Tag: BTC – Bitcoin

Categories
Commentary

Daily Brief For March 10, 2023

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

Subscribe
Graphic updated 7:15 AM ET. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

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

Fundamental

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Technical

As of 8:00 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a negatively skewed overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,947.00. 

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

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

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

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures (bottom middle) and market internals as taught by Peter Reznicek.

Definitions

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

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

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

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

About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 9, 2023

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

Subscribe
Graphic updated 8:30 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

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

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

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

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

Graphic: Retrieved from WSJ Market Data Group.

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

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

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

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

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

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

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

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

Positioning

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

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

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

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

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

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

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

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

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

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

Technical

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

The S&P 500 pivot for today is $3,988.25. 

Key levels to the upside include $3,999.25, $4,013.00, and $4,024.75.

Key levels to the downside include $3,975.25, $3,965.25, and $3,947.00.

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

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

About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For November 23, 2022

Physik Invest’s Daily Brief is read by over 1,200 people. To join this community and learn about the fundamental and technical drivers of markets, subscribe below.

Subscribe
Graphic updated 6:45 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Team, it’s been insane on my end. Physik Invest’s Daily Brief will be paused through the end of this week (November 24 and 25). Wishing you happy holidays!

Hopefully, clearer notes and consistent releases to resume, after the break.

Crypto Turmoil Persists:

The FTX (CRYPTO: FTT) debacle has induced even more illiquidity.

Bloomberg’s Matt Levine wrote that the fall in liquidity “has been dubbed the ‘Alameda Gap,’” noting that “[p]lunges in liquidity usually come during periods of volatility as trading shops pull bids and asks from their order books.”

Turmoil and Opportunity:

You may take advantage of the aforementioned uncertainties through arbitrage (i.e., buy at a lower price at one venue and sell at a higher price at another venue). Notice the ~$500 spread on BTC/USDT, for instance.

Graphic: Retrieved from Shift Search at 6:53 AM ET on November 23, 2022.

Elsewhere, the Grayscale Bitcoin Trust (OTC: GBTC) is trading at a ~43.00% discount to the value of the Bitcoin (CRYPTO: BTC) it holds.

Per Bloomberg, “US regulators have repeatedly denied applications to convert GBTC into a physically-backed exchange-traded fund,” and that means the fund is not “able to redeem shares to keep pace with shifting demand.”

To note, the discount pales in comparison to the 101.00% premium to the net-asset value achieved in December 2017. The average net-asset value is a 12.00% premium.

Graphic: Retrieved from Bloomberg.

Anyways, in greater detail, we discussed the crypto turmoil on November 9 and 10. Those notes may be of interest if the context is desired. Though this is not a crypto-focused letter, crypto is “tied up in the liquidity bubble that exists across all assets.”

Graphic: Retrieved from Physik Invest’s Daily Brief posted on November 10, 2022.

As an example, during the week of November 8, when the narrative surrounding FTX’s demise was at its peak, the S&P 500 (INDEX: SPX), Bitcoin (CRYPTO: BTC), and FTX Trading token (CRYPTO: FTT) slid lower, bottomed, and rallied in sync.

Uncertainty, Correlation, and Positioning:

This is a part of the letter that may appear somewhat similar. We continue carrying forward and building on past analyses.

At its core, breakages in correlations some may have observed are accentuated by positioning forces we have talked about recently, as well as the above. These forces are important as you may have noticed the S&P 500’s tendency in responding to areas quoted by this letter.

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

In a nutshell, in light of a “de-grossing of ‘shorts’” per Nomura Holdings Inc (NYSE: NMR), the sale of the volatility investors owned, after events such as elections and CPI, boosted markets indirectly (i.e., counterparty exposure to risk declines as the market rises and investors sell volatility → counterparty reduces the size of their negative Delta hedges → this reduces market pressure and bolsters a rally).

Graphic: Retrieved from Nomura Holdings Inc (NYSE: NMR) via ZeroHedge.

Investors’ continued supply of protection, all the while markets were rising, resulted in further indirect support and, later, prompted responsiveness to key areas at which the options activity was concentrated. This was better detailed on November 16 and 18.

Graphic: Retrieved from Bloomberg.

While this activity is happening – the S&P pinning – underlying constituents are swinging far more amid traders’ own “uneasiness” in stocks and the crypto turmoil; if there are forces pinning and supporting the S&P, all the while there are constraints connecting it to wild(er) components, then something (e.g., correlation) has to give.

Expecting More Of The Same For Now:

Nonetheless, it’s likely for this wild activity under the surface to continue, and for the S&P 500, itself, to be the recipient of even more supportive flows.

For example, the buyback related to the pulled-forward decay of options’ Delta with respect to time (Charm) and continued sale of volatility (Vanna), in a lower liquidity environment, likely results in hedging flows enforcing seasonality and masking the wild(ness) mentioned above.

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

Risks Building Under The Surface:

However, what is happening right now may set the stage for persistently high realized volatility (RVOL) when something bad does happen and those flows we talked about do less to resist that underlying volatility and weakness.

To explain, implied volatility (IVOL) has performed poorly in the context of 2022’s far-reaching decline. That’s in part the result of proactive hedging and monetization of protection (i.e., supply) into the decline.

