Tag: Cathie Wood

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Commentary

Daily Brief For March 15, 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 6:15 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

As indicated yesterday, through the end-of-this week, newsletters may be shorter due to the letter writer’s commitments. Therefore, please read the Daily Brief for March 14, if you haven’t already, for a big discussion on bond and equity market volatility, as well as the odds of the market falling apart or rising, and positioning contexts that support that movement. If there are any incomplete statements below, we shall complete them in the coming letters. We’re laying it all out for awareness. Take care!

Fundamental

Headline inflation via CPI (Consumer Price Index) fell most on energy and core goods while shelter, food, and services inflation continues to be sticky. Core prices continue to be high, risking “inflationary psychology [] becoming ingrained,” Bloomberg’s John Authers explains.

Graphic: Retrieved from Bloomberg.

“There’s nothing in this report to suggest that inflation is defeated already,” explained Authers. “Not to raise the fed funds rate next week, with median inflation above 7%, would be a sign of panic,” and an acknowledgment of uncertainties with regard to the banking system, as talked about in the Daily Brief on March 14.

To note, however, contagion appears contained, despite Moody’s Corporation (NYSE: MCO) cutting its outlook for the banking system to negative from stable, and placing lenders including First Republic Bank (NYSE: FRC) on a downgrade review.

JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic did cut his equity allocation warning that not all carry trades, something this letter has talked about numerous times before (i.e., borrow at a low rate and invest in something that provides higher return), can be bailed out. Kolanovic appears worried about commercial real estate, which Simplify Asset Management’s Michael Green just told your letter writer is in a bubble that “we’re seeing crack,” finally.

Graphic: Retrieved from Bloomberg. The Federal Reserve’s new Bank Term Funding Program or BTFP is “QE in another name – assets will grow on the Fed balance sheet which will increase reserves.” Recall that QE is the flow of capital into capital markets while QT is the opposite. Q is for quantitative while E is for easing and T is for tightening.

Anyways, following yesterday’s CPI, traders price higher odds of a 25 basis point hike which puts the terminal or peak fed funds rate at 4.75-5.00%. Following this spring, factoring potential inflation plateau and financial system uncertainties, traders foresee the Fed easing. By year-end, traders expect rates to fall down to 3.75-4.00%. Recall that at the beginning of last week, there were no expectations of easing in 2023. Also, traders thought the Fed would raise as high as 5.50-5.75%.

Mortgage rates, determined by changes in the price of mortgage-backed securities or MBSs, fell too.

Graphic: Retrieved from ZeroHedge. Adding: “US layoffs [are] far higher than suggested by initial jobless claims, JOLTS.”

ARK Invest’s Cathie Wood, who your letter writer had the honor of interviewing in person for Benzinga articles, thinks we’re on the cusp of the “roaring twenties” as inflation “is likely to surprise on the low side of expectations” with the banking crisis also leading to “bad deflation.”

“Today, five major innovation platforms are evolving at the same time – multiomics sequencing, robotics, energy storage, artificial intelligence, and blockchain technology, all of which are converging,” she elaborates.

“Once the Fed stops looking backward at CPI inflation and starts addressing the deflationary banking crisis that a 19-fold increase in short rates and an inverted yield have caused, we would not be surprised to see a return to the Roaring Twenties.”

Graphic: Retrieved from Bloomberg.

On the backward-looking measures quote in the above paragraph, former Fed trader Joseph Wang notes that the Fed and central banks, in general, are aware segments of the market may break, but that won’t discourage them from tightening further.

“As the BOE saved the gilt market through purchases and kept tightening, so the Fed can save banks and keep tightening.”

Positioning

Tuesday’s letter said that following important events like CPI, the compression of wound implied volatility or IVOL, coupled with the nearing large options expirations (OpEx), sets the market up for potential short bursts of strength into the end of the month and next month.

That’s along the lines of what is happening. The S&P 500 rose mechanically after the release of CPI yesterday. Later, though the index succumbed, internally speaking the market remained strong through end-of-day, hence some short bursts boosted by some short-dated options activities, also.

As explained, yesterday, the recent re-grossing theme appears intact. Any further compression of wound IVOL and the passage of options expirations (OpEx) could support equities as month-end approaches. Though it may be too early to position for strength, one may consider it the way it was explained in the Daily Brief on March 14.

Technical

As of 6:15 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 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 $3,904.25. 

Key levels to the upside include $3,921.75, $3,945.00, and $3,970.75.

Key levels to the downside include $3,884.75, $3,868.25, and $3,847.25.

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.

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

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.

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Commentary

Daily Brief For September 28, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 970+ that read this report daily, below!

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Graphic updated 8:20 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 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, team, if the quality was lacking these past few days. Extremely busy on my end and I look forward to some detailed letters in the near future! – Renato

Fundamental

“Great powers are waging hot wars involving the flow of technologies, goods, and commodities.”

That’s according to Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar who believes that the pillars forming the context for a low-inflation world are changing, and this is setting the stage for longer-lasting structural inflation.

In short, inflationary impulses are incoming from non-linear geopolitical and economic conflicts. 

Just yesterday, Europe was investigating attacks on pipelines from Russia; there were “major leaks into the Baltic Sea from two Russian gas pipelines at the cent[er] of an energy standoff.”

“The word sabotage springs to mind,” Javier Blas of Bloomberg, said. “In a single day, the conduits, which link Russia with Germany under the Baltic Sea, have suffered not one, not two, but three separate major leaks.”

Per reports by Refinitiv, seismologists nearby registered “powerful blasts” that “do not resemble signals from earthquakes.” Instead, the explosions likely correspond with hundreds of “kilos (kg) of dynamite.”

Graphic: Retrieved from Bloomberg. 

Given that Nordstream 1 and 2 are not operational, now, the “leaks are more likely a message: [if truly the culprit], Russia is opening a new front on its energy war against Europe.” 

Accordingly, gas prices were higher but “below this year’s peaks,” Refinitiv reported. Generally, across some benchmarks, prices read “more than 200%, higher than in early September 2021.”

Separately, the Bank of England (BoE) is delaying quantitative-tightening (QT) bond sales and opting to purchase longer-dated government bonds in an attempt to restore stability, which we discussed was at risk on Monday and Tuesday.

Graphic: Retrieved from Bloomberg. Credit Default Swaps (CDSs) are a tool for investors to offload credit risk to other market participants.

As a result, after a near-vertical drop (visible below) in Gilts and British corporate bonds (which impacted mortgage lending, for one), UK yields saw some of their biggest drops on record.

Graphic: Retrieved from Bloomberg. Updated September 26, 2022.

The actions over the past few days complicate the Monetary Policy Committee’s (MPC) objective to reach a return to 2% inflation in the medium term.

Graphic: Retrieved, initially, from Bank of America Corporation (NYSE: BAC). Via The Transcript. Interest rates “may be higher for longer” than expected.

At home, here, in the US, yields on the 10-year topped 4.00%. There is a heightened chance of a Federal Reserve (Fed) bump in rates that brings the target rate to 375-400 basis points, while the UK, in stemming its inflationary pressures, is expected to bump by double that amount.

The action to stem inflation is feeding through to demand. Apple Inc (NASDAQ: AAPL) said it would ease plans to boost iPhone production “after an anticipated surge in demand failed to materialize,” a Bloomberg report said. 

