look unattractive.

“[W]e think 2022 will finally bring the multiple compression we incorrectly forecasted for 2H 2021. Our 12-month target P/E of 18x is 15% below current levels but in line with the 5-year average and the top quintile for the past 30 years.” 

“The risk of de-rating has been deferred, not avoided, and makes our 12-month S&P 500 Bear/Base/Bull targets of 3900/4400/5000 unexciting.”

This comes alongside expectations that inflation – a product of strong demand – is likely to worsen but not disrupt deflationary trends, such as increased moneyness of nonmonetary assets, innovation, and the like. 

Graphic: Inflation ought to worsen before it cools, via The Market Ear.

Moreover, in terms of positioning, the CBOE Volatility Index (INDEX: VIX) was a touch higher, while demand came in across the front area of the VIX futures term structure. 

Obviously, the tone has changed a bit since last week; customer demand and exposure to very short-dated put protection declined. This was most noticeable in how the VIX term structure behaved over the past sessions. After shifting outward (mostly) in the front, a sign of demand for short-dated protection, the curve shifted back down, late last week.

So, while the initial pop (and hedging on the part of those dealers that warehouse customer options orders) was destabilizing, the term structure slid back into line and the removal of that short-dated protection had the effect of leading dealers to buy back short stock/futures hedges.

This stabilized the market. 

Thereafter, the market drifted back up to the level at which positive options gamma is highest, ahead of a fast-approaching monthly options expiration (OPEX). Into OPEX, dealers’ positive exposure to the risks of price movement, based on predominant positioning in the S&P, ought to increase. In hedging this exposure, dealers ought to supply the market with liquidity (i.e., sell stock/futures) which ought to dampen upside volatility.

So, presently, we’re in a bind and things ought to loosen after OPEX, allowing fundamental catalysts to play a bigger role in price discovery.

A way to play this dynamic is to structure some sort of options spread that applies the proceeds from a short option (which capitalizes on pinning and the rapid decay of soon-to-expire options) toward a long option further out in time. Learn about basic Calendar Spreads or see below.
Graphic: The risk profile of a long put calendar spread, via Fidelity.

Expectations: As of 6:00 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the lower 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 sideways or higher; activity above the $4,674.25 micro composite point of control (MCPOC) puts in play the $4,695.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,711.75 all-time high and $4,735.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,674.25 MCPOC puts in play the $4,647.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,619.00 VPOC and $4,590.00 balance area boundary (BAH), or lower.

As an aside, participants reclaimed the volume-weighted average price (VWAP) anchored from the all-time high and recent Federal Open Market Committee (FOMC) meeting.

This is 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.

Further, given that this development suggests the average buyer, since the all-time high, is in a winning position, who does this dynamic embolden? The buyer or seller?

Click here to load today’s updated 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. Learn about the profile.

A Quick Guide To 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 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 direction (delta), time (theta), and volatility (vega). 

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

What People Are Saying

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

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.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.