Graphic: Retrieved from Bloomberg. Measures of equity IVOL tame relative to bonds and FX.

Investors, with IVOL performing poorly, are pushed into better-performing strategies. That includes selling IVOL which does less and less to boost the markets more and more (i.e., per SpotGamma, “the marginal impact of added volatility compression is far lower” at this juncture).

Accordingly, the market is left in a more precarious, less well-hedged position, and that’s concerning given some of the cracks that have appeared including the Credit Suisse Group AG (NYSE: CS) debacle covered in October, the UK liability-driven investment funds covered in September, interest rate swap risks, and beyond.

SCT Capital’s Hari Krishnan talked about some of these risks on a recent podcast.

In Essence, It’s Cheap To Hedge:

According to SpotGamma, “if you wanted to hedge, … it is historically cheap.”

Graphic: Cboe VVIX (INDEX: VVIX) measuring the expected volatility of the 30-day forward price of the VIX. Retrieved from TradingView. Via SpotGamma: “The VVIX is a naive check of participants’ exposure to the volatility of volatility itself (i.e., the non-linear sensitivity of an options price to changes in volatility or Vega convexity). This goes back to the point about the marginal impact of much more volatility compression; the marginal impact of volatility (expansion) compression would have a (bigger) smaller impact, comparatively.”

When you think there is to be an outsized move in the underlying, relative to what is priced, you buy options (+Gamma or positive exposure to directional movement).

When you think there is to be an outsized move in the implied volatility, relative to what is priced, you buy options (+Volga or positive exposure to IVOL changes).

If there’s a large change in direction (RVOL) or IVOL repricing, you may make money.

As an example, in mid-June, a trading partner and I noticed a change in tone in the non-linearity of volatility and skew with respect to linear changes in the price of the market (or S&P 500). The prices of ratio spread structures (i.e., long or short one option near-the-money, short or long two or more further out-of-the-money) changed by hundreds of percent for only a few basis points of change in the indexes.

At the time, Kai Volatility’s Cem Karsan noted this was “a spike in short-dated -sticky skew, [the] first we’ve seen since [the] secular decline began and it hints [at] a potentially critical change in dealer positioning [and] the distribution of underlying outcomes.” 

“We’re transitioning to a fat left tail, right-based distribution,” he added. 

So why does any of this matter?

In essence, it’s cheap to hedge and the context is there for you to do so, at least from a volatility (not directional) perspective. 

Here is an excerpt from Mohamed Bouzoubaa et al’s book Exotic Options and Hybrids to support some of the earlier statements.

Options have a “non-zero second-order price sensitivity (or convexity) to a change in volatility,” Bouzoubaa et al explain. “ATM vanillas are [not] convex in the underlying’s price, … but OTM vanillas do have vega convexity … [so], when the holder of an option is long vega convexity, we say she is long vol-of-vol.” 

In other words, by owning protection that’s far from current prices, you are positioned to monetize on a non-linear repricing of volatility, something we saw earlier this year and may continue to see.

Doing this in a manner that cuts decay (when nothing happens) is the difficult part.

Calendar and diagonal spreads come to mind (i.e., sell a short-dated option and buy a far-dated option). You are betting against movement (negative Gamma) over a span of time you don’t think the market will move (e.g., Thanksgiving). And, you are betting on movement (positive Gamma) over a larger span of time (e.g., after Thanksgiving) where decay may not be as accelerated.

Graphic: Retrieved from Trading Volatility, Correlation, Term Structure and Skew by Colin Bennett et al. Originally sourced via Academia.edu.

Ultimately, counterparties’ response to new demands for protection, if something bad happens later, would exacerbate movement and aid in the repricing of IVOL.

At that new IVOL level, there would be more stored energy to catalyze a rally and this letter would express that.

To sell downside volatility (or puts) at this juncture (with time) is a poor trade. To sell downside volatility as part of a larger, more complex structure could be a good trade (e.g., sell a call spread to finance an ultra-wide SPX put ratio spread).

It all depends on structure and management.

Technical

As of 6:45 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a positively skewed overnight inventory, outside of the prior-range and -value, suggesting a potential for immediate directional opportunity.

Our S&P 500 pivot for today is $4,000.25. 

Key levels to the upside include $4,027.00, $4,051.00, and $4,069.25. 

Key levels to the downside include $3,985.00, $3,965.25, and $3,923.00.

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

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 writes options market analyses at SpotGamma and is a Benzinga journalist. 

His past works include private discussions with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, the infamous Sam Bankman-Fried of FTX, former Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, the Lithuanian Delegation’s Aušrinė Armonaitė, among many others.

Contact

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

Disclaimer

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

Categories
Commentary

Daily Brief For November 10, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 1,200+ that read this report daily, below!

Subscribe
Graphic updated 8:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. 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

Yesterday, this letter unpacked the events surrounding recent crypto-market turmoil. There were some loose ends we will continue to clean up below and in the coming letters.

