Categories
Commentary

Daily Brief For August 30, 2021

Market Commentary

Equity index futures, bonds, dollar, VIX sideways to higher. Commodities were mixed.

  • Positioning lightened. Ample liquidity.
  • Ahead: Data on pending home sales.

What Happened: U.S. stock index futures auctioned sideways to higher overnight alongside news that the Federal Reserve would not make changes to its policy.

Ahead is data on pending home sales (10:00 AM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. 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: As of 6:30 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open near prior-range and -value, suggesting a more limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on strong intraday breadth and lackluster market liquidity metrics, the best case outcome occurred, evidenced by new all-time highs in the S&P 500 and Nasdaq 100. This is significant because it suggests continued bullishness after a v-pattern recovery.

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.

Further, the aforementioned trade is happening in the context of the Federal Reserve’s commitment to stay the course with respect to monetary policy. This theme’s implications on price are supportive; to elaborate, the absence of a rate hike or taper, alongside low bond and equity market volatility, among other things, suggests liquidity will remain ample.

The key for this week is U.S. jobs data later; those metrics will allow participants to better contextualize the taper timeline. At the same time, there’s been a cooling amongst some positioning metrics, also.

Graphic: Goldman Sachs Group Inc (NYSE: GS) Sentiment Indicator. According to The Market Ear, the “indicator measures stock positioning across retail, institutional, and foreign investors versus the past 12 months. Readings below -1.0 or above +1.0 indicate extreme positions that are significant in predicting future returns.”

Moreover, for today, given poor structure, a divergent volume delta Friday, as well as a decline in metrics like DIX and GEX, the odds of significant upside volatility are lower. Still, participants may make use of the following objective frameworks for today’s trade.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,513.50 overnight high (ONH) puts in play the $4,520.25 Fibonacci extension. Initiative trade beyond the Fibonacci level could reach as high as $4,556.25 and $4,592.25, two other key Fibonacci extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,513.50 ONH puts in play the $4,495.00 high volume area (HVNode). Initiative trade beyond the $4,495.00 HVNode could reach as low as the $4,481.75 HVNode and $4,454.25 LVNode, or lower. 

To note, the $4,454.25 LVNode corresponds with an anchored volume-weighted average price (VWAP), 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.

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 past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). 

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

Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.

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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

News And Analysis

Banks are effectively sterilizing central bank liquidity.

Morgan Stanley eyes mid-cycle transition, correction.

An options turn upheavals into mid-month sure thing.

Ida made landfall in Louisiana, stronger than Katrina.

Sustained vaccine demand to support pharma growth.

Billionaire Paulson is calling cryptocurrency a bubble.

Crypto nomads – surfing the world for risk and profit.

Cadano’s Ada is the latest cryptocurrency surging up.

What People Are Saying

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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

Weekly Brief For August 29, 2021

Editor’s Note: If this commentary was valuable to you, consider forwarding it to your peers. Alternatively, share on social media and tag either @renatolcapelj or @physikinvest.

Wishing you good health and success!

Market Commentary

Equity index, bond, and commodity futures traded higher Friday. The VIX, US10Y, and dollar were sideways to lower.

  • What happened and things to expect.
  • Ahead is important employment data.
  • Trade Idea: Complex spread in GME.
  • Expecting less volatility to the upside.

What Happened: U.S. stock index futures auctioned sideways to higher last week alongside impactful events like the Federal Reserve’s Jackson Hole Economic Symposium. 

Ahead this coming week is important data on employment, consumer confidence, vehicle sales, manufacturing, and more. See here for updated calendar data.

Graphic updated 7:30 AM ET Sunday. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. 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: During the prior week’s trade, on mostly strong intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by new all-time highs in the S&P 500 and Nasdaq 100. This is significant because it suggests continued bullishness after a v-pattern recovery.

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.
Graphic: Ally Financial Inc-owned (NYSE: ALLY) Ally Invest chart shows S&P 500 defending advance.

