Tag: CS – Credit Suisse Group Ag

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Commentary

Daily Brief For March 27, 2023

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

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Graphic updated 9:10 AM ET. Sentiment Risk-On if expected /MES open is above 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

Sorry for the delay. Please read through the positioning section. Have a great Monday!

As always, if there are holes or unclear language. We will fix this in the next letters.

Fundamental

On 3/22, we mentioned news of Russia wanting to adopt the yuan for settlements.

And, with that, publications covering these East alliances use some tough language. One Bloomberg article notes China and Russia “roll[ing] back US power and alliances … [to] create a multipolar world … [and] diminish the reach of democratic values, so autocratic forms of government are secure and even supreme.”

Let’s rewind a bit to understand why all the toughness and fear.

Recall Chinese President Xi Jinping speaking with Saudi and GCC leaders. Here is our 1/4 summary takeaway:

Graphic: Retrieved from Physik Invest’s Daily Brief for January 4, 2023.

Essentially, those remarks confirm the East is hedging sanctions risk. Reliance on the West is falling, and this inevitably will present “non-linear shocks” (i.e., “inflation mess caused by geopolitics, resource nationalism, and BRICS”) monetary policymakers are not equipped to handle. So, are the markets at risk?

This most recent meeting between China and Russia increases the risks of unwinding the “debt-fueled economy in the US,” FT’s Rana Foroohar confirms, as we wrote in the Daily Brief for 1/4. Further, this is a threat to “hidden leverage and opaqueness.” That means the markets are at risk. Let’s explain more.

Read: Saudi National Bank Chair Resigns After Credit Suisse Remarks Helped Trigger A Slump In The Stock And Bonds That Prompted The Swiss Government To Step In And Arrange Its Takeover – Bloomberg

Graphic: Retrieved from Bloomberg.

With the encumbrance of commodities, among other initiatives, these nations’ weight in currency baskets may rise and keep “inflation from slowing.” If that happens, future rate expectations are off. Additionally, “the US dollar and Treasury securities will likely be dealing with issues they never had to deal with before: less demand, not more; more competition, not less,” we quoted Zoltan Pozsar (ex-Credit Suisse) saying on 1/5.

The markets most responsive to this are public, as we saw with 2022’s de-rate. In 2023 and beyond, added liquidation-type risks lie in the private markets. This will have knock-on effects.

Graphic: Retrieved from VoxEU.

The likes of The Ambrus Group’s Kris Sidial mentioned to your newsletter writer in a Benzinga interview that private market investors’ raising of cash to meet capital calls could prompt sales of their more liquid public market holdings. This is a major risk Sidial noted he was watching, in addition to some risks in the derivatives markets.

At the same time, Eric Basmajian believes the “banking crisis will cause a tightening of money and credit.” This will further solidify the “broader business cycle and corporate profit recession.”

Graphic: Retrieved from Bloomberg. Per John Authers, “the combination of deeply troubled banks and strong performance for the rest of the stock market cannot persist much longer.”

Positioning

Sidial’s well positioned to take advantage of the realization of these risks. In January, he explained that measures like the Cboe VIX Volatility Index (INDEX: VVIX) were low. This suggested, “we can get cheap exposure to convexity while a lot of people are worried.” In an update to Bloomberg, Sidial said The Ambrus Group’s tail-risk strategy (which Sidial has explained to us before) has performed well as the VIX index has risen, a sign of traders hedging concerns about “some contagion hitting and their portfolios being destroyed on that.”

Graphic: Retrieved from Bloomberg.

“We have seen an increase in tail hedging,” added Chris Murphy of Susquehanna International Group. “We have continued to see call buying in the VIX since the bank turmoil began.” The caveat, though, is that realized volatility or RVOL, not just implied volatility or IVOL (i.e., that which is implied by traders’ supply and demand of options), must shift and stay higher for those options to maintain their values, which may be difficult according to Kai Volatility’s Cem Karsan.