Fundamental

As a recap, the “seemingly untouchable” FTX.com (CRYPTO: FTT) is on a path toward bankruptcy online reports appear to show. In short, the firm has a shortfall of ~$8 billion prompting investors like Sequoia Capital to write down the full value of their investments in FTX.com and FTX.US, the latter of which owns names like Blockfolio and LedgerX, and is allegedly “unaffected by its parent company’s liquidity.”

Graphic: Retrieved from Litquidity’s Exec Sum newsletter.

It’s the case that, unlike what I was explained to by Sam Bankman-Fried (SBF), with FTX.com (not FTX.US which is required to hold customer assets 1:1) there is counterparty risk, of sorts. 

As well put by Bloomberg’s Matt Levine, there’s a timing problem that’s “connected to a real economic risk.” The safety provided by “systems that automatically liquidate trades” was overwhelmed by the dangers of volatility and a simultaneous bank run.

The complicated part is as follows: “whereas the basic model of Coinbase Global Inc (NASDAQ: COIN) is ‘they buy Bitcoin (CRYPTO: BTC) for you and put it in an envelope,’ the basic model of FTX has to be ‘they lend your money to buy crypto and then make use of your crypto to get money.’ In financial terms, they … rehypothecate your collateral; you can’t expect them to just keep it in an envelope if they’re lending you the money” for leveraged trading.

Accordingly, “[t]he reason for a run on FTX is if you think that FTX loaned Alameda [Research, a trading firm also founded by SBF], a bunch of customer assets and got back FTT in exchange. If that’s the case, then a crash in the price of FTT will destabilize FTX. If you’re worried about that, you should take your money out of FTX before the crash. If everyone is worried about that, they will all take their money out of FTX. But FTX doesn’t have their money; it has FTT and a loan to Alameda. If they all take their money out, that’s a bank run.”

“[D]ue to recent revelations,” Binance Holdings Ltd’s (CRYPTO: BNB) founder Changpeng Zhao (CZ) was prompted to sell large FTT holdings. “People worried that this would tank the price of FTT and put pressure on FTX, so they started withdrawing money from FTX. FTX didn’t have the money, and SBF started calling around asking for a loan or a bailout.”

The proposed bailout has since been withdrawn and CZ established some major takeaways as a result of the event: “1: Never use a token you created as collateral [and] 2: Don’t borrow if you run a crypto business. Don’t use capital ‘efficiently’. Have a large reserve.”

Now that the deal has fallen through, Coinbase’s CEO Brian Armstrong says it is likely users of FTX will “take losses.”

In summary, Alameda and FTX were far closer than they appeared. Alameda tapped into some large reserves of FTT and used them as collateral when borrowing customer funds from FTX. 

Per The Milk Road: If “Alameda’s investments go south, or the FTT collateral starts to dump in value, then Alameda goes down, and it pulls FTX down with it.”

Some Knew Earlier Than Others:

A fall in volumes and market share, “splintered attention”, the departure of executives including but not limited to FTX.US’ Brett Harrison and Alameda’s Sam Trabucco, “market manipulation allegations,” and “bad bull market decisions” such as partaking in NFT community “Doodles’ insane $54 million raise,” were some of the reasons prompting users to turn on FTX early.

Potential Follow-On Implication:

As Kai Volatility’s Cem Karsan puts eloquently, “[T]he collapse[s] of crypto will increasingly feed the [fire] of more traditional populism as its promise as a solution to the populism that fueled its ascent fades, leaving anger in its wake.”

That’s a narrative Karsan has maintained for as long as I can remember. Back in 2021, he and I spoke about the revolutionary technology of blockchain and its “broad association [and] use for cryptocurrency [being] tied up in the liquidity bubble that exists across all assets.”

Read the Daily Brief for November 9 to better understand this “liquidity bubble that exists across all assets.”

On the heels of scrutiny that was likely to come with some collapses, Karsan said there would likely be no “clear window where cryptocurrency is not subject to constraints,” adding that it’s likely “we move towards a digital dollar.”

Graphic: Retrieved from Bloomberg.

Circle (CRYPTO: USDC) co-founder and CEO Jeremy Allaire noted, too: 

“Once again, it’s moments like these that require all of us to hold crypto to a higher standard, a standard with greater transparency and accountability, enshrined in practice and in law,” adding that “Circle has no material exposure to FTX and Alameda.”

A ‘Good Practice For Indie Traders’: 

Independent volatility trader Darrin Johnson suggests traders “[s]weep excess cash into short-term T-notes or [money-market] accounts.” In case of some catastrophic events, “securities will be reimbursed at a higher notional value than cash.”

FTX’s Roadmap ‘For The Next Week’:

An online whistleblower shared messages allegedly sent by SBF to employees. 

In short, SBF’s “number one priority, right now, is to do right by customers.” To do so requires “a raise” which “may end up being a combined FTX Int[ernational] and FTX.US infusion.” Without a cash injection, the company would likely file for bankruptcy.

It’s reported SBF et al transferred ~$4 billion in FTX funds (e.g., customer deposits) to help buoy Alameda Research after severe losses including a $500 million loan agreement with Voyager.

Technical

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

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

Any activity above the $3,752.25 HVNode puts into play the $3,801.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $3,838.25 and $3,871.25 LVNode, or higher.

