Tag: Bridgewater Associates

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Commentary

Daily Brief For March 1, 2023

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

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

Administrative

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

Fundamental

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

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

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

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

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

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

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

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

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

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

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

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

Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.

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

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

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

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

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

Graphic: Retrieved from NDR via Macro Ops.

Positioning

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

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

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

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

Technical

As of 9:20 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a positively skewed overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,965.25. 

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

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

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

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

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

About

The author, Renato Leonard Capelj, works in finance and journalism.

Capelj spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. Separately, Capelj is an options analyst at SpotGamma and an accredited journalist.

Capelj’s past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For February 9, 2023

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

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Graphic updated 7:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility.

Positioning

The cross-cutting forces on inflation are set to net out says Bob Elliott, the CIO at Unlimited. The former Bridgewater Associates executive thinks short-term inflation pressures are skewed upward, and that new data suggests “the respite in inflation … is probably going to fade and higher numbers are going to print.”

In short, disinflation from oil prices and the amelioration of supply chains “cannot persist, and that’s what we’re seeing now. It looks like those upward pressures on inflation are moving faster than the pace that services prices and housing costs are moving down.”

Consequently, there is a potential for broad inflation measures to remain higher for longer, hence the thinking that the Federal Reserve (Fed) indeed stays tougher on inflation for longer (i.e., higher rates for longer). This would support traders’ recent desire to bet large on downside movement next week when the Consumer Price Index (CPI) is set to update.

Publicized by Kai Volatility’s Cem Karsan and Damped Spring’s Andy Constan, some trader(s) bought to open 24,000 put options at the $4,050.00 S&P 500 (FUTURE: /ES) strike expiring February 17, 2023. The trade coincided with market makers selling to open “roughly 7,200 [/ES] futures contracts worth roughly $1.5 billion.” This “caused the local low,” Constan, who also worked at Bridgewater (and your letter writer had the honor of interviewing before), explained.

This trade, and others like it, compounded the pressures of the dealers selling their existing stock and futures “to re-hedge their call options exposures that are declining in value.”

Graphic: Retrieved from SqueezeMetrics.

Accordingly, the Cboe Volatility Index (INDEX: VIX) is bid, as is the Cboe VIX Volatility Index (INDEX: VVIX), which your letter writer talked about in a SpotGamma note last night. Basically, traders are hedging more, and this is observed by previously low readings of convexity moving higher. Still, given that there is still some time to CPI, there’s potential for “current prices the SPX trades at [to] appear sticky for lack of better phrasing,” SpotGamma explained; pre-CPI, traders often sell short-term volatility as a bet on limited movement. It’s the post-CPI expirations in which implied volatility (IVOL) is wound and will serve as a catalyst for a fast move higher or lower. 

Graphic: Retrieved from TradingView. Blue = VVIX. Orange = VIX.

So, in the short-term, there may be some pinning, followed by an expansion of range into the mid-February (2/17) monthly options expiration (OpEx). This event likely puts the market in a precarious position and at the whims of macro-type repositioning, which may be bearish based on the insights this letter has covered in the past.

Graphic: Retrieved from Physik Invest. Data from SqueezeMetrics. Gamma exposure is set to fall in mid-February, and this may result in less support from the options market.

Trades that look and are working well include those that use short-call vertical credits to finance long-put vertical debits out months from now. For instance, for every two units of short call verticals (SOLD -1 VERTICAL SPX 100 19 MAY 23 [AM] 4150/4200 CALL), your letter writer is looking to own one unit of the long put vertical (BUY +1 VERTICAL SPX 100 16 JUN 23 [AM] 3450/3350 PUT). Remember that your letter writer may not necessarily think the market will trade that far, rather it may be a bet on IVOL repricing.

A case study on last week’s ultra-successful call ratio spreads is coming soon. Take care and watch your risk!

Technical

As of 7:20 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,168.75. 

Key levels to the upside include $4,189.00, $4,202.75, and $4,214.25.

Key levels to the downside include $4,153.25, $4,136.25, and $4,122.75.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

About

The author, Renato Leonard Capelj, works in finance and journalism.

Capelj spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. Separately, Capelj is an options analyst at SpotGamma and an accredited journalist.

Capelj’s past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com or find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram.

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 15, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 900+ that read this report daily, below!

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Graphic updated 7:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

Apologies – yesterday the above graphic was not properly updated. The sentiment reading was incorrect, as were a couple of other figures. Separately, a lighter note, today, followed by more in-depth stuff currently being worked on in the coming sessions. Thanks!