Though Karsan thinks markets will likely see RVOL come back in a big way, he thinks policymakers’ intervention will be stimulative short-term as it reverses a lot of the quantitative tightening or QT (i.e., flow of capital out of capital markets). Stimulation will be compounded by the continued unwinding of hedging strategies in previously depressed products like the Nasdaq 100 (INDEX: NDX). What do we mean by this?

Recall that traders’ closure and/or monetization of put protection results in options counterparties buying back their short stock and/or futures hedges. Therefore, before any downside is realized, the market may trade into a far “more combustible” position.

Consequently, look for low- and zero-cost call structures (e.g., ratio spreads) to play the upside while opportunistically using higher prices and elevated volatility skew to put on bear put spreads (i.e., buy put and sell another put at a lower strike price) for cheaper prices.

Consider following and supporting us on social media:

Technical

As of 9:10 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 the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,026.75. 

Key levels to the upside include $4,038.75, $4,049.75, and $4,062.25.

Key levels to the downside include $4,004.25, $3,994.25, and $3,980.75.

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

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

Definitions

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

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

About

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 20, 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 8:10 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

As well summarized by Eric Basmajian, inflation, and growth are on a downward trajectory. Most leading indicators “suggest recessionary pressure will be ongoing.” The banking crisis and response, which will ultimately “cause a tightening of lending to the private economy,” likely exacerbates the ongoing recessionary pressures.

Breaking: UBS To Buy Credit Suisse In $3.3 Billion Deal

Most strategists including the Damped Spring’s Andy Constan agree. In a recent video, Constan detailed the implications of policymakers’ intervention. In short, an asset fire sale was turned into a managed sale, and a reduction in credit creation will tighten financial conditions, slowing the economy and inflation.

“Small banks that are facing deposit outflows will see earnings and margins collapse as their cost of funds surges from 1% or 2% on deposits to 4% or 5% at the Fed funding facility,” Basmajian summarizes, noting that the increase in the Federal Reserve (Fed) balance sheet came from the discount window, new bank funding facilities, and spillover from the FDIC insurance backstop, all of which are not to be confused with quantitative easing or QE (i.e., monetary stimulus and a flow of capital into capital markets). 

Graphic: Retrieved from Bank of American Corporation (NYSE: BAC) via The Market Ear.

“As deposits leave regional and smaller banks for more yield and safety, they will flow into bigger banks that do less lending or into money market funds that don’t drive credit creation.” Consequently, there will be “a significant tightening of lending standards, and a credit crunch on the private economy as regional and smaller banks face massive funding pressure.”

Graphic: Retrieved from Morgan Stanley (NYSE: MS) via The Market Ear. “MS models show that a permanent +10pt tightening in lending standards for C&I loans leads to a 35bps rise in the unemployment rate over the next two years. Historically, recessions have arrived more than half a year after jobless claims begin a sustained rise.”

Traders are conflicted about the Fed’s coming interest rate decision. Many were expecting a couple more hikes of at least 25 basis points in size. However, following the recent bank turmoil in the US and abroad, it appears that traders think it will be one additional 25 basis point hike before rate cuts ensue in mid-2023.

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

Historically, selling markets on the last Fed rate hike is a good strategy, Bank of America found.

Graphic: Retrieved from Bank of American Corporation (NYSE: BAC) via The Market Ear.

Positioning

Top-line measures of implied volatility or IVOL including the Cboe Volatility Index or VIX are higher heading into Monday’s trade.

Macro uncertainties have some frightened, hence “equity volatility present[ing] itself in a much stronger way,” said The Ambrus Group’s Kris Sidial. For this equity volatility (i.e., implied volatility or IVOL) to continue performing well, realized volatility or RVOL (i.e., the movement that actually happens and is not implied by traders’ supply and demand of options) must shift and stay higher as well (note: in many ways RVOL and IVOL reinforce the other during extreme greed or fear events.

Though big options expiries (OpEx) “may help unpin the market” and manifest market downside and follow-through in RVOL needed to keep IVOL performing, the window for this to happen may be closing.

The monetization of profitable options structures, as well as volatility compression and options decay, may result in counterparties buying back their short stock and/or futures hedges (to the short put positions they have on), thus boosting the market (particularly the depressed and rate-sensitive Nasdaq 100).