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

Any activity below the $3,752.25 HVNode puts into play the $3,727.00 VPOC. Initiative trade beyond the latter could reach as low as the $3,685.00 VPOC and $3,638.25 LVNode, or lower.

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

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

Considerations: Futures tied to the S&P 500 are trading within close proximity to a blue line in the above graphic. This blue line depicts a volume-weighted average price (VWAP) anchored to price action following the release of consumer price data on September 13, 2022.

The VWAP metric is highly regarded by chief investment officers, among other participants, for the quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Should the S&P 500 auction away from this level, and come back to it, a prudent response is to fade. If the price is above the VWAP, and it auctions lower, into the VWAP, traders would buy. On the other hand, if the price is below the VWAP, and it auctions higher, into the VWAP, sell.

At this time, the S&P 500 is near VWAP offering traders lower (directional) opportunities.

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, 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 November 9, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 1,200+ that read this report daily, below!

Subscribe
Graphic updated 8:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

A crypto-market leader and a lender of last resort – FTX – co-founded by Sam Bankman-Fried (SBF) was little questioned by many. It appears, however, that the company had growing pain points.

Events are developing quickly, too add. Here is a note that SBF issued to investors after entering into a nonbinding agreement with Binance.

Graphic: Retrieved from @gurgavin on Twitter. Read the story on The Block.

In short, there’s little substance.

Let’s go through the motions and start unpacking this debacle. Should we have loose ends, we’ll address those in the coming days.

In late December of 2021, I spoke with SBF regarding his background and aims with FTX. The resulting work was published on Benzinga.com, where I continue to work part-time as a writer and project lead.

Graphic: Retrieved from Renato Leonard Capelj. On the top is Renato Leonard Capelj. On the bottom is SBF.

In short, SBF is an MIT alumnus who started in finance at Jane Street, a trading firm and liquidity provider. Eventually, he saw an opportunity elsewhere; there were spot price inconsistencies across cryptocurrency exchanges.

SBF then founded the firm Alameda Research in 2017. A focus, there, was to extract premiums to spot via arbitrage. SBF et al would purchase Bitcoin (CRYPTO: BTC) domestically, send it to foreign exchanges to sell at higher prices, and, then, convert and wire the funds back. 

​​“You do have to put together this incredibly sophisticated global corporate framework in order to be able to actually do this trade,” SBF said in one conversation. “That’s the real task, the real hard part.”

In light of some frustration with existing exchange offers, SBF founded FTX.com and FTX.US parent FTX Trading Ltd. As late as September 2022, FTX was seeking $1 billion at a value of $32 billion. The firm was looking to become a one-stop-shop for retail and institutional market participants such as FTX brand ambassador and spokesperson Kevin O’Leary who I talked to just prior to my interview with SBF.

“If you’re being compliant internally and also with regulators in each jurisdiction you operate in, you don’t have the option to be off-sides,” O’Leary explained to me on FTX building one of the larger infrastructures institutions’ compliance departments could easily “work with and external auditors can audit.”

Eventually, the exchange grew to become a major player.

FTX was a top-five exchange, adding market share through acquisitions of players like Blockfolio and LedgerX, as well as building a reputation of transparency, or so it appeared, through its work with regulators.

Adding, SBF said to me he wanted FTX to cater to other asset classes and “become a global liquidity venue across the board.” In mid-to-late this year, FTX added stock trading via no-fee brokerage accounts, a follow-through on his vision.

The expansion narrative cooled, however. There was the collapse of the TerraUSD stablecoin, Celsius Network, Three Arrows Capital, and Voyager Digital, which FTX’s subsidiary in the US, FTX.US, won assets to in an auction this year.

At the surface, it appeared FTX was “seemingly untouchable,” as Immutable Holdings’ Jordan Fried explained online. Check out my last chat with Jordan Fried, here.

However, “cracks started to appear [and] people in crypto were taking notice”; the CEOs of both Alameda Research and FTX.US stepped down. Fried added that the situation worsened when Alameda Research’s balance sheet was leaked.

The firm had $14.6 billion in assets (nearly $4 billion in FTT, which is FTX’s utility token, and about $2 billion in FTT token collateral) against $8 billion in liabilities.

“Binance owns a bunch of FTT themselves and, two days ago, Changpeng Zhao (CZ) [who is the] founder of Binance, [said] that SBF … could be lobbying to get regulators to help out FTX more than Binance.” In response, CZ was to “dump all $2 billion of FTT” Binance was holding.

This coincided with a large selling pressure on the FTX utility token. With Alameda Research having ~50% of their assets in FTT, Fried says, “they were dead in the water”. A run appeared likely and, with FTX and Alameda Research’s dealings so intertwined, “the failure of one meant the failure of another.”

On the heels of billions in withdrawals, users weren’t “getting their cash” and, ultimately, in SBF seeking to protect users’ assets, FTX entered into a strategic transaction with Binance.

The follow-on impacts of this week’s events, during which SBF saw a ~90% wipeout of his wealth, can be speculated on. Apparent losers include SoftBank Group Corporation’s (OTC: SFTBY) Vision Fund, the Ontario Teachers’ Pension Plan, and Tiger Global Management.

