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!

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 20, 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!

Graphic updated 6:20 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.

Fundamental

A hot topic over the past sessions is speculation on the Federal Reserve’s (Fed) next steps and the impact those steps may have.

Further, in the news, last night, aside from the prospects of another big hike, was “the biggest annual increase since 1994” in two-year Treasury yields. That’s in part due to recent upside surprises in inflation talked about yesterday and last week.

Graphic: Retrieved from Bloomberg. US Government Bonds 2 YR Yield and Fed Funds.

Per the CME Group Inc’s (NASDAQ: CME) FedWatch Tool, there’s a near-80% chance of a 50 to 75 basis point bump to the target rate, as the Fed looks to stem inflation.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

This is all the while the Fed will let their Treasuries mature and, “instead of using the proceeds to buy another Treasury,” they will “buy nothing and reduce their balance sheet,” explained the Damped Spring’s Andy Constan.

Accordingly, “to pay that bond off, the US Treasury has to issue a bond,” and this bond will need to be “bought by the private sector” which has “to sell something to buy the bond, and that starts at the riskiest asset,” like crypto, watches, and cars, for instance.

Let’s unpack this further, below.

The transmission mechanism of quantitative easing (QE) and tightening (QT) is very weak “to economic activity but very strong to financial markets.”

In a detailed explainer, initially quoted in the September 16 letter, we learned “QE creates new reserves on bank balance sheets. The added cushion gives banks … more room to lend or to finance trading activity by hedge funds, … further enhancing market liquidity.”

Therefore, QE (QT) will mildly inflate (deflate) the economy as asset owners are pushed further out (in) on the risk curve. In practice, with QE, owners get pushed from Treasury to corporate bonds, bonds to equities, equities to crypto, and, finally, homes, watches, cars, and beyond.

With QT, as put forth, earlier, the reverse happens.

As Joseph Wang, author of Central Banking 101, said, in short, with QT “consumers have less wealth to spend” and this means that drops in financial markets and the tightening of “financial conditions impact the real economy,” negatively, albeit not as harshly as a rise in interest rates.

Unpacking further, with the Treasury set to increase issuance, thus boosting the government’s checking account, or Treasury General Account (TGA), “the level of reserves in the banking system declines, or the level of RRP could also decline,” Wang added.

This is as all of the above are liabilities to the Fed. Therefore, money comes out of the economy, via a fall in reserves, and this is put into the government’s checking account (TGA boost).

The linked reduction in bank deposits and reserves bolsters “repurchase agreement rates and borrowing benchmarks linked to them,” per Bloomberg. This, then, may play into “an additional tightening of overall financial conditions,” as mentioned, earlier.

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.

Here’s a provision.

It’s the case that the Fed believes it needs a certain level of reserves for the proper functioning of the financial system (~$2 trillion). Wang explained that in 2019, banks dumped a lot of their reserves into repo to earn some extra return. 

When QT was about to end, there was less money in their reserves which preceded a spike in rates and a blow-up among those who needed the money the most, as explained here.

Graphic: Retrieved via Bloomberg.

“The Fed saw the system breaking at around 8% GDP and thinks that is where the limit is,” he added. “This suggests, going forward, the Fed is going to have to do something to top up the reserves in the banking system, and they have tools to do that.”

What’s the result, then?

These tools include capping the RRP, “forcing money out into the banking system,” as well as modifying the supplementary leverage ratio (SLR), making it “cheaper for banks to maintain a large balance sheet.”

Together, this, ultimately, may increase “the capacity of banks to make loans [and] create credit, so that is financial easing.”

As Wang said in another work best: These “easing effects may even overwhelm the tightening impact of a marginally longer QT.”

So, what can we expect? 

In terms of timelines, Wang puts forth that economic data will likely prompt a mid-2023 cut in rates, which is in line with what the futures market is pricing.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

Before then, traders are pricing nearly 225 to 250 basis points of rate increases. Based on where rates are at, now, some argue 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.”