If the market rallies, that has the potential to “make things hotter” in the economy, explained Kai Volatility’s Cem Karsan, which emboldens policymakers to make and keep policy tighter. So, barring follow-through to the downside, any equity market upside that arises is likely limited, as a disclaimer, some think.

Apologies for rushing this section, today. More on positioning in the coming letters.

Technical

As of 8:10 AM ET, Monday’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 $3,946.75. 

Key levels to the upside include $3,970.75, $3,994.25, and $4,026.75.

Key levels to the downside include $3,912.25, $3,891.00, and $3,868.25.

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 (FUTURE: /MES) bottom-middle.

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.

About

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 17, 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 8:50 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

Higher asset prices boosted household wealth and demand; consumers’ increased ability to spend more wealth pushed up inflation. If policymakers use their tools to lower household wealth and demand, this should cut down on inflation.

Kai Volatility’s Cem Karsan says the latter was a policy objective and recent financial institution failures are a sign of follow-through; excesses and speculation are being removed, as policymakers desired.

Policymakers don’t want liquidations, however. They want lower asset prices. Recent events put policymakers in an odd position after raising rates non-stop. In the Federal Reserve’s (Fed) case, and we paraphrase Karsan, policy/rates moved very quickly with little pause. With there being a lag, the Fed may want to pause and assess. However, they have to telegraph this carefully so that the market does not read it as a pivot. If the market rallies, that “makes things hotter,” Karsan says.

There’s already been an overreaction in the bond market, he adds, which is not ideal. The Fed does not want the long end of the yield curve to fall, as it has on the back of the turmoil and intervention, as well as data including housing starts which show more supply coming onto the market, likely a mortgage application booster in the near term.

Graphic: Retrieved from USTreasuryYieldCurve.com.

Even at the front end, there’s been lots of movement. This has “forc[ed] widespread risk liquidation,” Bloomberg says. Take a look at the Three-Month SOFR (FUTURE: /SR3), a tool used to hedge USD short-term interest rates.

Graphic: Retrieved from Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s thinkorswim platform.

The consensus, which Karsan agrees with, is that the Fed moves forward with a 25 basis point hike while telegraphing it wants the long end of the curve to rise or higher for longer as it is colloquially referred to.

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

It is possible for the US policymakers to adopt a meeting-by-meeting stance, as their counterparts have in Europe, letting uncertainties regarding the likes of Credit Suisse Group AG (which just received a ~$54 billion or so liquidity backstop and is mulling a combination with other lenders), SVB Financial Group (NASDAQ: SVB) and First Republic Bank (NYSE: FRC) pan out.

Graphic: Retrieved from Bloomberg. “[T]he credit extended through the two backstops show a banking system that is still fragile and dealing with deposit migration in the wake of the failure of Silicon Valley Bank of California and Signature Bank of New York last week.” Per John Authers: the phenomenal borrowing from the Fed’s discount window suggests that if these are just liquidity problems, they are widespread and serious. Further, the point of the exercise is to slow down the economy, which will in time tend to put pressure on banks’ solvency.”

Pausing, or intending to pause explicitly, could raise inflation expectations or “boost the odds of a recession by spooking consumers and companies into believing that the economy is worse off than they thought,” Bloomberg explains, noting: “All told, the emergency loans reversed around half of the balance-sheet shrinkage that the Fed has achieved since it began so-called quantitative tightening — allowing its portfolio of assets to run down — in June last year.”

Graphic: Compiled by Physik Invest. Per Jefferies Financial Group Inc’s (NYSE: JEF) Christopher Wood: “2022 was the year when US equities suffered multiple contraction from monetary tightening. This year will be the year when earnings downgrades hit the stock market if the US recession forecast proves to be accurate. This is now the key issue in world financial markets. Then 2024 will be the year when markets will have to deal with the emerging credit problems in the private space.”

Positioning

Heading into this most recent market decline, investors foresaw increased volatility and were positioned for it as indicated by the pricing of tail risk and performance of implied volatility or IVOL (as investors continued to demand protection during this window of non-strength), said Laya Royer of Citadel Securities.