Some, including Arthur Breitman of Tezos (CRYPTO: XTZ), mulled the impact of FTX’s potential divestment from Solana (CRYPTO: SOL) which “took a drubbing Tuesday,” along with just about every other crypto token including Bitcoin.

Graphic: Retrieved from Bloomberg.

Noteworthy are the impacts of this crypto-market turmoil in equities. As I stated in a note to SpotGamma subscribers yesterday, following “news of a liquidity crunch at FTX, when the selling accelerated in FTT [] and Bitcoin, so did the selling in the S&P 500.”

“The bottom, in all three products, happened at 2:30 PM ET.”

Graphic: Retrieved by Physik Invest from TradingView.

I add that these products – S&P 500 (INDEX: SPX) and Bitcoin – have traded in sync and held positive correlations.

In short, both are recipients of the same risk-on and -off flows. Easy monetary policies cut financial asset volatility and pushed market participants into riskier investments. In short, it was easier to borrow and make longer-duration bets on ideas (e.g., crypto and Ponzi-like DeFi, growth, risky private equity investments) with a lot of promise in the future. 

Financial asset investments were more attractive. That’s, in part, why we saw asset inflation early on in 2020 when policymakers embarked on historic interventions.

Monetary authorities cut interest rates and bought bonds, all the while money was sent to people. Risk assets were the first to respond. Then, as the economy reopened, demand picked up, supply chains tightened, and prices in the real economy inflated.

As we added on Monday, de-globalization and persistent supply chokepoints (e.g., Ukraine and Russia) have done little to help. Inflation remains a problem and investors are seeking safety amid Fed intervention. 

Financial assets are in less demand while real assets are in more demand. A disruption (or reversal) in these policies puts at risk the prevailing carry regime. A stock and crypto market drop is, in part, the result of an unwind in carry. 

The drop is a deflationary shock, precisely what policymakers are seeking, per Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar who says inflation is a structural issue, and “we [have] to generate a round of negative wealth effects to lower demand such that it becomes more in line with the new realities of supply.” 

As we established on Monday, that invokes “collateral damage to the US economy,” S&P Global Inc (NYSE: SPGI) economists have put forth “as households and businesses pull back spending and investment.” 

For example, just announced today, Meta Platforms Inc (NASDAQ: META), which became wrapped up in the speculativeness of the early 2020s reaching beyond the crypto markets, hence the name change from Facebook Inc, is seeking to cut 11,000 jobs.

Per Bloomberg, “the macroeconomic downturn, increased competition, and ads signal loss have caused [] revenue to be much lower than expected.”

Ultimately, a deflationary pulse manifesting disinflation in consumer prices may prompt the policymakers to reverse on rates and efforts like quantitative tightening (QT), the (out)flow of capital from capital markets.

We’re seeing demand erode and many businesses starting to suffer the effects of a switch to “just-in-case” from “just-in-time,” according to S&P Global Inc. Inventories (which are to be sold at a loss) are piling up and workers are needed less.

That’s a recession.

Graphic: Retrieved from Bloomberg. “The overhang is leading to canceled orders, a sharp slowdown in global trade growth and stagnating factory activity. On one hand, it’s good that logistics networks are seeing relief from the logjams that plagued the start of 2022 — ocean-shipping rates have tumbled close to pre-pandemic levels and delivery times are shortening.”

This said, the “risk of recession, whether it is real or merely implied by an inversion of the yield curve, won’t deter the Fed from hiking rates higher faster or from injecting more volatility to build up negative wealth effects.”

“Rallies could beget more forceful pushback from the Fed,” which is a concern given the poor performance in implied volatility (IVOL) that’s resulted in participants’ disinterest in maintaining their hedges this year; equities’ left tail is growing.

Graphic: Retrieved from Bloomberg. Initially created by QVR Advisors. “When shares drop, demand for fresh protection remains subdued given the unusually thin positioning among big money. At the same time, put owners quickly book profits, often leading to a drop in implied vol.

In summary, there’s no longer “a disinterest and unimportance to cash flows.” The commitment to reducing liquidity and credit has consequences on the real economy and asset prices which rose and kept the deflationary pressure of policies at bay.  

It is elevated volatility and persistent declines that are to prompt investors to lower their selling prices in risk(ier) assets (e.g., options bets, metals, cryptocurrency and stablecoins, equities, bonds), and compete for cash.

Positioning

Based on traders’ current positioning, the market, absent exogenous shocks, is more so prone to sharp upside reversals and a slow(er) grind lower.

As the former Bridgewater Associate Andy Constan explained to me once, therefore, you “want Deltas and leverage” via options trades that are defined risk and two-to-four months out in maturity.

We shall go more into this, later.

Technical

As of 8:45 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 negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

If above the $3,828.75 HVNode, the $3,874.25 HVNode is in play. Initiative trade beyond the latter could reach as high as the $3,909.25 MCPOC and $3,936.25 ONH, or higher.

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

If above the $3,828.75 HVNode, the $3,806.25 LVNode is in play. Initiative trade beyond the latter could reach as low as the $3,787.00 VPOC and $3,727.00 VPOC, 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 July 20, 2022

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

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

Fundamental

Thanks to all the subscribers who have signed up in the past few days. Not sure how you got here so thank you! Also, thanks to whoever may have shared the letter to make that happen!