“The supply constraints pulling down on the market since last year have eased and the industry has shifted to a demand-constrained market,” said Nabila Popal, research director at IDC. 

“High inventory in channels and low demand with no signs of immediate recovery has OEMs panicking and cutting their orders drastically for 2022,” a fear we said ARK Invest’s Catherine Wood shared, not too long ago.

Positioning

The beginning of the week was characterized by a sideways-to-lower S&P 500 (INDEX: SPX) and implied volatility (IVOL) metrics, such as the Cboe Volatility Index (INDEX: VIX), rising.

Per IVOL the term structure, demand for options protections seems to be concentrated in options that are shorter-dated and far more sensitive to changes in direction and volatility.

That means for large shifts in price and/or volatility, hedging ratios (e.g., Delta) shift markedly, too. This prompts “hedging feedback mechanisms in both market directions,” per SpotGamma.

Graphic: Retrieved from VIX Central. Taken from The Market Ear. Updated 9/27/2022.

Moreover, the risks are skewed to the upside, SpotGamma added. 

“For pumped-up options far from the money to retain their value, there essentially needs to be an adverse move (in price and volatility). Should nothing bad happen, the probability of these options paying out will fade, as will their exposure to direction (or Delta). [In] re-hedg[ing] decreased exposure to Delta, liquidity providers [] may provide the market with a boost.”

Graphic: Retrieved from SpotGamma. SPX prices X-axis. Option delta Y-axis. When the factors of implied volatility (Vanna) and time change (Charm), hedging ratios change. The graphic is for illustrational purposes, only.

At the same time, there appears to be some “dealer disintermediation” amid “less incentive to make deep, tight markets” due to “capital constraints,” potentially, explained SqueezeMetrics, the creator of the DIX (Dark Pool Index).

This comes after months of high average readings in DIX (likely as market-makers assembled “basket[s] of S&P 500 stocks to create ETF shares, or to hedge away the exposure of a futures contract[s]”). Typically, high DIX readings are associated with stronger 1-month market returns, particularly when put flows are strong (i.e., lower Gamma exposure readings, like now).

Graphic: Retrieved from SqueezeMetrics.

Overall, the trend change is “suggestive of some second thoughts from the [buy-the-dip] crowd, and perhaps (likely!) some deleveraging from elsewhere,” SqueezeMetrics ended.

Technical

As of 8:20 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $3,638.25 LVNode puts into play the $3,688.75 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,722.50 LVNode and $3,771.25 HVnode, or higher.

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

Any activity below the $3,638.25 LVNode puts into play the $3,610.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,554.75 and $3,506.25 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.

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 September 22, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 950+ that read this report daily, below!

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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

An easy read, today. For more complex, see the September 20 and 19 letters. Also, there will not be a letter published for Friday, September 23, 2022. See you next week, team!

Fundamental

Equity markets traded down, yesterday, on the heels of the Federal Reserve’s (Fed) decision to raise interest rates by 0.75% and “keep at it” for longer, eyeing a 1.25% jump, in sum, by 2023.

This puts the current target rate at 3.00-3.25%.

Separately, if the “keep at it” quote sounds familiar, that’s because it is. The Fed Paul Volcker’s memoir is titled “Keeping at It.”

Graphic: CME Group Inc’s (NASDAQ: CME) FedWatch Tool shows higher odds of a 75 to 100 basis point rate hike in November, along the lines of what the futures market was pricing heading into the event.

The Fed Chair Jerome Powell admitted there may be below-trend growth and the potential for unemployment to reach 4.4% next year, up from the current rate of 3.7%. Projected increases, as of yesterday, show interest rates at 4.4% by 2023, and 4.6% in 2023, before moderation in 2024 to 3.9%, as well summarized by Bloomberg.

Graphic: Retrieved from Bloomberg.

Moreover, economists suggest that raising rates to 4.5% would cost the economy nearly 1.7 million jobs while rates at 5% would bring that number to 2 million. A higher savings rate and increased funds at the state level would likely cushion the blow, however.

In response, the likes of Ark Invest’s Cathie Wood, who we quoted recently regarding her thoughts on why the Fed needs to lower the pace of tightening and/or cut, said:

“Most disappointing about the Fed’s decision today was its unanimity. None of those voting on the Federal Reserve is focused on the significant price deflation in the pipeline. The Fed seems to be making decisions based on lagging indicators and analogies.”

She adds that the Fed is setting the stage for deflation:

“The Fed is solving supply chain issues by crushing demand and, in my view, unleashing deflation, setting it up for a major pivot.”

Graphic: Initially retrieved from Bloomberg. Taken from Ophir Gottlieb who concludes costs are dropping, as observed via shipping, gasoline, manufacturing, cars, and rent measures.

Moreover, it’s the case that “[a]s rates rise and debt servicing costs increase, ‘many zombie institutions, zombie households, corporates, banks, shadow banks, and zombie countries are going to die,’” said economist Nouriel Roubini, who predicted the 2008 financial crisis. 

Prior to the Fed event, Roubini forecasted a 75 basis point hike in September, followed by a 50 basis point hike in November. The market is pricing more than what Roubini thought the Fed would probably do after Wednesday’s Fed meeting.

In his opinion, stay “light on equities and have more cash, … [as] equities and other assets can fall by 10%, 20%, 30%.”

Positioning

In short, unexpected was the post-event response. In recent times, post-Fed moves have been positive, driven by the “rebalancing of dealer inventory,” per Kai Volatility’s Cem Karsan.

That didn’t happen and let’s unpack why.

Basically, into the event, traders demanded protection and bid implied volatility (IVOL). The assumption is that counterparties, who are likely on the other end, have exposure to positive Delta and negative Gamma, which they hedge through negative Delta trades in the underlying.

Should fears have been assuaged, the supply of that protection once demanded, would have decreased IVOL (and options Delta), providing the markets a boost.

Graphic: Retrieved from SqueezeMetrics.

That didn’t happen. Instead, traders added protection, as shown by this SpotGamma graphic tracking changes in put open interest on the S&P 500 (INDEX: SPX).

Graphic: Retrieved from SpotGamma. Updated September 22, 2022.

This bid some basic measures of IVOL into the close.

Graphic: Retrieved from VIX Central. Updated September 21, 2022.

That’s as these particular options, which were added at much lower prices, as I explained in a SpotGamma note, recently, “are far more sensitive to changes in direction and IVOL.”

These options can go “from having very little Delta (exposure to direction) to a lot more Delta on the move lower,” quickly. “If we maintain that liquidity providers are short those puts, a positive Delta trade, then those liquidity providers [will sell] futures and stock, a negative Delta trade to stay hedged.”

Graphic: Retrieved from SqueezeMetrics.

Notwithstanding, it’s still the case that a “reload on fresh short-dated downside” flows heighten the risk of a “negative Delta squeeze … into month end,” said Nomura Holdings Inc’s (NYSE: NMR) Charlie McElligott. 

Therefore, “you have to consider a move up [to] $4,000.00 as part of your distribution of outcomes to the upside,” as that is near where “market makers are ‘long,’” as part of an impactful collar trade many are aware sits.

As an aside, some online conversation was sparked around placing cash into riskless trades for some small, but guaranteed, rates of return. In that conversation, Box Spreads were put forth as a solution to lend cash and earn a competitive interest rate.