Further, the aforementioned trade is happening in the context of the Jackson Hole Economic Symposium. This event’s implications on price are supportive

To elaborate, given a slow down in the pace of the post-pandemic recovery, the Federal Reserve (i.e., Fed) decided not to manipulate policy to offset temporary factors. The reason being, policy effects are often delayed; doing something now could curb the recovery. 

Graphic: Guggenheim Investments unpacks the impact of weaker data on monetary policy.

At the same time, with measures like the Marshallian K – the difference between year-over-year growth in M2 money supply and GDP – turning negative, there are concerns around liquidity and its impact on the equity market.

Graphic: According to Bloomberg, “While stocks kept rising during frequent negative Marshallian K readings in the 1990s, the pattern since the 2008 global financial crisis — a period when the central bank was in what Ramsey calls a “perpetual crisis mode” — begs for caution.”

According to Moody’s, however, “it will take a while before liquidity concerns are justified even with the Fed likely to begin tapering its $120 billion in monthly asset purchases either late this year or early next.”

Why? Well, for starters, if liquidity was an issue, financial institutions wouldn’t be parking that much money at the Fed. Low volatility in the bond and stock market also implies ample liquidity, Moody’s adds.

So, by not rapidly reducing its asset purchases, the Fed isn’t worried about the economy overheating due to non-temporary inflation; instead, Chairman Jerome Powell maintains that “[o]verall global deflationary trends remain in force.”

Eventually, though, after progress is made on full employment, the Fed will taper, likely keeping inflation expectations in line.

To note, last week’s straight-up trade came alongside the so-called sale of any volatility spike which can – through the process of hedging – support the market. Here’s just one example that received a lot of attention.

“In theory, if a stock was dropping and the retail masses all started to sell puts, they could push market makers to start buying large blocks of shares,” SpotGamma, an important voice in the space, says. “This could stabilize a dropping stock.”

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on the underlying’s order book. For instance, in selling a put, customers add liquidity and stabilize the market. How? The counterparty long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

Moreover, given a divergent volume delta and decline in metrics like DIX and GEX, the odds of significant upside volatility are lower. Still, participants may make use of the following objective frameworks for next week’s trade. Check for updated levels in Monday morning’s commentary.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.00 high volume area (HVNode) pivot puts in play the minimal excess all-time high and $4,511.50 Fibonacci extension. Initiative trade beyond the $4,511.50 level could reach as high as the $4,520.25 and $4,556.25 extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,495.00 HVNode puts in play the $4,481.75 HVNode. Initiative trade beyond the $4,481.75 HVNode could reach as low as the $4,454.25 low volume area (LVNode) and $4,427.00 untested point of control (VPOC).

To note, the $4,454.25 LVNode corresponds with an anchored volume-weighted average price (VWAP), 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.

Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.

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.

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

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

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 7:30 AM ET Sunday.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. It is a peek into the thought process here at Physik Invest.

Options offer an efficient way to gain directional exposure. 

If an option buyer was short (long) stock, he or she could buy a call (put) to hedge upside (downside) exposure. Additionally, one can spread, or buy (+) and sell (-) options together, strategically.

Commonly discussed spreads include credit, debit, ratio, back, and calendar.

Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.

Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.

Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 

Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.

Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

Typically, if bullish (bearish), sell at-the-money put (call) credit spread and/or buy a call (put) debit/ratio spread structured around target price. Alternatively, if the expected directional move is great (small), opt for a back spread (calendar spread). Also, if credit spread, capture 50-75% of the premium collected. If debit spread, capture 2-300% of the premium paid.

Be cognizant of risk exposure to direction (delta), time (theta), and volatility (vega). 

Negative (positive) delta = synthetic short (long). 

Negative (positive) theta = time decay hurts (helps).

Negative (positive) vega = volatility hurts (helps).

Trade Idea: SELL -1 1/2 BACKRATIO GME 100 17 SEP 21 530/680 CALL @1.20 LMT

Though I began filling this trade at limits for credit as high as 2.00, the spread collapsed markedly, Friday. Still, there’s an opportunity for unique structures such as the 530C+1, 680C-2 that pay you to be long the stock.