Positioning

We’ve talked about this before but what is expected, after Wednesday’s Fed update, is a move that is “structural,” as Kai Volatility’s Cem Karsan has put it before, and “a function of inevitable rebalancing of dealer inventory post-event.”

“The second move and final resolution, if you wait for it, is usually tied to the incremental effects on liquidity (QE/QT).”

Should participants’ fears with respect to the pace of tightening, for one, be assuaged, then it is likely that the protection demanded heading into the meeting, that’s bidding measures of implied volatility (IVOL), is supplied. This likely provides a boost.

From thereon, markets are more at the whims of macro-type positioning on rising rates and the withdrawal of liquidity.

Technical

As of 6:20 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, 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 $3,909.25 MCPOC puts into play the $3,936.25 ONH. Initiative trade beyond the ONH 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 $3,885.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,857.25 and $3,826.25 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.

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!

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 September 12, 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!

Graphic updated 7:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. 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

Hey team, before we get started, let’s address the mismatch some observed last week with this letter’s levels and S&P quotes, versus what they saw at home. 

It is basically the case that our charting platform rolled over to the December S&P 500 Index futures contract on September 9, 2022. This was about 1-week ahead of the expiry of the old contract on September 16, 2022.

Going forward, unless otherwise noted, 6-days prior to the expiration of a quoted contract, the levels and prices in this letter may reflect that of the new, father-dated contract.

As an aside, based on CME Group Inc’s (NASDAQ: CME) Equity Quarterly Roll Analyzer Tool, the pace of the E-mini S&P 500 (FUTURE: /ES) roll is far off of what it has historically been at this stage of the roll period. 

This roll, too, caught your letter’s writer by surprise. Sorry!

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

Moving on, coverage this week may be sporadic due to some uncertain travel commitments. It is seeming very likely that there may not be a letter published on September 13 and 14, 2022.

Fundamental

Let’s get into it.

At its core, there’s a lot of stuff happening on the monetary and fiscal front. Guiding some of this action, on those fronts, are (geo)political happenings, the rising tide of populism, and beyond.

On the political fronts, Ukrainians “broke through weakened Russian lines, seizing the strategic railway hub of Kupiansk and the key staging area of Izyum,” Noah Smith explained in his letter.

Recent happenings illustrate “some important principles about the broader conflict unfolding across our world between liberalism and illiberalism,” as well as what a “successful defense of Ukraine” would do to hurt “the dawn of a new age of imperial expansionism,” something we’ve talked a lot about in past letters, alongside the growing deglobalization pulse.

The go-to on the implications of these conflicts, as well as the “burgeoning monetary order,” dubbed Bretton Woods III, has been Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar who thinks the dollar “is entering a new and rockier phase” and what “matters more than access to dollars is access to commodities and actual things.”

From hereon, Pozsar thinks “commodity prices can go much higher, … and a dollar can get devalued in terms of commodities.”

In the face of geopolitical and supply chokepoints (further bolstered by such things as railroad strikes), as well as the fragmentation of “the physical world,” it’s no “longer appropriate to think about the world as a unified whole,” Pozsar explains.

Potentially at hand is a “self-reinforcing ‘dollar doom loop,’” Jon Turek of JST Advisors adds in the earlier quoted article. That’s big since, as we once explained, the dollar is the dominant currency for carry due to the easy monetary policies that removed the risk of a strong dollar. 

“Non-US entities make dollar-based loans and transactions … because it’s considered more trustworthy than native fiat,” Bankless explained. “When there’s a disruption in global cash flows, there’s effectively a short squeeze on the dollar.” 

Therefore, while efforts to stem inflation bolstered by supply chokepoints continue, “the stronger the dollar gets in comparison, the less tenable it becomes as a global reserve.”

That is pressure on the long-term trajectory of the dollar.

Ultimately, through the earlier mentioned developments, “breaking the dollar’s dominance could arguably help some countries avoid a tightening of financial conditions,” Bloomberg explains.

Accordingly, with “the dollar’s peak [] already in the rearview mirror,” concerns are amped in regard to how this impacts U.S. markets. It’s the case that U.S. market liquidity, as well as the dollar’s strong role as a reserve, put the S&P 500 at the center of the global carry regime. 