For context, “Boxes allow market participants to create a loan structure similar to a Treasury bill. T-bills are ‘discount’ instruments that are purchased at a value less than the stated face value. Upon maturity, bills call for the return of the stated face value.”

“For example, one might buy a $1 million 90-day T-bill for $998,000. Ninety days later, the $1 million face or principal value is returned and the $2,000 discount is earned as interest. One may represent the rate on this transaction as a 0.80% or 80 basis point discount yield [= (360/90) x ($2,000/$1,000,000)]. The effective rate on a box represents a ‘discount yield’ similar to a quoted T-bill rate.”

Graphic: Retrieved from boxtrades.com.

IPS Strategic Capital’s Pat Hennessy explains that SPX boxes “typically yield[] 20-40 bps above [the] corresponding maturity risk-free rate.” Additionally, there are tax advantages to using the S&P 500’s 1256 contracts. 

For easier fills, use the “3K/4K line in an AM settled expiry,” Hennessy noted. “Helps if you know where the broker market is.”

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 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 $3,826.25 HVNode puts into play the $3,857.25 HVNode. Initiative trade beyond the latter could reach as high as the $3,893.00 VPOC and $3,936.25 ONH, or higher.

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

Any activity below the $3,826.25 HVNode puts into play the $3,770.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,722.50 LVNode and $3,688.75 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 September 19, 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 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. 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

Slow start to the week with some color on statements made in last week’s detailed newsletters, like the one published on September 16, 2022. 

As an aside, some updates are coming to this letter’s format and you will be in the loop on what those are and why, shortly.

Fundamental

This is the season for volatility. The S&P 500’s (INDEX: SPX) monthly realized volatility, over a period spanning 1928 to 2021, has historically been high during this part of the year.

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

Adding to the volatility are uncertainties with respect to the macro environment. For example, last week we discussed the implementation of contractionary monetary policies for reducing inflation and growth. 

Read the Daily Brief for September 16, 2022, for detail on rates, quantitative tightening (and its impact on lending and market liquidity), as well as positioning and beyond.

Given the lagging data policymakers input into their decision-making, versus what non-lagging indicators are showing the likes of Catherine Wood and Elon Musk, “deflation is in the pipeline,” and the Fed may hike into a “deep recession,” as BlackRock Inc (NYSE: BLK) strategists put.

Per Andreas Steno Larsen, in the latest Consumer Price Index (CPI) report, which had traders pricing increased odds of a 100 basis point hike to interest rates, shelter costs did much of the “heavy lifting.”

Graphic: Retrieved from Bloomberg via Michael J. Kramer. Based on where rates are at, the market may still be too expensive.

The MoM shelter costs were up in excess of 0.7%. Notwithstanding, the “[c]ost of shelter is the most lagging variable in the basket,” all the while the “shelter index in the CPI basket lags the housing price development by up to 18 months.”

As a result, this means drops in rents and home prices could “take more than a year for the CPI methodology to” account.

Graphic: Via Morgan Stanley (NYSE: MS) research.

These aforementioned comments, coupled with reports issued by the National Federation of Independent Business, boost the cases of those claiming inflation has peaked, such as Musk and Wood. 

Steno Larsen puts forth that “most analysts and newsletter-sellers … missed the most important inflation print of the week, namely the NFIB price plan survey” which bolsters the case for prices reaching their “new highs in YoY terms.”

Graphic: Retrieved from Andreas Steno Larsen.

Positioning

Pointing readers back to the September 16, 2022 letter for contexts on the positioning. 

Further, it is essentially the case that “2022 is a put-weighted regime [and] returns are negative into options expiration (OPEX) and positive after,” explained SpotGamma on Sunday.

The impact of OPEX is so staggering that “flipping to cash” the week of expiry nets far better returns than holding S&P 500 without any adjustments.

More on this, later!

Graphic: Retrieved from SpotGamma and Saqib Iqbal Ahmed.

Technical

As of 6:45 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, outside 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 $3,857.25 HVNode puts into play the $3,909.25 MCPOC. Initiative trade beyond the MCPOC could reach as high as the $3,935.00 VPOC and $3,964.75 HVNode, or higher.

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

Any activity below the $3,857.25 HVNode puts into play the $3,826.25 HVNode. Initiative trade beyond the latter could reach as low as the $3,770.75 HVNode and $3,722.50 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: A feature of this 2022 down market was responsiveness near key-technical areas (that are discernable visually on a chart). This suggested to us that technically-driven traders with shorter time horizons were 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.

That’s changing. The key levels, quoted above, are snapping far easier and are not as well respected. That means other time frame participants with wherewithal are initiating trades. 

Those are the participants you should not fade.

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 September 16, 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 6:50 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.

Administrative

A longer note so stick with me!

Updates are pending for the above dashboard. Exciting! Beyond this, the newsletter is getting a revamp in other parts. If you have any feedback on what should be changed, please comment!

Also, I am going to refer everyone to a conversation between Joseph Wang and Andy Constan, as well as some updates Cem Karsan of Kai Volatility made (HERE and HERE). That is, in part, a primer for what we will be talking more about, soon.

Fundamental

Talked about yesterday was the prospects of contractionary monetary policy reducing inflation and growth. BlackRock Inc (NYSE: BLK) strategists, even, put forth that a “deep recession” is needed to stem inflation. In short, “there is no way around this,” they claim.

Graphic: Retrieved from The Market Ear. FedEx Corporation (NYSE: FDX) sold 20% on warning about the global economy.

From thereon, we talked about how rates rising would “bring private sector credit growth down,” as well as “private sector spending and, hence, the economy.”

Based on where rates are at, the market may still be too expensive.

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.”

On the other hand, some argue inflation peaks are in. ARK Invest’s Cathie Wood suggests “deflation [is] in the pipeline, heading for the PPI, CPI, PCE Deflator.” 

Tesla Inc’s (NASDAQ: TSLA) Elon Musk added that he thinks the Federal Reserve (Fed) may make a mistake noting “a major Fed rate hike risks deflation.” Musk suggested the Fed should drop 0.25%, basing his decision on non-lagging indicators, unlike the Fed.

That’s not in line with what CME Group Inc’s (NASDAQ: CME) FedWatch tool shows. Through this tool we see traders pricing an 80% chance of a 0.50-0.75% hike, all the while quantitative tightening (reducing Fed Treasuries and mortgage-backed securities holdings) accelerated on September 15. 

UST and MBS will roll off (which could turn into “outright sales”) at a pace of $95 billion per month, now, increasing competition for funding among commercial banks, and bolstering borrowing costs, as explained, below.

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.

According to Bank of America Corporation (NYSE: BAC), since 2010, nearly 50% of the moves in market price-to-earnings multiples were explained by quantitative easing (QE), the inverse of QT, through which the Fed (or central banks, in general) creates credit used to buy securities in open markets, MarketWatch explains.

Graphic: Retrieved from the Federal Reserve Bank of Richmond. “The Fed Is Shrinking Its Balance Sheet. What Does That Mean?”

The “purchases of long-dated bonds are intended to drive down yields, which is seen enhancing appetite for risk assets as investors look elsewhere for higher returns. QE creates new reserves on bank balance sheets. The added cushion gives banks, which must hold reserves in line with regulations, more room to lend or to finance trading activity by hedge funds and other financial market participants, further enhancing market liquidity.”