From here, you can expect in-depth commentaries on aspects like fundamentals, technicals, and positioning. Insights are actionable as they help me protect and grow my own capital!

Without further delay, below is what you need to know for today!

In the news was Netflix Inc’s (NASDAQ: NFLX) post-earnings jump on better-than-expected subscriber loss numbers, the Russians and Europeans agreeing on gas pipelines, mortgage boycotts spreading across China, tight food supplies, gas prices falling to some of the lowest levels in months, and China warning against a Taiwan visit by the U.S.

View: Earnings calendar.

Further, after our July 19 remark on incredibly strong pessimism likely to serve as a contrarian signal, the equity indexes pushed higher, following through key multi-week resistance.

Key levels quoted held nearly to the tick. Now, both the Nasdaq 100 (INDEX: NDX) and S&P 500 (INDEX: SPX) are above their 20- and 50-day moving averages. The Russell 2000, a laggard, made it above the 200-day moving average.

Graphic: Retrieved from Bloomberg.

The speed and ferociousness of the rally have more to do with how participants were positioned – in light of what seemed to be a worsening fundamental situation – into the break of some very visual resistances, discussed in prior letters. Read the next section for more on the positioning.

Graphic: Retrieved from Bloomberg.

Cryptocurrencies, which were recipients of the same risk-on flows equities saw, too, went higher yesterday. Per CoinMetrics data, Bitcoin’s (CRYPTO: BTC) correlation to equities is positive.

Graphic: Retrieved from Bloomberg.

For context, asset volatility had fallen on participants’ extension of moneyness to nonmonetary assets, given easy monetary policies and an environment of ample debt and leverage. These policies made it easier to borrow and make longer-duration bets on ideas with lots of promise.

This had consequences on the real economy and asset prices, accordingly, which rose and kept deflationary pressures at bay. The distinction between economies and financial markets blurred.

When the reverse happens – tighter liquidity and credit – and volatility eventually rises, demand (and competition) for money (or cash) deflates assets (e.g., equities, crypto, and the like).

Graphic: Via Schroders plc (OTC: SHNWF). Taken from the Weekly S&P 500 ChartStorm.

With U.S. market liquidity, as well as the dollar’s role as a global reserve currency, putting U.S. markets and the S&P 500 at the center of the global carry regime, a U.S. stock market drop is a recession and the direct reflection of the unwinds of carry.

It is the manifestation of a deflationary shock, and today’s sentiment reflects this.

Graphic: Retrieved from Layoffs.fyi Tracker.

Ultimately, a deflationary pulse manifesting disinflation in consumer prices may prompt the Fed (Federal Reserve) to reverse on rates and quantitative tightening (QT), the (out)flow of capital from capital markets.

Graphic: Graphic: Via Bank of America Corporation (NYSE: BAC). Retrieved from Bloomberg. “The previous low on this measure came five months before the final market low, but again this could be taken as evidence that the market has already taken enough evasive action.”

Positioning

The continued sale of volatility (as long volatility trades have not panned out), particularly across shorter time horizons, left those, on the other side, warehousing long volatility (a sort-of naive thing to say bluntly as we’re discounting customer trades being paired off with each other).

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

Nonetheless, these liquidity providers’ positions, all else equal, will maintain or increase in value if underlying(s) realize volatility (especially that far in excess of implied). To (re)hedge, those on the other side will do less to add realized (RVOL) volatility and more to suppress implied (IVOL).

Graphic: Via Banco Santander SA (NYSE: SAN). Into strength (weakness), counterparties’ long call exposures will increase (decrease) in value. To re-hedge, counterparties will buy (sell) weakness (strength).

Moreover, with RVOL creeping (and exceeding, at times) the IVOL, short volatility structures, particularly if unhedged and across short time horizons, are not doing good. The unwinding of these structures can add fuel to the directional resolve (e.g., if the customer buys back a short call, the liquidity provider sells their long call and buys back their short equity to re-hedge).

Hence, options structures that we said may be good to take advantage of the “smiley” skew (e.g., zero- or low-cost call ratio spreads) are performing much better.

Graphic: Updated 7/18/2022. Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim. Skew resembles more of a smile, rather than a smirk.

Technical

As of 6:45 AM ET, Wednesday’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 $3,943.25 HVNode puts into play the $3,982.75 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,016.25 HVNode and $4,055.25 LVNode, or higher.

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

Any activity below the $3,943.25 HVNode puts into play the $3,909.25 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $3,867.25 LVNode and $3,829.75 MCPOC, or lower.

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

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

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

Definitions

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

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 12, 2022

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

Subscribe
Graphic updated 7:00 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. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

The top headlines are on the inflation conjectures, the depth and breadth of the energy crisis, supply constraints, EUR/USD parity, geopolitical unrest, and global economic slowing.

Graphic: Via Bloomberg. Dollar surge, European growth path, waning demand, and increasing supply weigh on copper, a bellwether of the world economy.

A boiling point, if not already, is soon to be reached, in short.