Thus, an unwinding of carry may compound a market drop affecting nearly all risk assets, even housing, and prompting recession, something we shall unpack further in coming letters.

Graphic: Retrieved from The Market Ear. Via Morgan Stanley (NYSE: MS). “MS Research thinks the lows for this bear market will likely arrive in the fourth quarter with 3,400 the minimum downside and 3,000 the low if a recession arrives.”

To round out this section, a bull case is likely characterized by less outsized interest rate hikes here, in the US, with quantitative tightening (QT) ramping “to its maximal caps” with no increase in “vol or yields,” said JPMorgan Chase & Co (NYSE: JPM) market intelligence.

Graphic: Retrieved from Bloomberg.

However, if inflation remains hot – 8% and 9% – and supply disruptions remain sticky, the Fed may continue on its path of higher for longer. That means an “outsized rate hike cadence in Nov/Dec, bringing Fed Funds above 4.0% … and QT put[ting] upward pressure on yields.”

Graphic: Retrieved from Callum Thomas. Via Bank of America Corporation (NYSE: BAC). Market bottoms often appear when the Federal Reserve (Fed) begins cutting interest rates.

Positioning

Demand for protection and re-entry into shorts was the context for selling that culminated in an S&P 500 (INDEX: SPX) low at $3,900.00 last week. 

It’s at this level, “where the demand for put options was concentrated,” analysis providers like SpotGamma saw “support” and, “absent an exogenous catalyst,” S&P 500 stability.

From thereon, into the end of the week, SpotGamma adds that “positive delta hedging flows” bolstered a “market move away from the $3,900.00 support.” Tools like SpotGamma’s HIRO showed volatility selling and this validated a SpotGamma call for “follow-on bullishness.”

Graphic: Retrieved from SpotGamma. Updated September 7, 2022.

Nonetheless, in light of the above fundamental and positioning contexts, after derivatives expiries this month, the stage is likely set for larger two-way ranges.

Technical

As of 7:20 AM ET, Monday’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, 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 $4,107.00 POC puts into play the $4,136.75 MCPOC. Initiative trade beyond the MCPOC could reach as high as the $4,189.25 LVNode and $4,231.00 VPOC, or higher.

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

Any activity below the $4,107.00 POC puts into play the $4,071.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,018.75 HVNode and $3,991.00 VPOC, or lower.

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

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For August 11, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 750+ that read this report daily, below!

Graphic updated 7:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. 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

Equity market rally spurred by cooler a Consumer Price Index (CPI).

Expected was an 8.7% rise year-over-year (YoY) and 0.2% month-over-month (MoM). Core CPI (which excludes food and energy) was to rise by 6.1% YoY and 0.5% MoM, respectively.

Officially, the headline number rose to 8.5%. The core CPI rose 5.9% YoY and 0.3% MoM, meaning the March peak remains (6.5% YoY, then).

Graphic: Retrieved from CNBC.

Participants responded positively to the number, as expected could happen in a case where the CPI printed lower.

As I talked about in yesterday’s morning letter and in a SpotGamma note, with easing inflation:

(1) investors may command a lower rate of return for their purchasing power and (2) lower rates (if policymakers were to become less aggressive) do less to negatively impact discounted cash flows and the ability to finance future growth.

It is the case that immediately after the release of the CPI, traders dramatically shifted their bets on monetary action.

Previously, it was thought a 75 to 100 basis point hike would follow the report. Now, there are higher odds, as priced by the market, that there is a 25 to 50 basis point hike.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

“I think the market is a bit overly giddy on this CPI number and it’s probably unlikely that the [Federal Reserve] (Fed) will start to ease up and take a less hawkish stance,” The Ambrus Group’s Kris Sidial put forth.

“The increase in risk assets somewhat gives the Fed the green light to be able to move more swiftly with a hawkish tone.”

Accordingly, the Fed’s Mary Daly said it is too early to declare victory in the inflation fight (and rightfully so), signaling, however, that she may support a slower pace of hikes.