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

The liability side of the Fed’s balance sheet is what “matters to financial markets.” 

Thus far, “reductions in Fed liabilities have been concentrated in the Treasury General Account, or TGA, which effectively serves as the government’s checking account” to run the day-to-day business.

Given that we’re talking about balance sheets, here, Fed liabilities must match assets. Thus, a rise in the TGA must be accompanied by a decline in bank reserves (which are liabilities to the Fed). This, as a result, decreases the room banks have to “lend or to finance trading activity by hedge funds and other financial market participants, [which] further [cuts into] market liquidity.”

With the Treasury set to increase debt issuance, boosting TGA, it will effectively take “money out of the economy and put[] it into the government’s checking account.” The linked reduction in bank deposits and reserves bolsters “repurchase agreement rates and borrowing benchmarks linked to them, like the Secured Overnight Financing Rate,” per Bloomberg.

Graphic: Retrieved from the Federal Reserve Bank of New York. “The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.”

Adding, this may play into “an additional tightening of overall financial conditions, in addition to the increase in the main fed funds rate target that the central bank intends to continue boosting.”

This will “put more pressure on the private sector to absorb those Treasurys, which means less money to put into other assets” that may be riskier, like equities, said Aidan Garrib, the head of global macro strategy and research at Montreal-based PGM Global.

Positioning

As of 6:50 AM ET, Friday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.44%. Net gamma exposures decreasing may promote generally more expansive ranges.

Graphic: Via Physik Invest. Data retrieved from SqueezeMetrics.

Given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of options structures.

This is as there’s been a lot of speculation, particularly on the downside (put options), setting the stage for a more volatile and fragile market environment, says Kai Volatility’s Cem Karsan.

“On the index level, people are not well hedged,” a departure from what the case was heading into and through much of 2022. It’s the case that heading into 2022, traders were well hedged. Into and through the decline, traders’ monetization of existing hedges, as well as counterparty reactions, “compressed volatility” realized across US equities, as explained on July 15, 2022.

This made for some attractive trade opportunities seen here.

Graphic: Retrieved from The Market Ear. “VIX has decoupled from cross-asset volatilities.”

Now, given that the go-to trade is to sell stock and puts, short interest has grown, as have other risks, associated with this activity; essentially people are “los[ing] faith in convexity and risk premia’s ability to work,” as a result of “poor performance of vol,” and, the reaction to their “pain and financial loss,” is setting the stage for tail risks heading into the Q1 and Q2 2023.

The sale (purchase) of the front (back) expirations will bolster market pinning; as SpotGamma puts forth, “the positive impact of put closers and rolls, as well as decay,” is easing the market drop. However, this “positioning likely compounds drops and adds to volatility,” in the future.

To quote: “Though the removal of put-heavy exposures can boost markets higher, too add, the positive impacts are dulled via the demand for put exposures at much lower prices.”

Graphic: Retrieved from SpotGamma.

These particular options, which are at much lower prices, “are far more sensitive to changes in direction and IVOL,” as I explained in a SpotGamma note. These options can go “from having very little Delta (exposure to direction) to a lot more Delta on the move lower,” quickly.

Graphic: Via Mohamed Bouzoubaa et al’s Exotic Options and Hybrids.

“If we maintain that liquidity providers are short those puts, a positive Delta trade, then those liquidity providers [will sell] futures and stock, a negative Delta trade to stay hedged.”

Graphic: Via Banco Santander SA (NYSE: SAN) research.

Technical

As of 6:50 AM ET, Friday’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 $3,909.25 MCPOC puts into play the $3,935.00 VPOC. Initiative trade beyond the latter could reach as high as the $3,964.75 HVNode and $4,001.00 VPOC, or higher.

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

Any activity below the $3,909.25 MCPOC puts into play the $3,857.25 HVNode. Initiative trade beyond the latter could reach as low as the $3,826.25 and $3,770.75 HVNodes, 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: A feature of this 2022 down market was responsiveness near key-technical areas (that are discernable visually on a chart). This suggested to us that technically-driven traders with shorter time horizons were 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.

That’s changing. The key levels, quoted above, are snapping far easier and are not as well respected. That means other time frame participants with wherewithal are initiating trades. 

Those are the participants you should not fade.

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.

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

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 7, 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

An incredibly busy past few months with what it seems are back-to-back historic developments.

For instance, just this week, crypto broker Voyager Digital (OTC: VYGVF) filed for bankruptcy. “Impaired” will be account holders who likely won’t be “getting back exactly what they’re owed,” as reported by Bloomberg.

This is on the heels of crypto market volatility affecting some of Voyager’s largest borrowers like Three Arrows Capital, an embattled hedge fund. Voyager lent deposits to these parties at rates of interest that were ultra-high. Customers were then, accordingly, paid high rates.

However, this was done under the impression that the customer holdings were liquid, easy to access, and not subject to counterparty risks. That didn’t happen. Voyager, like others, was “making a lot of unsecured or undersecured loans.”

What’s the takeaway, here? Bloomberg’s Matt Levine explains well. 

“If supposedly safe crypto brokerages keep failing and customers keep losing money, that is bad for the whole ecosystem; if your money isn’t safe with any crypto brokerage then you might just not buy crypto.”

Others in the ecosystem have continued to lever on the supposed successes of crypto. The failure of Voyager, among others, may have knock-on effects to be felt much later in the cycle.

Another historic development was the London Metal Exchange’s (LME) cancellation of billions of dollars in trades. This made whole large bettors in that ecosystem, all the while dinging liquidity providers, badly.

Some, including algorithmic fund Transtrend, left the LME as they could no longer trust it with client funds.

The question is what now? What’s the next big thing and, more importantly, will it have an impact on the traditional markets we watch?

As talked about in past analyses, it is over the last four decades that monetary policies were a go-to for supporting the economy. From that, created was “a disinterest and unimportance to cash flows.”

The commitment to reducing liquidity and credit has consequences on the real economy and asset prices, accordingly, which rose and kept the deflationary pressures of policies at bay.

It is elevated volatility, persistent declines, slower tightening processes abroad, among other things, 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.

Graphic: Via TradingView. Retrieved by Physik Invest.

This all is to continue bolstering the dollar’s surge to some of its strongest levels in years.

Graphic: Retrieved from Aksel Kibar, CMT.

As well as further douse inflation (which is likely to peak on inventories bloat and a “supply gut”) and, eventually, prompt the Federal Reserve to reverse its aggressive rate hike and quantitative tightening (QT) path.

Graphic: Posted by Joe Weisenthal. “Wheat has erased all of its gains for the year. Also, it looks like corn and soy are rolling over.”

“It is starting,” Nassim Nicholas Taleb said online. “I’ve seen gluts not followed by shortages, but I’ve never seen a shortage not followed by a glut.”

ARK Invest’s Catherine Wood, who was very early to call the peak inflation, puts forth that “If inventories and stock prices are leading indicators for employment and wages, … then fears of cost-push inflation a la 1970’s should disappear during the next six months.”

Positioning

Thus far, we’re far into a dot-com type collapse, albeit one that has happened “underneath the surface of the indices,” per Simplify Asset Management’s Mike Green, as those largest stocks still are recipients of strong passive flows.

Graphic: SqueezeMetrics’ Dark Pool Index shows a trend in heightened implicit buying support.