Recall that Kris Sidial warned us of this. Options, colloquially referred to as volatility, would serve as the only hedge in an environment wherein commodities, stocks, and bonds don’t combine or balance each other as well as they did in 2022.

Graphic: Retrieved from Bloomberg.

Now, there are options expirations (OpEx) nearing (March 16 and 31); monetization of profitable options structures, as well as volatility compression and options decay, have counterparties buying back their short stock and/or futures hedges (to the short put positions they have on), boosting the market (particularly the depressed and rate-sensitive Nasdaq 100) through this OpEx/triple witching window.

Graphic: Retrieved from Cboe Global Markets (BATS: CBOE).

Following this period, the “rollover” of existing positions may result in “price swings” that last, Bloomberg puts forth. “This quarterly expiry may help unpin the market.”

Structures proposed in the Daily Brief for March 14 may work in reducing portfolio downside while allowing you to participate directionally at less cost.

Technical

As of 8:50 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, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,970.75. 

Key levels to the upside include $4,004.75, $4,037.00, and $4,059.25.

Key levels to the downside include $3,946.75, $3,921.25, and $3,891.00.

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

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 (FUTURE: /MES) at the middle bottom.

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.

About

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 16, 2023

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

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

Administrative

As previously indicated, through the end-of-this week, newsletters may be shorter due to the letter writer’s commitments. Take care!

Fundamental

Based on the 30-Day Fed Funds (FUTURE: /ZQ), traders expect the Federal Reserve (Fed) to continue its tightening campaign with a 25 basis point rate hike at the next Federal Open Market Committee (FOMC) meeting. Following this, traders expect one more 25 basis point hike that brings the terminal or peak rate to 5.00-5.25%.

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

Earlier this week, traders were pricing out hikes on financial institutions’ liquidity issues (e.g., SVB Financial Group) and data, including producer prices and retail sales, “moving in the right direction,” said Vital Knowledge’s Adam Crisafulli.

Graphic: Retrieved from Bloomberg via Gavekal Research/Macrobond. Recall that the Fed believes in needs a certain level of reserves for the proper functioning of the financial system (~$2 trillion). 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. Read the Daily Brief for September 20, 2022, for more.

Now, with fear of contagion ebbing on authorities’ commitment to preventing an “all-out systemic crisis,” explains Bloomberg’s John Authers, traders are again expecting a 5.00-5.25% terminal or peak rate.

Read: Credit Suisse Group AG (NYSE: CS) protection reaches prohibitively expensive levels as banks rush into CDS after big shareholders hesitate to boost their stake. Switzerland was forced to step in with a $54 billion lifeline to stabilize the crisis.

Graphic: Retrieved from Bloomberg via Holger Zschaepitz.

Adding, as Unlimited’s Bob Elliott puts it, “in the [Global Financial Crisis], credit risk spread rapidly. Today, there is very little [credit default swap] impact” or carryover.

Read: Daily Brief for October 4, 2022, for calculating CDS market-implied probability of default.

Graphic: Retrieved from Alexander Campbell.

Positioning

Following measures of US Treasury yield volatility implied by options (i.e., bets or hedges on or against market movement) adjusting higher, equity market volatility strengthened as observed by measures of convexity (e.g., Cboe VIX Volatility Index or VVIX). The Daily Brief for March 14 talked about this in detail.

Graphic: VVIX chart retrieved from TradingView.

For this protection to keep its value and continue to perform well, realized volatility or RVOL must shift higher substantially and stay elevated. That’s not really happening to some big extent, at least in the equity market. Consequently, put structures such as bear put spreads in the S&P 500 (INDEX: SPX), for example, are not performing.

Graphic: Retrieved from Alpha_Ex_LLC. “Easy to argue that rate vol is leading and in this context, one could suggest VIX has room to rise from here.” However, it would “take a lot for the MOVE to sustain itself at this level.”