Graphic: Retrieved from Bloomberg.

This is as home buyers and renters, in some areas, are seeing large hikes in prices. For instance, per one Bloomberg article, a Miami native saw their rent increase “by $650 to $2,400.00 a month,” forcing them to search for new places to live.

The Ambrus Group’s Sidial adds:

“Inflation is one of those things that is difficult to control when it’s out [of] the bag (historically). I think the Fed understands this and if they have the opportunity to tame it, while not completely obliterating risk assets, it seems like a perfect scenario.”

Ultimately, farther out in time, some metrics, which have incredible success in forecasting pivots, show the Fed likely to cut in 2023, shortly following the aggressive hiking cycle.

Graphic: Retrieved from Alfonso Peccatiello of The Macro Compass.

On the topic of (eventual) declines and slowing in the risk assets (like housing), “in most cases today, a borrower with 60 points of equity in their property, even facing moderate declines in their current home price, are not a big default risk,” explains Dan Ivascyn of PIMCO.

“A lot of what we like in the market today is seasoned-type risk that benefits from the multi-years of home price appreciation, and therefore is much less sensitive to what goes on from this point forward.”

From an S&P 500 (INDEX: SPX) perspective, the index has basically recouped half its losses for the year. This often came after the bear lows were in.

Graphic: Retrieved from Bloomberg.

Notwithstanding, here’s our updated liquidity tracker that is monitoring the “preeminent driver of markets during the post-crisis decade.”

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.

Positioning

As of 7:15 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.04%. Net gamma exposures increasing may promote tighter trading ranges.

Given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of options structures (i.e., replacing static directional exposures or delta with those that are dynamic) tied to the broader measures we follow like the S&P 500 (given increased average stock correlation and lower return dispersion).

The reason why? 

Per SpotGamma: “From an options perspective, a lot of the boost from volatility compression has played out. With implied volatility at a lower bound, it may be opportune to replace static delta bets for those that are dynamic (i.e., long option exposures) and have less to lose in this lower volatility environment.”

“In a case where market participants see the Fed keeping its commitment to aggressive monetary policy action, negative delta options exposures may outperform static short equity (bets on the downside).”

Technical

As of 7:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively 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 $4,227.75 HVNode puts into play the $4,253.25 HVNode. Initiative trade beyond the latter could reach as high as the $4,275.75 LVNode and $4,303.00 Weak High, or higher.

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

Any activity below the $4,227.75 HVNode puts into play the $4,203.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,189.25 LVNode and $4,153.25 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.

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For August 8, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 750+ that read this report daily, below!

Graphic updated 7:45 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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

In a non-farm payroll update, it was shown that the US added more than two times the jobs many economists thought it would.

“Some of this is driven by a reduced participation rate – a smaller portion of the population seeking work and showing up in unemployment data,” Bloomberg’s John Authers explained

Graphic: Retrieved from Bloomberg.

“It now becomes much easier for the Federal Reserve (Fed) to [continue] rais[ing] rates. If the employment market is still strengthening, while inflation remains its highest in decades, it’s hard to see why it shouldn’t.”

Accordingly, market participants are pricing a greater than 50% chance of the target Fed Funds rate increasing by 75 to 100 basis points to a target range of 300 and 325 basis points, up from 225 and 250 right now.

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

Therefore, in addition to this (projected tax increases, the expected high coupon issuance/QT doubling in September and Q4, and the like), the “knee jerk re-leveraging flow [is likely to] not survive,” per Damped Spring’s Andy Constan.

Additionally, Morgan Stanley (NYSE: MS) and Goldman Sachs Group Inc’s (NYSE: GS) strategists, both express an outlook at odds with the recent market rally on the back of “better-than-feared second-quarter earnings.”

Per MS’s Michael Wilson, the expectation profit margins will continue to expand into 2023 is “unrealistic due to sticky cost pressures and receding demand.”

“While prices to the end consumer are still rising at a rapid clip, prices for producers are rising at double the pace.”