The upcoming earnings season is likely to shed clarity with respect to corporates’ ability to weather or pass on higher costs. It is possible, as some put forth, that there is a broad “earnings compression,” deepening the de-rate in the face of what has been a “multiple compression.”

From a positioning perspective, so awing is the absence of heightened demand for downside skew, all the while that, on the upside, is bid probably due to the reach for bets on a ferocious bear market rally.

Graphic: Posted by SpotGamma. “30-day ATM SPY IV vs the VIX and while this plot has a bit of noise it seems to very closely resemble @Nations_Indexes VIX/VOLI measurement. One interpretation here is that OTM options aren’t trading for much premium over ATM (flat skew).”

As explained yesterday, it makes sense to be a buyer of volatility, albeit via complex structures. 

For instance, buying volatility on the upside that is closer to current prices and selling that which is farther out (if bullish). And (if bearish), opting for calendars (as it is volatility in the shortest of maturities being sold heavily), back spreads, and the like.

Read: Trading Volatility, Correlation, Term Structure and Skew by Colin Bennett.

Graphic: Posted by SpotGamma. “TSLA open interest continues to decline, particularly on the put side as the stock trades near 1year lows. Interestingly at-the-money IV remains elevated to levels going back to the days of the $1200 call gamma squeeze.”

On a more granular level, after the release of the Federal Open Market Committee (FOMC) meeting minutes, participants added to their put sales and call buys, at the index level. The hedging of this does more to take from potential realized volatility. 

Graphic: Pictured is SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator.

At its core, though, the market is at a pivot and losing the $3,800.00 S&P 500 area likely does more to bolster the creep in realized (RVOL) volatility, versus that which is implied (IVOL), all else equal.

Graphic: SPDR S&P 500 ETF Trust (NYSE: SPY) historical (orange) and implied (white) volatility via Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.

Technical

As of 6:45 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 $3,859.00 overnight POC puts into play the $3,883.25 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 $3,859.00 overnight POC puts into play the $3,831.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,800.25 LVNode and $3,774.75 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.

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 June 28, 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

What Happened

Overnight, equity index futures rotated higher, along with commodities. Implied volatility was bid. Bonds were lower. 

In the news were some changes to China’s COVID policies, the European Central Bank’s (ECB) intent to follow its peers and raise interest rates in July by 25 basis points, and the Group of Seven (G-7) leaders are talking about geopolitics and placing limitations on Russia. 

At home, mortgage lenders are turning “desperate” as soaring rates roil their industry. Some are bracing for a 20% reduction in business as 30-year mortgage rates level out below 5.75%.

Pursuant to some of our analyses last week, Scion Asset Management founder Michael Burry suggested a “supply gut at retail is the bullwhip effect.” More on this, later.

Ahead is data on trade in goods (8:30 AM ET), S&P Case-Shiller U.S. home price index (9:00 AM ET), consumer confidence index (10:00 AM ET), as well as updates by Federal Reserve (Fed) members (8:00 AM ET and 12:30 PM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: Though badly timed, last year ARK Invest’s Cathie Wood said inflation would be on its way out due in part to inventory build-ups and their impact on commodity prices.

Graphic: Via Societe Generale SA (OTC: SCGLY).

At the time, she asked whether the velocity of money was depressed given pent-up savings and demand for assets, putting forth disappointing GDP updates (which grew, mostly, on the back of inventories) and slightly negative retail final sales as support for her broader thesis. 

Recall happenings in real estate – the iBuying debacle – late last year. Wood said this: 

“This is unsustainable, … and I’m wondering if even the housing market inflation is going to give way, here.”

Participants were extending moneyness to nonmonetary assets, given monetary policies and an environment of debt and leverage that ultimately cuts into asset price volatility. Ultimately, these trends bolster the risks of carry when volatility does rise and the demand for money pushes deflation, particularly in asset prices.

Read: Daily brief for May 18, 2022.

Graphic: Via the Investment Company Institute. Taken from Joseph Wang. “Investors are selling everything for cash.”

With bank deposits to drain about $1 trillion or so by year-end, that volatility is happening, now, as investors “continue to lower their selling prices to compete for the cash they want.”

Scion Asset Management’s Michael Burry nods at the “supply gut” in retail. Like Wood, he thinks that it is a deflationary pulse that manifests disinflation in consumer prices, prompting the Fed to reverse itself on rates and quantitative tightening (QT).

Read: DC’s Chartbook #16 on the “fundamental evolution in the global money markets.”

Graphic: Via Societe Generale SA (OTC: SCGLY).

That’s as Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar, who gained much attention this year on his bold market commentary, said the Fed is likely to change course as it “can only deal with nominal [and] not real chokepoints.” This is as “nominal balance sheet and liquidity trends will, at some point, clash with the realities of a garden variety of supply chain issues.”

Graphic: Via @BarnabeBearBull. “[L]ast week 18 Central Banks tightened their monetary policy (12% of all monitored CBs), including 4 of the top 9. Strongest move in a while.”

Positioning: Incredible is the still-depressed volatility skew we’ve talked about ad nauseam on.

Graphic: Via JPMorgan Chase & Co (NYSE: JPM). Taken from The Market Ear. “Overwriting longs and using the premium to buy downside protection is relatively cheaper now.”

It’s the strong supply of volatility. Participants are hedging, buying into volatility that is closer to current prices, and selling (skew) that which is farther out. 

The counterparts are long that volatility further out, which they may sell into declines, and all of this, together, “results in vol underperformance on market declines,” per Sergei Perfiliev.

Graphic: Via Physik Invest. Taken from TradingView. The top is S&P 500 (INDEX: SPX). The second, from the top, is the Nations SkewDex (INDEX: SDEX), a clearer measure of options skew. The second from the bottom is the Cboe Volatility Index (INDEX: VIX). The bottom is the Cboe VVIX index (INDEX: VVIX), a naive measure of skew.

For that reason, the volatility that the markets are realizing (RVOL) is heightened and, at times, in excess of that implied.

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “SPX 6-month realized volatility is at a level rarely seen outside of major crises; current 6-month implied volatility has been exceeded in just 3 periods since 1940.”

As said, yesterday, given these dynamics, it makes sense to lean toward owning volatility, rather than selling it. A “higher starting point” in IVOL, and a still-present right-tail (from the positioning for a bear market rally), make it so we may position, for less cost, in short-dated structures with asymmetric payouts (call and put side), precisely as we’ve been talking about for half-a-year.

Graphic: Via Pat Hennessy. “[T]he performance of short-dated 1×2 put ratios in SPX this year. Despite being short the tail, the grind lower has been well captured by this trade structure.”

In the near term, from a positioning perspective, the front-running of quarter-end repositioning flow is (and is expected), in part, to add to the equity market upside.

Graphic: Taken by Physik Invest from Interactive Brokers Group Inc (NASDAQ: IBKR) on 6/24/2022. Multi-expiry skew in the Invesco QQQ Trust Series 1 (NASDAQ: QQQ). Notice the v-shape in the shorter maturity and smirk in the longer maturity. Here’s what that means.

Technical: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the mid-to-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 $3,909.25 MCPOC puts in play the $3,943.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,982.75 LVNode and $4,016.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $3,909.25 MCPOC puts in play the $3,885.75 ONL. Initiative trade beyond the ONL could reach as low as the $3,821.50 LVNode and $3,793.25 Ledge, 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.

