The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 800+ that read this report daily, below!
Fundamental
According to Goldman Sachs Group Inc (NYSE: GS) Prime Services, this is the third largest short-covering rally in three years.
The rally, as discussed in past commentaries, is, in part, the result of “volatility-target funds” and “trend-following funds” getting back into the market as volatility falls, sentiment and data on jobs improve, as well as cooler-than-expected inflation figures.
“The machines seem hell-bent on pushing the financial conditions easing trade,” said Dennis DeBusschere, the founder of 22V Research.
“Machines are eating the words from the Fed speakers for breakfast.”
Notwithstanding, JPMorgan Chase & Co (NYSE: JPM) estimates overall CTA exposures remain subdued. To incite ultra-impactful “buy signals” the S&P 500 would have to rise to $4,400.00.
This “would prompt CTAs to step up buying” and, potentially, turn “‘max long’ on stocks, buying probably $100 billion to $200 billion across various trend-following strategies.”
Though the S&P 500 has yet to retake the $4,400.00 level, likely to remain as support until the end of the week, at least, are options hedging flows, which we talked about last week.
“That can last perhaps another 100 days if volatility stays low,” JPM’s Kate Gandolfo suggested.
For context, at least at the index level, customers are short call, long put against their equity. In a rising market, the call side solicits increased hedging on the part of counterparties.
If counterparties are long the call, and the market is rising (falling), they must sell (buy) underlying to re-hedge. This can further contain realized volatility and support the market.
To act on this information, you are best off shrinking your timeframe and using if/then statements to put on trades. For instance, if the market rises past the downtrend line in the S&P 500, then the 2022 equity bear market is over. We should bias ourselves long, at that point.
Accordingly, over a larger horizon, its growth impulses, as well as the availability of credit and liquidity determine whether a market’s movements have legs.
Accordingly, “in the 1970s, the peak in inflation proved THE timing to load up on risk assets, but the missing link is a bottoming growth cycle,” Andreas Steno Larsen explained.
“The swiftly weakening growth cycle may rather be the EXACT reason why inflation has started to fade.”
The likes of Campbell Harvey, PhD, Kai Volatility’s Cem Karsan, among others, share a similar belief.
In fact, Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar sees inflation as a longer-lasting structural issue as “the pillars of the low inflation world – [de-globalization and populism] – are changing.”
As Crossmark Global Investments’ Victoria Fernandez puts it well, “We have probably reached peak inflation, but the stickiness of the inflation that remains (i.e., rents) keeps pressure on the Fed and therefore the markets.”
“We expected a summer rally due to better-than-expected earnings, but we aren’t satisfied that this is sustainable. A soft landing is still achievable, but we still anticipate volatility with so many unknowns out there.”
Positioning
Please refer to our detailed Daily Brief for August 12, 2022. We shall add to this narrative in the coming sessions.
Technical
As of 7:30 AM ET, Monday’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.
Any activity above the $4,253.25 HVNode puts into play the $4,275.75 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,303.00 Weak High and $4,337.00 VPOC, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,253.25 HVNode puts into play the $4,231.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,202.75 RTH Low and $4,189.25 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.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.
Disclaimer
In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.