GS’s David Kostin concurs and expects net margins to drop ~25 basis points in every sector led by energy, health care, and materials, Bloomberg summarizes.

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.

On the topic of geopolitical conflict, which we talked a lot about in the August 3 letter, the US’s Nancy Pelosi visited Taiwan last week prompting Chinese military exercises in the region.

Overall, it is likely not in China’s best interest to press the conflict much further,” Authers puts forth. “Taiwan’s role in the world’s electronics industry means that the global economic impact of any conflict could dwarf the disruptions of the last two years sparked by the pandemic.”

These disruptions would pain the world, including China.

Positioning

As of 6:40 AM ET, Monday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.13%. Net gamma exposures decreasing may help with an expansion of range.

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

Here’s our August 5 letter for more context.

For concision, we quote SpotGamma: “It’s the case when the fuel from a drop in option implied volatility is spent, as well as the sticky open interest at current prices rolls off, that options-related hedging does less to keep markets pinned.”

Technical

As of 6:40 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, 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 $4,153.25 HVNode puts into play the $4,189.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,227.75 HVNode and $4,259.75 LVNode, or higher.

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

Any activity below the $4,153.25 HVNode puts into play the $4,117.75 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $4,073.00 VPOC and $4,040.75 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: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

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

Definitions

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

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

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

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

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

About

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

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

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, 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 28, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 600+ that read this report daily, below!

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

Key, yesterday, was the Federal Reserve’s (Fed) move to rein inflation with another 75 basis point interest rate hike. This lifted the target for the federal funds rate to 2.25-2.5%.

Accordingly, with inflation (which is to be dampened) a negative for stocks, a primary driver behind this year’s de-rate, already, equity markets closed sharply higher.

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

Despite room for higher rates, the Fed explained future decisions would “depend on the data,” and that, per Bloomberg, the economy is likely “to withstand rapid monetary tightening.”

Graphic: Retrieved from Bloomberg. Tighter liquidity and credit bolster demand for money as well as the deflation of risk assets. “There used to be too little demand. Now there’s too little supply. And in a world of too little supply, the country doing the most to generate demand, which is the US, is exporting its problem—its problem being inflation,” per Harvard’s Jason Furman.

Adding, participants are, now, pricing in the potential for a federal funds rate peak in the range of 3.25-3.50% early-to-mid 2023, down from 4.00-4.75% after the last rate hike took place.

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

Strategists at the likes of Bank of America Corporation (NYSE: BAC) put forth that it is likely, given an economic slowing, that the Fed, indeed, cuts rates next year and ends quantitative tightening (QT).

“The Fed is likely to stop QT with rate cuts due to the contradictory signal it sends on monetary policy and to simplify policy communications; the Fed will likely not want to be easing with rate cuts but tightening with QT,” the bank’s strategists explained. 

An end to QT would cut the supply that the “Treasury needs to issue to cover Fed redemptions. It also means the Fed may conduct secondary purchases, further limiting the amount of supply the market needs to absorb.”

This is in comparison to the narrative we discussed earlier this week, put forth by Damped Spring Advisors’ Andy Constan.

With “most of [the Fed] balance sheet reduction to be run-off” – non-reinvestment of “proceeds from maturing assets they own” – coupled with the Treasury halving “coupon issuance that the market must absorb,” Constan explained, instead, that the “Fed is done for the summer.”

This is likely to “result in less surprise and falling asset volatility” as investors realize “they are now under-risked,” which may drive a “risk premium contraction” and demand for risk assets.

Positioning

As of 6:50 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.22%. Net gamma exposures increasing may promote tighter ranges.

It is often, just after an event, that market movement is the result of inventory rebalances. Per Kai Volatility’s Cem Karsan, the subsequent move is to be “tied to the incremental effects on liquidity (QE/QT).” 

Graphic: Retrieved from MarketWatch.

Rising rates and the withdrawal of liquidity, coupled with the impact of inflation and an economic slowing, could prompt continued pressure on equity markets.