This information, coupled with falling implied volatility or IVOL, the passage of nearing derivatives expiries, and the strength of products like the Nasdaq 100 (INDEX: NDX) relative to others like the Russell 2000 (INDEX: RUT), has your letter writer leaning optimistic. 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.

Graphic: Retrieved from Tom McClellan. “The direct message is that the SP500 options traders who drive the VIX Index are feeling more fearful than the VIX futures traders believe is merited.”

Technical

As of 7:15 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a balanced 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 $3,921.25, $3,946.75, and $3,970.75.

Key levels to the downside include $3,891.00, $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 (bottom middle).

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.

Categories
Commentary

Daily Brief For March 1, 2023

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

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

Administrative

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

Fundamental

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Graphic: Retrieved from NDR via Macro Ops.

Positioning

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

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

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

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

Technical

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

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

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

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

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

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

Definitions

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

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

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

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

About

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

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For February 21, 2023

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

Subscribe
Graphic updated 9:05 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.

Fundamental

Some big ideas/themes to mull as we leg into this week’s letters. Have a great day!

Investors are facing a big adjustment as a consequence of post-pandemic geopolitics and the race for control of physical things. Typical responses, like adjusting demands structurally to meet supply, are no longer optimal. Bailouts and zero-interest policies are what entered us into this cycle of inflation and geopolitical instability. What’s more optimal are fiscally-funded policies.

“The outcome of [quantitative easing or QE] was obvious and inevitable,” economist Dr. Pippa Malmgren explained in a letter. “The decline of interest rates to nothing and the return of inflation … destabilize[d] emerging markets and cause[d] governments to race for control over supply chains of food and energy.” As Credit Suisse Group’s (NYSE: CS) Zoltan Pozsar said in December, “whoever encumbers commodities and controls the factories rules inflation, whoever rules inflation controls interest rates, and whoever controls interest rates controls the level of the stock market and financial wealth more generally.”

Accordingly, policymakers’ new way to push cash into the economy is defense spending. Malmgren explained that this new fiscally funded QE if we will, is not subject to audits and falls under the guise of “civilian tech” innovation which “we are seeing the results of” in the air, space, and sea. Take, for instance, headlines on undersea internet cable and gas line disruptions, as well as the likes of Amazon Inc (NASDAQ: AMZN) and Starlink heading to space to provide satellite-based WiFi (which can be used for “strategic support” during operations), and China pulling satellites out of orbit.

“[W]e cannot see what’s going on in the graveyard of space,” Malmgren added, noting that the 200-foot balloons drifting over the West reveal the US is “already at war” and knocks the notion leaders “could be at war without the public needing to know about it.” China understands what Malmgren called leverage ratios. Flyovers with jets may work in Taiwan but not in the US. It “would invite an overwhelming response, … [while] balloons seem so innocuous,” just as the Japanese Sky Lanterns appeared during WWII, Malmgren detailed in another letter. In the Sky Lantern case, though many of the balloons “were found unexploded,” some blew; one took out power to “the very nuclear reactor that happened to generate the plutonium that would later be used in the Nagasaki nuclear bomb.”

Perhaps the Chinese balloons are intended to deliver payloads and, “like in the 1940s, we are already at such an advanced stage of confrontation amongst the superpowers that the job of the military is not so much to respond to the balloons as it is to prevent public panic.” As validation, one may look to the very little alarm over military activities in the Pacific, as well as “China and the US … trying to move on from the [balloon] dispute,” Bloomberg reported last week.

“It is as if the Western military establishment learned a great lesson from having underestimated President Putin” who just suspended the New START treaty with the US. Now, with reports that China is readying for an attack on Taiwan by 2027, the US “has shifted from holding exercises to engaging in mission rehearsals … [which] increase confidence in the twenty-year-olds who will be actually conducting warfighting.”

Anyways, a product of “The Invisible War,” as Malmgren calls it, is this painful divorce and will intensify the decoupling after the world hit a “limit of economic integration in 2006 or 2007,” Noah Smith put in a recent letter. With estimates that two years of global GDP growth could be wiped by a decoupling, Smith added, “we should be thinking about how to shape the next wave of globalization in a way that encourages global economic growth while also providing security to ourselves and our allies.” Malmgren ends: “The markets won’t like all this.”