For instance, the energy crisis, which is, in part, the result of earlier capacity erosion, short-term triggers, and panic, is expected to worsen according to the International Energy Agency (IEA).

Per Goldman Sachs Group Inc (NYSE: GS), a “full interruption to Russian flows to Europe would be equivalent to a 35% supply shock to the European gas market.” 

Graphic: Retrieved via The Market Ear. Via Goldman Sachs Group Inc (NYSE: GS). “[W]e estimate bills would increase by c.65% from here in this event, bringing the total household cost for power and gas to nearly €500/month, creating a meaningful affordability problem. Versus the summer-2020 trough, we estimate that gas/power bills would have increased by nearly 300% on this basis.”

What does this mean for the markets we’re focused on day-to-day in this letter?

Well – and this is pursuant to the Daily Brief for Monday, July 11 – markets have only suffered through compression in multiples. Does it stop or is there a looming earnings compression?

Most likely there is an earnings compression. For now, it is only sentiment that is taking the hit. 

Graphic: Retrieved via The Market Ear. Taken from FactSet Research Systems Inc (NYSE: FDS). 

When will the turn occur?

As stated yesterday, it will be the earnings season that is likely to shed clarity on the answer all the while – what is known right now – a strong dollar is for sure to translate into a headwind for S&P 500 earnings growth.

Graphic: Via Bloomberg. The “Fed is still perceived as having more room to hike rates going forward, also on the back of the strong US jobs report for June,” Unicredito SPA (OTC: UNCRY) analysts explained. “On the other hand, other central banks, such as the ECB and the BoE, might be forced to become more prudent, given the more direct exposure their respective economies have to the gas and energy crisis.”

What’s lending to the dollar’s strength?

Let’s start with the following. Participants were extending moneyness to nonmonetary assets, given easy monetary policies and an environment of ample debt and leverage (which cuts into asset price volatility). 

Graphic: Retrieved from The Market Ear. Via Morgan Stanley (NYSE: MS).

When the reverse happens – tighter liquidity and credit – and volatility eventually rises, the demand (and competition) for money (or cash) deflates assets.

Graphic: Via Citigroup Inc (NYSE: C). According to Joseph Wang, amidst asset price volatility and bank deposits to drain about $1 trillion or so by year-end, investors will “continue to lower their selling prices to compete for the cash they want.”

It is a deflationary pulse manifesting disinflation in consumer prices, that will prompt the Fed to reverse itself on rates and quantitative tightening (QT).

What does this mean?

Depends on the timeframe. 

Though the policy pivot may come alongside a peak in the de-rate markets are experiencing, now, longer-term there are multi-decade trends brewing on the back of the de-globalization pulse, for instance, and a tendency to spend wealth, instead of creating it (as supply chains are replicated here at home), is inflationary which makes the context for a more two-sided market in the future (rather than straight up or down).

Read: Former Bridgewater Associate talks recession odds, capturing a macro edge.

What about the dollar?

With the Fed “still perceived as having more room to hike rates going forward,” per Unicredito SPA (OTC: UNCRY), all the while “other central banks, such as the ECB and the BoE … [are] more prudent, given … the[ir] gas and energy crisis,” short-term dollar strength does more to diminish the global reliance on the U.S.

This is explained even better by Lyn Alden of Lyn Alden Investment Strategy.

The dollar is the dominant currency for carry primarily due to easy monetary policies removing the risk of an ultra-strong dollar. Accordingly, the dollar is “the currency that most offshore debt is denominated in all over the world,” as explained by Bankless, who interviewed Alden.

“Non-US entities make dollar-based loans and transactions in pretty much all markets everywhere because it’s considered more trustworthy than native fiat,” they add. “When there’s a disruption in global cash flows, there’s effectively a short squeeze on the dollar.”

“The stronger the dollar gets in comparison, the less tenable it becomes as a global reserve,” and that is a pressure on the long-term trajectory of that currency.

Positioning

Yesterday’s letter was spot on with respect to positioning.

We can speculate as to where the market may move next, after the release of inflation figures, this week. What’s likely is that, even if the print is hot, the first move is to be structural, per Kai Volatility’s Cem Karsan.

“A function of inevitable rebalancing of dealer inventory post-event. The second move and final resolution, if you wait for it, is usually tied to the incremental effects on liquidity (QE/QT).”

Rising inflation probably bolsters the Fed’s backing of a 75 basis point rate hike on July 27. So, don’t fight the Fed. Rising rates and the withdrawal of liquidity prompts a continued de-rate.

Knowing this, the “flattening in the downside fixed strike skew, while the upside wings [are] more smiley,” as described by JPMorgan Chase & Co (NYSE: JPM), has made for attractive low-cost spread opportunities, as talked about yesterday and in the July 8, 2022 letter.

The moral is as follows: own volatility where the market is likely to not expire. Sell it where the market is likely to expire. Just because implied (IVOL) volatility is at a high starting point does not mean it should be sold, blindly.

Read: Explanations and Applications – Moontower on Gamma.

Technical

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

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

Any activity above the $3,830.75 MCPOC puts into play the $3,867.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $3,909.25 MCPOC and $3,943.25 HVNode, or higher.