Fundamental

First – going to refer everyone to yesterday’s letter, a conversation between Joseph Wang and Andy Constan, as well as some updates Cem Karsan of Kai Volatility made. That is, in part, a primer for what we will be talking more about, soon.

Next – we have futures markets pricing rate a peak in the overnight rate at ~4.6% in February of 2023. From thereon, rate cuts are implied.

Graphic: Via Charles Schwab Corporation’s (NYSE: SCHW) TD Ameritrade thinkorswim. Observed is the Eurodollar, the interest offered on U.S. dollar-denominated deposits held at banks outside of the U.S. (i.e., participants’ outlook on interest rates).

It’s becoming the consensus that “[f]or hikes to reduce inflation, they need to hurt growth,” Jean Boivin and Alex Brazier of BlackRock Inc (NYSE: BLK) explained.

“There is no way around this,” they add. “We estimate it would require a deep recession in the U.S., with around as much as 2% hit to growth in the U.S., and 3 million more unemployed, and an even deeper recession in Europe.”

It’s the impact of rising rates and quantitative tightening (the latter which will compound the impacts of the former) that are part of the toolkit used to cool the sticky inflation.

Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.

Ray Dalio, of Bridgewater Associates LP, said that rates rising “toward the higher end of the 4.5% to 6% range … will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it.”

Accordingly, equity prices could plunge upwards of 20%, as a result.

Graphic: Retrieved from Bloomberg via Michael J. Kramer. “What is amazing is how expensive this market is relative to rates. The spread between the S&P 500 Earnings yield and the 10-Yr nominal rate is at multi-year lows.”

Further, per Bloomberg’s John Authers, it’s the case that “[a]ll major global synchronized crises ended with moderate inflation and low growth; that hasn’t been reached yet.” Separately, a peak in inflation “doesn’t come close to guaranteeing equity gains.”

The pivot will come when there’s a “sustainable path to 2% (not 3 or 4%) inflation” and a “fed funds that is greater than CPI for a few quarters,” explained Alfonso Peccatiello of The Macro Compass.

“The timing mostly depends [on] the MoM CPI ahead,” he added, pointing to a graphic that suggests “there is no ‘pivot’ earlier than mid-2023, and it could well be later. Looking at the SOFR curve, that’s also what’s roughly priced in.”

Graphic: Retrieved from Bespoke Investment Group via Alfonso Peccatiello.

Positioning

Ahead of a multi-derivative expiry, markets are trading sideways to lower. Demands to protect equity downside (with puts), compounded macro-type selling earlier this week.

Now, with traders well hedged, Kai Volatility’s Cem Karsan put forth that there is a “race to monetize,” which is lending to “relatively flat” trade and “lack of follow-through.”

Graphic: Retrieved from Pat Hennessy. “Every large down move in SPX this year (quantified by <= -2 Zscore) has been followed by a relatively flat day/lack of follow through. Any ideas as to why this is?”

From hereon, as we said, a lot of the exposure demanded is short-dated. Should that exposure not be rolled forward in time, and allowed to expire, “SPX/ES dealers [who] are well hedged,” will unwind their hedges which may drive bullishness “through OpEx,” added Karsan.

Notwithstanding, this “has [the] potential to drive a tail post” OpEx. In [the] tech/meme market melt-up of 2020-2021, positioning was [the] exact opposite.”

Technical

As of 7:45 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $3,965.75 HVNode puts into play the $4,001.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,018.75 and $4,069.25 HVNodes, or higher.

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

Any activity below the $3,965.75 HVNode puts into play the $3,925.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,867.75 LVNode and $3,829.75 HVNode, or lower.

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

Definitions

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

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

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.

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 9, 2022

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

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What Happened

U.S. markets were weighed by action abroad before recovering late in the overnight session. 

This was ahead of a European Central Bank (ECB) decision that likely results in a tightening of monetary policies in that region of the world. The expectation is that the ECB will end its bond purchases this month. Then, hike rates in July and September. 

At home, in the U.S., the Securities and Exchange Commission (SEC) is looking to change the business model of wholesalers. In consideration is a model in which different firms compete with each other to fill investors’ trades. Some suggest this would increase trading costs.

Elsewhere, one of the largest U.S. export plants of liquified natural gas (LNG) is to shut down due to a facility explosion, raising the risk of shortages in Europe, according to Reuters.

Ahead is data on jobless claims (8:30 AM ET), as well as real household net worth and domestic financial debt (12:00 PM ET).