Though there may be a dip in inflation in the interim resulting in a pivot and relief in markets, the prospects of inflation resurfacing, potentially with vengeance, are up, and this has negative implications on traditional portfolio constructions as this letter started with, today. Therefore, investors should consider adding exposure to cash, bonds, and commodities, as this letter quoted Pozsar explaining before.

Technical

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

The S&P 500 pivot for today is $4,052.25. 

Key levels to the upside include $4,071.75, $4,083.75, and $4,104.25.

Key levels to the downside include $4,034.75, $4,015.75, and $3,998.25.

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.

About

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

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For January 31, 2023

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

Subscribe
Graphic updated 8:00 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility.

Fundamental

Late release. Apologies!

To stay ahead of big trends likely to impact our portfolios in non-linear ways, we must not narrow our playing field. This is from a December 30, 2022 conversation between Dr. Pippa Malmgren and Michael Green of Simplify Asset Management on the “big adjustment” investors are likely to face, as well as the risks to models/frameworks and the “religious belief” in them built up over time.

To explain, the typical response to inflation, which is higher interest rates, is outdated.

“We have a supply shock” brought on by the pandemic and exacerbated by geopolitics, Malmgren said. “We don’t have enough production of physical things” such as food, as well as “oil, gas, and molecules.”

Monetary policymakers are ill-equipped to handle the inflation situation and the global conflicts we’re engaged in; the current response, to quote Credit Suisse’s (NYSE: CS) Zoltan Pozsar, of “curbing demand structurally to adjust to shortages” has put the economy on an L-shaped path (i.e., vertical drop in activity via recession, and flatline for a period of time as rates remain higher for longer to prevent a sharp rise in inflation, though the latter part is to be debated, hence the talk inflation will come roaring back once policymakers scare and pivot prematurely).

Malmgren suggests policymakers should (and eventually may) look to bring markets in balance by asking how “to get more” supply. The answer is that businesses need to be created, and this is capital-intensive; “raising interest rates precludes that from happening,” Malmgren added. Rates are a blunt tool and we “do not want to treat everything the same.”

Rather, there may be fiscally funded industrial policy, as Pozsar suggested months back, as well as “different interest rates for different things in the economy” through the use of a central bank digital currency (CBDC), Malmgren said. With a CBDC, we can have “personalized interest rates for each individual company and each individual in society … determined by … your behaviors, and views about whether your sector is going to be a winner or not.”

The “belief systems in models [are] so deeply religious, and we’ve built everything on that.” Consequently, policies that worked in the past (i.e., bailouts, at-zero interest rates, and providing endless amounts of cheap capital) will, inevitably, create sticky inflation and “spark off geopolitics,” Malmgren explained.

To fast forward, the moral of the story is that policymakers are using outdated ways to handle new problems. Therefore, the inflation story will continue, and its resolution will look nothing like it has in the past. 

Yes, though there may be a dip in inflation in the interim resulting in a pivot and relief in markets, the prospects of inflation resurfacing, potentially with vengeance, are up, and this has negative implications on traditional portfolio constructions.

Technical

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

The S&P 500 pivot for today is $4,011.75. 

Key levels to the upside include $4,028.75, $4,050.25, and $4,061.75.

Key levels to the downside include $3,988.25, $3,981.00, and $3,965.25.

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

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

Definitions

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

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

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

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

About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

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

Contact

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For January 23, 2023

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

Subscribe
Graphic updated 7:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) measure reflects the total attractiveness of owning volatility.

Administrative

Your letter writer has returned after a period of travel. Now, there is a lot of content to cover, so we’ll give it a good shot today and fill in some of the missing points over the coming days. Thanks!

Fundamental

At its core, the expectation is that the US economy will fall into recession in the first half of 2023, and traders are betting policymakers will reverse in the second half of the year. This, in part, has boosted the S&P 500 (INDEX: SPX) over the past weeks.

However, many strategists think there is little reason for the policymakers to reverse course, and that will not be good for the markets.