Balanced (Two-Timeframe Or Bracket) Trade The Status Quo: Rotational trade that denotes current prices offer favorable entry and exit. 

Balance areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

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

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.

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, 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 22, 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

Overnight, equity index and commodity futures were sideways to lower all the while bonds and volatility were bid. 

This is after participants, based on metrics included later in the letter, took the advance as an opportunity to sell at higher prices. Demanded was protection, and this bid implied volatility.

Big headlines include China sending warplanes near Taiwan after the U.S. rejected its strait claims. The Taiwanese Foreign Minister Joseph Wu wrote that the threat was “more serious than ever.” This is, also, ahead of Taiwan and U.S. officials talking about arms sales.

In other news, Congress was called on to pass a $0.184 per gallon gasoline tax holiday. Growth in job postings slowed as Q2 GDP forecasts have been revised lower, Chinese manufacturing orders declined by 20-30%, U.K. inflation hit a 40-year record, and sellers of homes are cutting prices in some of the hottest markets while the demand for adjustable-rate mortgages surges.

Ahead, the Federal Reserve’s (Fed) Patrick Harker speaks at 9:00 AM ET. Then, Jerome Powell testifies to the Senate Banking Committee at 9:30 AM ET. Later, Charles Evans speaks at 12:50 PM ET, followed by Harker and Barkin, again, at 1:30 PM ET.

Graphic updated 6:30 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: For what it is worth when it comes to talking of theory and the economy, ARK Invest’s Cathie Wood has been spot on, in many ways.

Somewhat pursuant to our detailed analysis on May 18, 2022, which talked about the impact of reduced liquidity and credit on the real economy and asset prices, Wood explained that the U.S. fell into a recession during the first quarter.

Read: Daily brief for May 18, 2022.

“If massive inventor[ies] bloat real GDP in the second quarter, they will unwind and hurt growth for the rest of the year,” she said. Last year, though badly timed, Wood said that inflation would be on its way out due in part to excess inventory which would be reflected in commodity prices.

Read: Walmart Inc’s (NYSE: WMT) inventory glut to reduce in a “couple of quarters” and how Target Corporation’s (NYSE: TGT) oversupply problem should scare all retailers.

Graphic: Via Bloomberg. “The hot commodities rally is cooling off fast as recession fears again ground and cloud the outlook for demand.”

“If inventories and stock prices are leading indicators for employment and wages, … then fears of cost-push inflation a la 1970’s should disappear during the next six months.”

To put it briefly, as we’ve talked about in the past, the recent market rout is a recession and the direct reflection of the unwind of carry. It is the manifestation of a deflationary shock, and today’s sentiment and reducing demand for goods, among other things, reflect this.

And, with that, after a period during which capital was misallocated, the Fed is not in a position to control price stability “without bringing down the markets,” per Kai Volatility’s Cem Karsan.

Read: Kris Abdelmessih’s Moontower #148 on prevailing macroeconomic perspectives.

In light of these efforts to control price stability, to remain is a continued reach for cash (or bank deposits) and the sale of non-cash assets.

Graphic: Via Redfin Corporation (NASDAQ: RDFN).

“Bonds are not acting as a hedge and appear to be becoming less ‘money’ like due persistent declines in price and elevated rate vol,” as Joseph Wang, who was a trader at the Fed, puts it.

Bank deposits are to drain about $1 trillion or so by year-end, prompting investors to “continue to lower their selling prices to compete for the cash they want.”

Graphic: Per Bloomberg, “[E]very $1 trillion of QT will equate to a decline of roughly 10% in stocks over the next 12 months or so.”

If it provides any solace, per comments by Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar, the Fed, which “can only deal with nominal [and] not real chokepoints,” is likely to change course.

This is as “nominal balance sheet and liquidity trends will, at some point, clash with the realities of a garden variety of supply chain issues.”

Likewise, Andreas Steno Larsen explains that bond yields remain governed by demographics, and this is good news for stocks, in general.

“Just look at the growth rate of the working-age population (10 years forward) versus the term premium of US Treasury bonds. The current bond bear market is not standing on structural pillars.”

Graphic: Via Andreas Steno Larsen. “Bond yields remain governed by demographics over the medium-term. Low(er) for longer.”

Positioning: To preface, I encourage everyone to check out the Daily Brief for June 17, 2022.

Moving on. So, last week, we had a large monthly options expiration (OPEX). After this, liquidity providers’ re-hedging flows supported the market.

Over the weekend, into Tuesday’s U.S. close, equities, then, traded higher. The rally, however, was not confidence-inspiring and was indicative of short-covering.

Per SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator, participants took the relief rally “as an opportunity to hedge/sell,” as I wrote for SpotGamma, yesterday.

Graphic: SpotGamma’s combined HIRO reading for the S&P 500 (INDEX: SPX) and SPDR S&P 500 ETF Trust (NYSE: SPY). Trade was responsive (i.e., buy dip, sell rip) up until 2:00 PM ET when demand for negative delta (i.e., put buying, call selling) outweighed that for positive delta.

This ultimately showed up in broad measures of implied volatility. As The Ambrus Group’s Kris Sidial said: “[I]n the final hour, spot [and] vol up.”

This plays into decreased odds for a far-reaching rally. Participants are positioned out in strikes that are lower and the activity in those strikes plays into a change in tone with respect to the non-linearity and strength of volatility and skew with respect to linear changes in asset prices.

As Karsan spoke to, last week, the spikes in short-dated -sticky skew – the “first we’ve seen since [the] secular decline began” – hints at a “critical change in dealer positioning.”

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

So why does any of this matter?

There still appears to be a heavy supply of options, particularly those with less time to maturity, and skew remains poor-performing (hence comments in prior letters on the benefit of buying into implied skew convexity should volatility reprice).

Graphic: Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim. Note historical or realized volatility (RVOL) versus that which is implied (IVOL).

Basically, participants are hedged and volatility remains well-supplied. 

If there was to be forced selling or demand for protection by a greater share of the market in ways not recently seen, then the repricing of the aforementioned structures would be a boon for those who own them.

Graphic: Via Banco Santander SA (NYSE: SAN) research.

Options have a “non-zero second-order price sensitivity (or convexity) to a change in volatility,” as Mohamed Bouzoubaa et al explain well in the book Exotic Options and Hybrids.

“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 that protection – e.g., butterfly and back spreads – you are positioned to monetize on a continued non-linear repricing of volatility. The difficult part is cutting the decay of those spreads when nothing happens.

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

As an aside, despite the bearish tilt in positioning, there has been a notable uptick in index call buying per UBS Group AG (NYSE: UBS), presumably so that participants don’t miss out on a vicious reversal, should one transpire.

Graphic: Via UBS Group AG.

Adding, the “high starting point” in IVOL makes it possible to put on zero- and low-cost bets that deliver asymmetric payouts in case of violent and short-lived reversals. 

Read: Daily Brief for May 13, 2022.

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

Technical: As of 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the 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; activity above the $3,696.00 low volume area (LVNode) puts in play the $3,722.50 LVNode. Initiative trade beyond the LVNodes could reach as high as the $3,735.75 and $3,770.75 high volume areas (HVNodes), or higher.

In the worst case, the S&P 500 trades lower; activity below the $3,696.00 LVNode puts in play the $3,675.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,639.00 RTH Low and $3,610.75 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.