Given the macro risk, and the poor performance of implied volatility (IVOL), relative to that which markets have realized (RVOL), per The Ambrus Group’s Kris Sidial, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”

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

Should investors “ditch their [old] hedges in frustration as sentiment improves, because they didn’t work properly in a falling market,” this may set up “the potential for a second-leg-down event,” in the next year, as well explained in the Systemic Individual Investor.

“During the next sell-off, panic put-buying can cause a much more violent downward spiral, because options dealers are forced to sell an increasing amount of S&P futures into an accelerating down move.”

So, what to do? 

With call options outperforming “their delta to the upside,” it continues to make much sense to replace static equity long exposure with that which is dynamic, Karsan explained.

Technical

As of 6:50 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 negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $4,015.75 HVNode puts into play the $4,041.25 HVNode. Initiative trade beyond the $4,041.25 HVNode could reach as high as the $4,071.50 BAL and $4,095.00 VPOC, or higher.

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

Any activity below the $4,015.75 HVNode puts into play the $3,971.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,943.25 HVNode and $3,921.00 VPOC, or lower.

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

Definitions

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

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 18, 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!

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. 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

Positivity across most products we monitor in this letter. This is alongside participants’ paring of bets on more aggressive Federal Reserve (Fed) action. It was just last week, right after the CPI dump, that participants were pricing a near-50% chance of a 100 basis point rate hike in July.

That is no longer the case. The odds are 60-40 in favor of a 50 to 75 basis point hike.

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

A quick check of the Eurodollar (FUTURE: /GE) curve, a reflection of participants’ outlook on interest rates, we see a peak of the Fed-rate-hike cycle – the terminal rate – near DEC 2022.

Below, we see the overnight rate expected to peak near 3.915% by late 2022.

Graphic: Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim.

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 DEC 2022 prices (96.085), this reflects an implied interest rate settlement rate of 3.915%.

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

The U.S. Dollar (INDEX: DXY), though it is generally far stronger on pressures (e.g., recession, geopolitics) elsewhere, eased.

Read: Why the U.S. Dollar is booming and creating a possible doom loop and Sunak takes the lead in the voting for U.K. Prime Minister, as well as China weighs mortgage grace period to appease angry home buyers and the ECB case for a half-point rate hike just won’t go away.
Graphic: Via Bloomberg.

Further, it is policy adjustments that 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.

A prospective hit in demand is in the context of improvement among supply chains, as Citigroup Inc (NYSE: C) economists explain

Graphic: Via Bloomberg.

“The bad news is that this looks to be occurring on the back of a slowing in the global consumer’s demand for goods, especially discretionary goods, and thus may also signal rising recession risks.”

Graphic: Via Bloomberg. “Carmakers registered the fewest new vehicles in the European Union since 1996 as persistent supply chain snarls and record inflation afflict the industry. New-car sales in the EU and four other states tracked by the European Automobile Manufacturers’ Association fell 17% to 1.07 million last month, according to a statement. Volkswagen AG was the hardest-hit major carmaker, with registrations dropping 24% from a year ago.”

It is the case that as the “Fed is pursuing demand destruction through negative wealth effects,” it will, ultimately, pivot because “central banks can only deal with nominal [and] not real chokepoints,” according to Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar.

Read: Despite stronger than expected retail sales, inflation adjustments point to a leveling-off.

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

“Rallies could beget more forceful pushback from the Fed – the new game.”

Watch: Quantitative Tightening is the direct flow of capital to capital markets.

Positioning

Please check out the Daily Brief for July 15, 2022. There we summarized, well, the implication of the macro landscape and options positioning.

The summary was that with commodities not offering protection, one has to be concerned if “the flock move[s],” per The Ambrus Group’s Kris Sidial and, ultimately, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”

This is as markets are in a window of “non-strength,” says Karsan in the video below.

Technical

As of 6:30 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively 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 $3,943.25 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.

Any activity below the $3,909.25 MCPOC puts into play the $3,857.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,829.75 MCPOC and $3,800.75 LVNode, or lower.

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

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

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

Definitions

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

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 15, 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!

Graphic updated 6:35 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

Note: A really interesting discussion in the below positioning section which tidies up some of the past analyses we’ve made. Read on for more!