Graphic: Retrieved from Bloomberg. Traders bet big on a peak in interest rates; some have amassed positions “in June 2023 SOFR options targeting a policy peak between 4.75% to 4.875%, and paying a premium of approximately $5.25 million for the hedge.”

As a recap, recall our past letters featuring the likes of Kai Volatility’s Cem Karsan and Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar. The inflation conversation began when authorities cut rates and bought bonds, while money was sent to people.

Risk assets were the first to respond; it was easier to borrow and make bets on ideas with a lot of promise in the future. As the economy reopened and demand picked up, supply chains tightened, and prices in the real economy inflated. 

Graphic: Retrieved from Moody’s Corporation (NYSE: MCO).

As argued by Pozsar, Andy Constan, and Joseph Wang, inflation likely trends higher for longer. Trends in de-globalization, supply chain chokepoints and restructuring, and a large credit boom in the banking sector are among the factors to blame.

Policymakers will continue generating negative wealth effects. Collateral damages to the economy (e.g., Alphabet Inc [NASDAQ: GOOGL] [NASDAQ: GOOG] and Spotify Technology SA [NYSE: SPOT] layoffs) are expected, consequently.

Graphic: Retrieved from The Market Ear. Per Morgan Stanley (NYSE: MS), “the single most important driver of equities over the last year has been excess liquidity, and it’s about to turn more restrictive. The amount of liquidity in the system is about to change again – the Treasury is increasing bill issuance sizes, which will drain liquidity from the system. The Treasury could build cash by more than $200 billion over the span of a month – which on top of QT will effectively drain nearly $300 billion from bank reserves – which implies the S&P 500 should be 6% lower over the net month.”

Moreover, per Andreas Steno Larsen, markets likely bottoms in the middle of 2023.

“[Christopher] Waller said that the QT process will either have to slow or come to a complete halt if the amount of USD reserves is equal to 10-11% of USD GDP, which is around 2.5 trillion USDs relative to current GDP (but rising over time obviously).”

Because we have more than $3 trillion USD in the system, and “more to be added due to the debt ceiling, we need a withdrawal of another $5-600 billion before QT will end [or] slow in between weeks 34-40 on our calculations,” Steno Larsen added, noting that if GDP flatlines, that would help keep QT running for longer. 

“If the Fed is willing to bring reserves down to 10% of GDP, we should expect S&P 500 to bottom around $3,250.00 in the second half of the year,” Steno Larsen said. “The Waller Rule is not good news ultimately, but for now let’s enjoy the liquidity added in February and March due to the debt ceiling. When a debt ceiling deal is signed, run for the hills.”

Graphic: Retrieved from Andreas Steno Larsen.

Technical

As of 7:15 AM ET, Monday’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.

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

Key levels to the upside include $3,998.25, $4,011.75, and $4,019.00.

Key levels to the downside include $3,979.75, $3,965.25, and $3,949.00.

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

As a disclaimer, the S&P 500 could trade beyond the levels quoted in the letter. Therefore, you should load the above link on your browser for more relevant levels.

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 long periods of time, it will be identified by low-volume areas (LVNodes). 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 HVNodes for favorable entry or exit.

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

About

In short, an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

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

Contact

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For January 10, 2023

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

Subscribe
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 this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) measure reflects the total attractiveness of owning volatility.

Fundamental

Apologies for the delayed send. Please be subscribed to our Substack to receive updates sooner every day!

Last week, we added to our discussion on the “non-linear shocks” keeping inflation above target. In short, these shifts are not good for portfolio constructions like 60/40.

Moreover, in a January 6 Credit Suisse (NYSE: CS) follow-up, Zoltan Pozsar provided what he thinks may be a more optimal portfolio construction: 20% cash, 40% stocks, 20% bonds, and 20% commodities.

“[T]his ain’t your parents’ global macro environment,” Pozsar put forth, adding that some of the crises impacting the stability of money stem from the crisis of inflation “driven by mother nature and geopolitics.” Consequently, central banks’ responses may not be good for risk assets.