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

Any activity below the $3,830.75 MCPOC puts into play the $3,800.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,774.75 HVNode and $3,755.00 VPOC, or lower.

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

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

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

Example: The below 65-minute S&P 500 chart with volume profiles was included in the July 8, 2022 edition of the newsletter. Prices were near an inflection (micro-composite point of control and two key volume-weighted average price levels). From thereon, selling surfaced.

This is what is meant by responsiveness near key-technical areas.

Graphic: Updated 7/2/22. 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.

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For April 11, 2022

Hey team, you’re going to have to forgive me. Still am traveling through the rest of this month. Therefore, coverage will remain sporadic and less in-depth. Apologies and take care!

Subscribe

What Happened

Overnight, equity index futures were mixed after last week’s liquidation alongside news that the Federal Reserve was interested in sharper interest-rate hikes and balance-sheet reductions to stem inflation. 

China equities were weak on the implications of COVID-19 outbreaks, among other things. 

Some Russian entities entered into effective default, as ruled by markets. The conflict between Russia and Ukraine, that spurred crippling economic sanctions, is ongoing. 

And, in other news, some Bitcoin (CRYPTO: BTC) pundits suggest weakness in risk assets, like technology, may bring down cryptocurrency. 

Crypto prices “do not trade on the fundamentals of being peer-to-peer, decentralized, censorship-resistant digital networks designed for the transfer of money,” explained BitMEX founder Arthur Hayes on correlations with the Nasdaq 100 trading at record highs. 

Crypto “will lead equities lower as we head into the downturn, and lead equities higher as we work our way out of it.”

Ahead is data on NY Fed median 1- and 3-year expected inflation (11:00 AM ET). Fed-speak by Charles Evans (12:40 PM ET). The quarterly earnings season begins this week. Bank stocks to start reporting Wednesday, April 13.

Graphic updated 6:45 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

Fundamental: The ruling narrative, so to speak, is concerned with the management of inflation through monetary policies, credit impulse contractions, as well as the implications of Russia’s invasion of Ukraine, China’s COVID-19 actions, and beyond.

Graphic: Via The Macro Compass.

The Federal Reserve’s (Fed) roadmap for shrinking the balance sheet and raising rates was revealed in the recent release of Federal Open Market Committee (FOMC) minutes. 

“The FOMC stayed far too easy for far too long and has belatedly realized their mistake,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. 

“They are now scrambling to get policy back to neutral as quickly as they can. Once they arrive at something close to neutral, they will have to ascertain over time how far into restrictive territory they have to move to get inflation back under control.”

Graphic: Via Bloomberg.

Moreover, as talked about in past commentaries, quantitative tightening (QT) amplifies the impact of rate hikes.

Per statements by JH Investment Management, through QT, central banks remove assets from their balance sheet. This is “either through the sale of assets they purchased or deciding against reinvesting the principal sum of maturing securities.” 

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

As liquidity is removed, this may prompt risk assets to converge with fundamentals.

Graphic: Via Bloomberg. Bonds continue their losing streak. This is amid end-of-quarter rebalancing inflows; “Bonds performed so poorly in the past month that exchange-traded fund investors were forced to buy in record amounts.”

At present, via CME Group Inc’s (NASDAQ: CME) FedWatch tool, participants are pricing in a heightened probability of a half-point hike next month.

Graphic: Via CME Group Inc. FedWatch tool.

Notwithstanding, per Credit Suisse Group AG (NYSE: CS) research, there has been no meaningful breadth disconnect; breadth remains supportive of higher S&P 500 prices.

Via: Credit Suisse research. Taken from The Market Ear.

At the same time, JPMorgan Chase & Co’s (NYSE: JPM) Mislav Matejka sees continued gains in earnings while equity versus credit and bond yields are still supportive of valuations.

Positioning: Keeping this section light, today.

After quarterly rebalances and options expiries, the reduction in counterparty exposure to positive gamma freed indexes (i.e., unpinned), as expected. 

Why? 

We see counterparties as those participants who take the other side of customer trades. The collapse in realized volatility and the move higher in equity markets solicited counterparties’ decreased (increased) hedging of put (call) options. 

The naive assumption is that counterparties are short (long) put (call) protection. When implied volatility declines and underlyings move higher, counterparties have less (more) exposure to amplified losses (gains). 

To hedge, they sell into strength and buy into weakness, basically.

As participants start to concentrate their bets in shorter-dated expiries, at higher prices, counterparties take from underlying movement in their provision of liquidity. It takes an options expiry, or some exogenous event, to disrupt this balance. 

That happened at the end of last month. Since then, increases in implied volatility and lower underlying equity prices have helped pressure indexes and increase realized volatility.

Technical: As of 6:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher; activity above the $4,468.75 poor low puts in play the $4,489.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,501.00 VPOC and $4,519.75 overnight high (ONH), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,468.75 poor low puts in play the $4,444.50 weak low. Initiative trade beyond the weak low could reach as low as the $4,409.00 VPOC and $4,395.25 high volume area (HVNode), or lower.

Considerations: 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.

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

Definitions

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

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

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

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

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

About

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

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

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, 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.