Ahead are updates on retail sales, import prices, Empire State Manufacturing (8:30 AM ET), industrial production and capacity utilization (9:15 AM ET), as well as University of Michigan consumer sentiment and inflation expectations, and business inventories (10:00 AM ET).

This week, markets repriced after data on inflation came in hot. Participants have bet on tough action from the Federal Reserve (Fed). Now, there is a near-50% chance of a 100 basis point hike later in July.

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

Per The Macro Compass, published by Alfonso Peccatiello, companies have downgraded their outlooks and job creation “is much less impressive” amid labor force shrinkage.

“[T]he number of total employed people in the US divided by its total population in the 25-54y age bracket dropped below 80%,” he explains. “Over the last 30 years, at the peak of each economic cycle, this ratio was over 80%.”

Accordingly, earnings “are nowhere near pricing the economic slowdown, … [and there still remains] way too much optimism.”

Graphic: Retrieved from The Market Ear. Via Barclays Plc (NYCE: BCS).

Additionally, commodities (even more so those that are industrial and “are the cleanest expression of global demand”) have endured selling pressure with a near 30% copper drawdown likely to precede positive total returns for long bonds, Peccatiello explains.

Graphic: Retrieved from Callum Thomas. With “[r]ecessions see[ing] oil prices fall by 20% to 70%, … being bullish on oil at this point is either betting against history or [] recession.”

Positioning

The drawdown in commodities is significant as that was, arguably, the last place that offered participants a hedge against their poorly performing bond and equity exposures. 

“A lot of people allocated to commodity trend following and that did a good job in the first two quarters,” The Ambrus Group’s Kris Sidial explained

“CTAs were performing and you had a lot of people who did not need to buy [equity] volatility because their portfolios were covered from the inflation hedges.”

Graphic: Shared by Benn Eifert of QVR Advisors.

That, coupled with the sale of ultra-short-dated volatility, particularly in some of the single names to capture “rich” volatility, as well as hedging of structured products issuances, continues to play into suppressed index volatility.

For context: Rising rates and a drive for yield have been a boon for exotic derivatives. 

Participants often seek exposure to products that are essentially short volatility a year or so out. The counterparty, here, is long volatility on these notes. To hedge risk – since “you can’t just be long volatility, … [otherwise] you’ll bleed money for long periods of time” – the bank will hedge risk in the listed market. 

However, on a one-year auto-callable, for which it would be appropriate to sell one-year volatility in the listed market, “some of these banks … create this synthetic calendar profile where they’re … sell[ing] a little bit of one-month vol because they can take in that theta a whole lot faster, or two- and three-month vol,” spreading exposure in buckets.

See, here, for a sample presentation on what is an Auto-Callable Yield Note.

This suppresses “vol in the front of the term structure, and … opens up the door to … that other move where if everybody is selling vol in the front of the term structure,” it may blow out on a large increase in demand.

“If you look back during COVID, there are articles about banks that lost a lot of money because of the[ir] hedges. This has happened previously and you’re seeing little blips of it start to” return.
Graphic: Retrieved from The Ambrus Group’s Kris Sidial. “[S]ome dealers will opportunistically look to sell vol in some buckets in the front of the term structure.”

Basically, “the macro landscape … opened up another area to hedge” which resulted in the increased movement of realized equity (RVOL) volatility, relative to that which is implied (IVOL).

Graphic: Via S&P Global Inc (NYSE: SPGI). As explained by SpotGamma, “30-day realized SPX volatility is now trading above the VIX, something that generally shows after major selloffs wherein IV “premium” needs to reset to calmer/higher equity markets.”

Now, with commodities not offering protection, one has to be concerned if “the flock move[s].”

“If commodities are not performing, they’re not going to work as a hedge for your portfolio. That opens the door … [to] markets sliding lower and [people] need[ing] to get hedges on,” which is likely to bid equity volatility where some single names “are only trading three to four vol points above where they were trading in January of 2020,” the complete dismissal of a crash.