Graphic updated 6:40 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 past week, a narrative on bearish bets in funds such as the iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG) surfaced.

The ETF saw some of the largest volumes since March of 2020, presumably as traders looked to hedge for low cost, the Federal Reserve’s (FED) hawkishness. 

Graphic: Via Bloomberg. “Given that HYG’s realized volatility is still relatively low, it’s an inexpensive way to hedge the impact of tightening monetary policy on corporate credit.”

According to The Ambrus Group’s Kris Sidial, “a lot of banks continue to push credit vol[atility] as a cheap hedge. Every month, at least four banks push the theme on that trade because of ‘value.’”

This is “also, another reason why every month you see HYG put spreads hit the tape with big size, relatively speaking,” he adds.

Adding, Bridgewater Associates, which was founded by Ray Dalio in 1975, is betting on the sale of corporate bonds via credit default swaps (CDS), which are used to transfer and hedge credit exposure on fixed income products.

Bridgewater’s Co-Chief Investment Officer Greg Jensen explained their bet against corporate bonds is based on inflation remaining stubborn, resulting in the Fed to “tighten in a very strong way, which would then crack the economy and probably crack the weaker [companies].”

Here’s why that matters. 

The firms facing challenges, “are creations of easy credit,” according to Bloomberg and, now, for some of them, their time is running short as they “aren’t earning enough to cover their interest expenses, let alone turn a profit.” 

“When interest rates are at or close to zero, it’s very easy to get credit, and under those circumstances, the difference between a good company and a bad company is narrow,” said Komal Sri-Kumar of Sri-Kumar Global Strategies. 

“It’s only when the tide runs out that you figure out who is swimming naked.”

Graphic: Via Bloomberg.

Despite many of these companies having debt that could last them “months, even years,” Vincent Reinhart explains that “[a]s rates rise, it pushes more of those firms into distress, and amplifies the tightening by the Fed of financial conditions and credit availability.”

As stated yesterday, financial conditions are “the mechanism through which the Fed [impacts] the economy,” and “if the data doesn’t slow, financial conditions will need to tighten more,” potentially feeding into a freezing of credit and a harder hit on still-frothy areas of the market “with the greatest systemic risk.”

As we quoted Simplify Asset Management’s Mike Green explaining in early May, we’re more than halfway through a dot-com type collapse that’s happened “underneath the surface of the indices.” 

That’s noteworthy since still-strong passive flows continue to support the largest stocks within the index.

That said, with bonds “not acting as a hedge and appear to be becoming less ‘money’ like due persistent declines in price and elevated rate vol,” per Joseph Wang, who was a trader at the Fed, “[i]nvestors in both bonds and stocks are reaching for cash by selling their assets, driving further asset price declines. For non-bank investors, ‘cash’ means bank deposits.”

How to think about trades?

As explained, yesterday, the marginal impact of further volatility compression is likely to do less to bolster equity market upside. Heading into the Federal Open Market Committee (FOMC) event, next week, according to SpotGamma, short-dated, pre-event volatility is likely to get sold (further promoting market consolidation) while that which is farter-dated is likely to be bought.

To capitalize on a resolution of the index-level pinning, participants, too, could sell short-dated volatility (which capitalizes on pinning and the rapid decay of soon-to-expire options) and use those proceeds to fund farther dated options. 

Such a structure would assist in lower the cost of directional exposure.

Graphic: The risk profile of a long put calendar spread, via Fidelity.

Alternatively, if bearish on volatility, one could buy a butterfly (short two times at the money and long above and below out of the money options). 

Graphic: The risk profile of a long call butterfly spread, via Fidelity.

In such a case, the trader becomes long implied skew convexity. This is a play on the comments above, coupled with the fact that the Cboe VVIX Index (INDEX: VVIX), the expected volatility of the 30-day forward price of the VIX, or the volatility of volatility (a naive but useful measure of skew), dropped off largely, too, in comparison to the VIX, itself.

Graphic: Text taken from Exotic Options and Hybrids: A Guide to Structuring, Pricing and Trading.

Technical: As of 6:40 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 balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher; activity above the $4,129.25 low volume area (LVNode) puts in play the $4,149.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,164.25 regular trade high (RTH High) and $4,189.25 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,129.25 LVNode puts in play the $4,101.25 LVNode. Initiative trade beyond the LVNodes could reach as low as the $4,073.25 weak high/low and $4,055.75 LVNode, or lower.

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

Definitions

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

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

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

About

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

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

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

Disclaimer

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