Considerations: Gap scenarios are in play, today.

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.

Definitions

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.

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.

Categories
Commentary

Daily Brief For June 16, 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

Overnight, equity index futures took back the post-Federal Open Market Committee (FOMC) bump. Bonds and most commodity products (less gold) followed suit. 

The Federal Reserve (Fed) admitted to run-away prices and committed to slaying inflation via tougher action. Accordingly, the central bank upped interest rates by 75 basis points. This was the largest increase since 1994 and, as the Fed commented, another 75 basis point hike may be in store at the next meeting in July.

In other news, the Celsius Network (CRYPTO: CEL), a crypto favorite that amassed in excess of $20 billion in assets, froze withdrawals to stop what some say was a potential bank run. Private equity is facing a so-called “crisis of value” given over inflated prices in that market. 

We shall unpack the latter, below, a bit.

Also, U.S. retail sales posted their first drop in five months, the Bank of England raised its rates along with the Swiss central bank which surprised with its first hike since 2007.

This is all the while Goldman Sachs Group Inc’s (NYSE: GS) buyback desk was flooded with volumes about 3 times last year’s daily average. This could be construed as companies viewing the latest selloff as an “opportunity to repurchase shares rather than retrenching.”

Ahead is data on jobless claims, building permits, housing starts, as well as the Philadelphia Fed’s manufacturing index (8:30 AM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: Fed funds rate upped 75 basis points. 

Now, it appears the rate will surpass 3% after the FOMC affirmed its commitment “to returning inflation to its 2% objective.” Participants reacted, pricing in the potential for a rate peak in the range of 4.00-4.75% early-to-mid 2023, after which the easing cycle is to likely take place.

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

The overnight rate is expected to peak near 4.23% by mid-2023. This is a given via a quick check of the Eurodollar (FUTURE: /GE) futures curve, a reflection of participants’ outlook on interest rates. The peak of the Fed-rate-hike cycle – terminal rate – is around March 2023 (previously it was June).

For context, the price of /GE reflects the interest offered on U.S. dollar-denominated deposits at banks outside of the U.S. With that, they’re “expressed numerically using 100 minus the implied 3-month U.S. dollar LIBOR interest rate,” per Investopedia. This means that at current March 2023 prices (95.775), this reflects an implied interest rate settlement rate of 4.225%.

Read: The shift from the Eurodollar to SOFR is accelerating as “SOFR adoption cracked 50%.”

Moreover, the FOMC’s forecasts for inflation have moved all the while predictions for 2023 and 2024 have not. 

Graphic: Via FOMC. Taken from Bloomberg.

GDP growth estimates, too, have shifted but with the expectation there still will be growth.

Graphic: Via FOMC. Taken from Bloomberg.

As stated in this morning’s introduction (above), these policy adjustments are inflicting damage on some inflated areas of the market like crypto and private equity.

Recall that prevailing monetary policies made it easier to borrow and make longer-duration bets on ideas with a lot of promise in the future. Central banks, too, underwrote losses of this regime and encouraged continued growth. This had consequences on the real economy and asset prices which rose and kept deflationary pressures at bay.

As well put forth in our May 18, 2022 commentary, the recent market rout is a recession and the direct reflection of the unwind of carry. Capital was “misallocated” and the Fed’s move to control price stability is “completely unreasonable” as they’re not in a position to do it “without bringing down the markets,” per Kai Volatility’s Cem Karsan.

Read: Kris Abdelmessih’s Moontower #148 on prevailing macroeconomic perspectives.

As Lyn Alden of Lyn Alden Investment Strategy put forth, “unfortunately for the Fed, the U.S. economic growth rate is already decelerating” and, to cut inflation, it must reduce demand for goods. Indeed, this is recessionary and is already reflected by slowing retail sales.

Graphic: Via Bloomberg. “As price pressures become more entrenched in the economy, spending will likely ebb either due to higher prices, higher interest rates, or both.”

As Bloomberg explains, spending has shifted and is supported by consumers spending down their savings and leveraging credit cards. 

Read: Klarna’s debt costs rise as buy-now-pay-later sector suffers.

Graphic: Via Bloomberg. This “could be concerning if Americans fail to keep up on payments. That could ultimately mean a slowdown in the pace of inflation-adjusted consumption.”

“If this credit bubble ever pops, it’s going to be the most catastrophic market failure that anyone has ever read about — but let’s hope that doesn’t happen,” Mark Spitznagel, Miami-based Universa’s CIO, said in early June. “We’ve gotten ourselves into a tough spot.” 

Perspectives: “The move in markets prices in more than enough recession risk, and we believe a near-term recession will ultimately be avoided thanks to consumer strength, Covid reopening/recovery, and policy stimulus in China,” JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic and his team said. 

Positioning: Measures of implied volatility had come in, yesterday, and that was significant in that participants have a lot of exposure to put options.

Graphic: Via SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator.

Further, (naively) we see it as liquidity providers being short those puts. As volatility continues to come in, the exposure of those options to direction (delta) compresses. 

As a result, liquidity providers cut some of their negative (static) delta hedges to that positive delta put position.

Graphic: Via SpotGamma. “SPX prices X-axis. Option delta Y-axis. When the factors of implied volatility and time change, hedging ratios change. For instance, if SPX is at $4,700.00 and IV jumps 15% (all else equal), the dealer may sell an additional 0.2 deltas to hedge their exposure to the addition of a positive 0.2 delta. The graphic is for illustrational purposes, only.”

This means that the potential options expiration (OPEX) related bullishness, so to speak, was pulled forward and, now, markets, being markedly lower than they were immediately after the FOMC event, are at risk of trading into (and below) the sizeable interest down below.

Read: Daily Brief for June 15, 2022.

Graphic: Taken by Physik Invest from Interactive Brokers Group Inc (NASDAQ: IBKR). Updated 6/15/2022.

As stated, yesterday, these options, down below, have little time to expiry and, thus, their gamma (options sensitivity to direction) grows rather large, at near-the-money strikes.

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

As the time to expiry narrows, above the strike in question delta decays, and counterparts buy back their static delta hedges. 

As the time to expiry narrows, below the strike in question delta expands and counterparts sell more static delta to hedge.

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

This means that if below these high-interest strikes, associated hedging, less any new reach for protection would pressure markets lower. If above, hedging, less new sales of protection, would bolster markets higher.

Ultimately, if lower, all else equal, the June 17 OPEX will coincide with the removal of the in-the-money options exposures in question. This opens a window during which markets may have less pressure to rally against.

Bonus: As SpotGamma explains, “​​[g]iven the supply and demand of volatility, as well as divergences in the volatility that the market realizes and implies from options activity, there’s a case to be made for maintaining positive exposure to direction via long volatility.”

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

Graphic: Taken by Physik Invest from Interactive Brokers Group Inc (NASDAQ: IBKR). The divergence in volatility implied (IVOL) by participants’ options activity, versus that which the market realizes (RVOL) resurfaced on June 15, 2022, in the Nasdaq 100 (INDEX: NDX).

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

In the best case, the S&P 500 trades higher; activity above the $3,688.75 HVNode puts in play the $3,727.75 HVNode. Initiative trade beyond the $3,727.75 HVNode could reach as high as the $3,773.25 HVNode and $3,808.50 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $3,688.75 HVNode puts in play the $3,664.25 HVNode. Initiative trade beyond the $3,664.25 HVNode could reach as low as the $3,610.75 HVNode and $3,587.25 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.