Therefore, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”

Technical

As of 6:30 AM ET, Friday’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 $3,807.00 VPOC puts into play the $3,830.75 MCPOC. Initiative trade beyond the MCPOC could reach as high as the $3,867.25 LVNode and $3,909.25 MCPOC, or higher.

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

Any activity below the $3,807.00 VPOC puts into play the $3,770.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,751.00 VPOC 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: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

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

Definitions

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

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 30, 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!

What Happened

Overnight, equity index and commodity futures auctioned lower while bonds, the dollar, and implied volatility metrics were bid at the tail-end of the quarterly rebalancing period.

Participants have bet on a half-point rate cut in 2023 amid heightened recession odds, all the while the projected target rate sits in the range of 2.25-2.50% for the July 27, 2022 meeting.

Pursuant to this letter’s remarks in the days prior, trades biased long volatility are performing well, particularly those structured a standard deviation and beyond prior prices. We’ll unpack why that is, today.

Ahead is data on PCE inflation, disposable income, and consumer spending, as well as jobless claims (8:30 AM ET) and Chicago PMI (9:45 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: Discussed in recent letters were the prospects of whether a recession would be necessary for stemming inflation.

Read: The Fed needs to remove the heat from the demand without prompting an accident among mortgage financiers.

Graphic: Via Bloomberg. “[W]hat’s happened to mortgage-backed bonds this year is a radical departure. Bloomberg’s index dates back to 1988 when the asset class was still in its infancy. This is the first time it has ever withstood a decline that stretches into double figures.”

“That’s the message the market took,” Bloomberg’s John Authers explained. “[T]he most painful surprise over the second half of this year would be for inflation to stay sticky.”

“That would quash the belief in a swift easing campaign in 2023.”

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

Some, like the Federal Reserve’s (Fed) Loretta Mester, suggest that gone are the days to err on the side of being too accommodative.

“It also calls into question the conventional view that monetary policy should always look through supply shocks,” Mester said. “In some circumstances, such shocks could threaten the stability of inflation expectations and would require policy action.”

Graphic: Via Bloomberg. “The Richmond Fed’s survey of manufacturing isn’t generally one of the most closely monitored releases, but as this one was the worst since the Great Recession (barring only one month during the Covid shutdown), it garnered more attention than usual.”

Moreover, the Fed’s preferred inflation measure – the personal consumption expenditure deflator (PCE) – is set to update. The expectation is that core PCE drops, “thanks to base effects from last year,” bolstering the “narrative that inflation will soon be licked.”

Graphic: Via Bloomberg.

Positioning: Discussed, earlier this week, was whether it made sense to lean toward owning volatility, rather than selling it outright.

A “higher starting point” in implied volatility (IVOL), and a still-present right-tail (from the positioning for a bear market rally), made it so we could position, for less cost, in short-dated structures with asymmetric payouts, on both sides of the market.

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

For instance, S&P 500 (INDEX: SPX) spreads +1 (near-the-money) x -2 (out-of-the-money), in excess of 200 points or so in width and up to 15 days to expiration, are performing well, today, pricing in excess of a 600% gain, only after pricing for little to no cost to enter in the days prior.

Disclaimer: Have delta in the direction you want the market to move, as well as positive gamma. In our case, we wanted negative delta (short bias) and positive gamma (profits amplified).

Graphic: Via Glyn Holton. “Positive gamma corresponds to curvature that opens upward. Negative gamma corresponds to curvature that opens downward.”

Recent market weaknesses will allow us to monetize and rotate those proceeds into speculative directional bets on the call-side, potentially. After all, the money is made in not losing it. Stay nimble. These are not trade recommendations. Be open-minded.

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.”

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 $3,770.75 HVNode puts in play the $3,793.25 Ledge. Initiative trade beyond the Ledge could reach as high as the $3,821.50 LVNode and $3,840.75 ONH, or higher.

In the worst case, the S&P 500 trades lower; activity below the $3,770.75 HVNode puts in play the $3,735.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,722.50 LVNode and $3,696.00 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: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

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

Definitions

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.

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.