Amid a re-shaping of global flows (i.e., lower demands for the US dollar and Treasury securities), the Federal Reserve (Fed) may focus on backstopping bonds; if the usual marginal buyer won’t buy, in the context of geopolitical events, Treasuries may be at risk of tailing in auctions, which could, then, drive volatility in equities, credit, and EM.

By the end of 2023, the solution may be quantitative easing (QE) under the guise of yield curve control (YCC); QE will happen in the context of dysfunction in the Treasury markets, and seek to “police swap spreads at high levels of interest rates, not depress yields [and] inflate risk assets.”

Technical

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

Our S&P 500 pivot for today is $3,908.25. 

Key levels to the upside include $3,926.50, $3,943.25, and $3,955.00.

Key levels to the downside include $3,891.00, $3,874.25, and $3,857.00.

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

As a disclaimer, the S&P 500 could trade beyond the levels quoted in the letter. Therefore, you should load the above link on your browser for more relevant levels.

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 long periods of time, it will be identified by low-volume areas (LVNodes). 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 HVNodes for favorable entry or exit.

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

About

In short, an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

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

Contact

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For January 5, 2023

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

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Graphic updated 7:05 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

Today’s coverage adds to comments made, yesterday. See the Daily Brief for January 4, here. If you’re short on time, here’s an abstract:

  • There is the existence of “non-linear shocks that will keep inflation above target” 
  • A shift, the first in generations, from unipolar to multipolar is not good for “60/40”

Fundamental

Yesterday’s letter discussed whether “the next set of non-linear shocks that will keep inflation above target” are priced. According to a December 27 note by the Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar, these non-linear shocks have yet to be priced. 

In summary, as Pozsar said on December 29, “whoever encumbers commodities and controls the factories rules inflation, whoever rules inflation controls interest rates, and whoever controls interest rates controls the level of the stock market and financial wealth more generally”; a shift, the first in generations, from unipolar to multipolar, via the “Great Power conflict, BRICSpansion, ‘BRICS coin’, and commodity encumbrance, … portends nothing good for your 60/40 portfolio.”

To stay ahead of these shifts, investors have to glean information from statesmen, rather than central bankers. The pursuit of “friend-shoring and Belt and Road” – cooperation, development, and the facilitation of interstate payments off the Western systems – to lower dependencies on the West and hedge against sanctions risks, is a reversal of trends that helped create a “more speculative, debt-fueled economy in the US,” per the Financial Times. Central bankers are not equipped to fight this trend reversal.

So, with that, where are we at with these shifts? Pozsar thinks “2023 will be pivotal.”

The G20 is set to become “the ‘G7 + Australia’ = 8 countries on one side, and ‘BRICS + new applicants + the thematically aligned’ = 11 countries on the other. 8 + 11 = 19. The remaining member, the European Union (EU), is perhaps the most directly affected by this global ‘split’”.

Graphic: Retrieved from the German press and information offices.

In fact, if new candidate countries for the BRICS expansion are accepted, “an entity with a GDP 30% larger than the United States, [with] over 50% of the global population [] in control of 60% of global gas reserves” could be created. This is significant. Per Pozsar, “the BRICS are most aligned on [] the de-dollarization of their fast-growing, bilateral trade flows.”

Graphic: Retrieved from the Silk Road Briefing.

Consequently, in this strive for some independence from the West, “the US dollar and Treasury securities will likely be dealing with issues they never had to deal with before: less demand, not more; more competition, not less.” That’s information for us investors to keep in mind as 2023 unfolds and more seek to join the “friend-shoring and Belt and Road” train.

Consider reading Pozsar’s full note for December 27 and December 29.

Positioning

For an update on positioning, stay tuned for Friday, January 6’s newsletter.

Technical

As of 7:00 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.

Our S&P 500 pivot for today is $3,867.75. 

Key levels to the upside include $3,878.75, $3,893.75, and $3,908.25. 

Key levels to the downside include $3,857.00, $3,845.25, and $3,834.25.

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

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). 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 HVNodes for favorable entry or exit.

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

About

In short, an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

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

Contact

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

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.