What People Are Saying

Definitions

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.

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.

Categories
Commentary

Daily Brief For May 19, 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

What Happened

Overnight, equity index futures continued lower as weakness spread overseas. Commodities were mixed and yields were lower. At a high-level, measures of implied volatility held their bid.

Apart from the removal of structural forces underpinning a rally into mid-week, earnings reports played into “fears of the consequences of if inflation is brought under control,” per Bloomberg.

Ahead is data on jobless claims and manufacturing (8:30 AM ET). Later, existing home sales and leading economic indicators (10:00 AM ET). No events are scheduled for tomorrow.

Graphic updated 8:30 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: On the heels of Target reporting lower profits on costs and tighter margins, the beloved Cathie Wood of Ark Invest chimed in with a note on an explosion in inventories. Late last year, we quoted Wood suggesting businesses were scrambling to increase inventories.

Graphic: Via Bloomberg. “Target announced that sales were up, but profit was down thanks to increasing costs and tightening margins. Also like Walmart the day before, the market rewarded the stock with its biggest one-day decline since the Black Monday crash of October 1987. That’s alarming, although it’s worth pointing out that Target had been a conspicuous beneficiary of the pandemic to date.”

Though early, she said inflation would eventually be on its way out and inventory build-ups were one of the indicators to watch.

“Walmart Inc’s (NYSE: WMT) inventories increased 33% in nominal terms on a year over year basis, translating into 20-25% in real or unit terms, as Target Corporation’s (NYSE: TGT) inventories increased by 42% and 30-35%, respectively,” Wood said.

At the same time, sentiment has plunged to Great Recession levels, all the while consumers are “rebelling against their loss of purchasing power,” and China is in turmoil (talked about May 16).

These comments play into the recession narratives we unpacked earlier this week (May 17 and May 18). Monetary policies sent money to capital and that bolstered deflationary trends. 

Then came the pandemic and the increasing effects of inequality; money was sent to labor, and that bolstered inflationary trends.

Graphic: Via Bloomberg. “Overall wage increases were 6% in April, for the second month running — too high for the Fed’s comfort but at least with no increase. It is the least well paid who are commanding the highest percentage rises.”

As we quoted Kai Volatility’s Cem Karsan explaining, today’s contractionary monetary policy is a blunt tool and is not equipped to “address the main problem which is a lack of supply to absorb the demand.”

Graphic: Via Bloomberg. “China appears to be gradually easing its lockdown of Shanghai, but that won’t bring immediate relief to global supply-chain congestion.”

Likewise, Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar explained what he felt was “the Fed is pursuing demand destruction through negative wealth effects,” as the “central banks can only deal with nominal” chokepoints.

Graphic: Via JPMorgan Chase & Co (NYSE: JPM). Taken from The Market Ear. “A stronger dollar, lower equity prices, and higher mortgage rates will weigh on demand growth [and] Over time weaker output demand should lead to weaker labor demand Don’t fight the Fed as this is what Fed wants (slower growth).”

By that token, we must “[c]onsider at least the possibility that the extreme volatility and lack of liquidity [we] see in markets is by design, and the Fed will not be deterred by it, but rather that it will be emboldened by it in its singular pursuit of price stability.”

Why does any of this matter? 

As quoted, yesterday, “[w]ith supply-side economics, the only way that they can control [price stability] is to pull back. And slow capital markets decrease via the wealth effect. Ultimately, there’s a significant lag, so [the Fed is] not in a position to ultimately control inflation without bringing down markets.”

By that token, a stock market drop is both a recession and a direct reflection of the unwind of global carry. It is the manifestation of a deflationary shock, and today’s sentiment, the gradual build-up of inventories, tightening of financial conditions, and the like, are a reflection of this.

Graphic: Via Guggenheim Partners. Taken from MarketWatch. The “ Fed is headed toward overtightening financial conditions just as employment show some softness.”

Perspectives: Recall that the indexes are trading relatively strong, in comparison to constituents, especially those that are smaller technology and growth companies.

Essentially, “we’re two-thirds of the way through a dot-com type collapse,” we quoted Simplify Asset Management’s Mike Green explaining.

“It’s just happened underneath the surface of the indices which is [that] … dynamic of passive flows supporting the largest stocks within the index, whereas the smaller stocks can be influenced to a greater extent by the behavior of discretionary managers.”

Pursuant to those remarks, JPMorgan Chase & Co’s Marko Kolanovic says there are significant opportunities in the beaten areas of the market.

“I almost refuse to talk about ‘where should I buy S&P?’” he said adding that “[m]ost of the bad things have happened already this year.”

“There will be no recession this year, some summer increase in consumer activity on the back of reopening, China increasing monetary and fiscal measures.”

Per the earlier quoted Pozsar, Kolanovic, like Wood, maybe too early in his calls.

“Banks’ stock buybacks are lowering SLRs [], and the Fed is about to embark on QT,” Pozsar says. For context, QT (Quantitative Tightening) is the central banking authorities’ removal of balance sheet assets via sales or the non-reinvestment of the principal sum of maturing securities. 

The dynamic is as follows: if bonds are sold, their values fall and yields rise, thus pushing yield-hungry investors into less risky asset categories.

“These nominal balance sheet and liquidity trends, will at some point clash with the realities of a garden variety of supply chain issues,” as a result of geopolitical chokepoints.

Graphic: Per Bloomberg, “[E]very $1 trillion of QT will equate to a decline of roughly 10% in stocks over the next 12 months or so.”

Given Pozsar’s findings, the Fed is likely to do QE again in the summer of 2023. 

Checking Eurodollar (FUTURE: /GE), a reflection of participants’ outlook for U.S. interest rates, shows the peak of the Fed-rate-hike cycle – terminal rate – at around June 2023.

Positioning: This week’s expiration of options on the Cboe Volatility Index (INDEX: VIX), per SpotGamma, pulled forward the positive effects of volatility compression heading into the large May monthly equity and index options expiration (OPEX).

“Barring a forced re-pricing, we saw what was already little fuel to the upside drained into the weighty VIX options expiration (as bets on the VIX decay, this leads to hedging that bolsters S&P 500 upside),” SpotGamma said. 

“Following this event (and the coming monthly May OPEX), we see the door open to lower prices amid the removal of “max put” positioning which “clears the way for lower-lows.”

Heading into the monthly OPEX, if the S&P 500 Index (INDEX: SPX) is well below $4,000.00, “the buyback of short futures to short put exposures that no longer require liquidity providers to hedge,” may bolster a sharp reversal.

Graphic: Via SpotGamma. Taken from The Market Ear. “Deep short gamma where dealers are trapped in selling low and buying high and the poor liquidity environment, where the pushing of deltas (both ways) gets even more magnified due to non-existent volumes. This dynamic works both ways.”

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

In the best case, the S&P 500 trades higher; activity above the $3,862.75 low volume area (LVNode) puts in play the $3,908.75 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as high as the $3,943.25 high volume area (HVNode) and $4,061.00 virgin point of control (VPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $3,862.75 LVNode puts in play the $3,836.25 LVNode. Initiative trade beyond the LVNodes could reach as low as the $3,795.75 and $3,727.25 HVNodes, 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

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.

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, 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.