All else equal (i.e., discounting factors such as an increase in volatility), should the spread trade fully in-the-money – meaning the stock travels to the $680 short strike – the 530 strike will be 150 points in-the-money while the at-the-money strikes, combined (based on current at-the-money pricing), will trade around $53.00.

That suggests the spread should price for a credit north of $97.00 to close. Nice!

Thesis: I’m bullish on GameStop and I think the stock may climb over the next week few weeks. 

I will structure a spread above the current stock price, expiring in 18 days. I will buy the 530 call option once (+1) and sell the 680 call option twice (-2) for a $1.20 credit or better. Should the stock not move to my target, I keep the $120.00 credit. Should it move to $680, I could make $15,000.00 at expiry. Should the stock move past $830 break even or so, I may incur unlimited losses. My goal with this spread is to capture the initial credit and close for additional credit if the stock moves higher. 

If necessary, I will hedge the position by either (A) buying stock, (B) widening strikes, (C) buying a far out-of-the-money call option to cap upside in case of an unpredictable move higher, or (D) roll strikes up in price and out in time.

Below is a log chart of GameStop Corporation (NYSE: GME) and the ratio spread profit zone.

News And Analysis

Treasury bears redeemed as Citi, Michael Burry see higher yields.

Visa jumps into the NFT craze, buying a CryptoPunk for $150,000.

The top 7 reasons why COVID-19 could lead to inflationary regime.

Storm Ida roars toward Louisiana with winds of 150 miles per hour.

Chinese health officials reject U.S. allegations on COVID-19 probe.

What People Are Saying

Let’s Hang Out

Los Angeles, CA September 10-12

Salt Lake City, UT September 28-30

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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 25, 2021

Editor’s Note: Dark Pool Index (DIX) and Gamma (GEX) visuals are based on where each metric falls with respect to the MAX and MIN for all data available on https://squeezemetrics.com/monitor/dix (i.e., DIX in relation to high and low of the entire DIX data set).

Market Commentary

Equity index futures trade sideways.

  • Updates to DIX, GEX calculation.
  • Implications of Fed’s cash deluge.
  • Ahead: Some goods orders data.
  • Positioned for sideways to higher.

What Happened: U.S. stock index futures auctioned sideways alongside an absence in overnight catalysts.

Ahead is data on durable and nondefense capital goods orders (8:30 AM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. 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 Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on strong intraday breadth and lackluster market liquidity metrics, the best case outcome occurred, evidenced by sideways trade at the $4,481.75 high volume area (HVNode). This is significant because sideways trade – after the completion of a v-pattern recovery – denotes an acceptance of higher prices (i.e., participants find prices valuable to transact at).

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.

Further, ahead of the upcoming Jackson Hole Economic Symposium on August 26-28, 2021, the aforementioned trade is happening in the context of moderating economic growth and monetary distortions.

According to Bloomberg, “[d]emand for the so-called RRP facility has surged as a flood of dollars threatens to overwhelm funding markets. That’s in part a result of the central bank’s long-standing asset purchases and drawdowns of the Treasury’s cash account, which is pushing reserves into the system. As a result, liquidity has been swelling, especially as the Treasury cuts supply to create more borrowing room under the debt ceiling.”

“Even if the central bank were to complete tapering by August 2022, as JPMorgan expects, there may still be an additional $850 billion to $1 trillion of additional liquidity injected into the financial system.”

Graphic: Bloomberg plots Federal Reserve data on reverse repo usage.

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,481.75 high volume area (HVNode) puts in play the $4,492.00 overnight, minimal excess all-time high (ONH). Initiative trade beyond the ONH could reach as high as the $4,511.50 and $4,556.25 Fibonacci extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,481.75 HVNode puts in play the $4,454.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,427.00 untested point of control (VPOC) and $4,393.75 micro composite point of control (MCPOC).

To note, the $4,427.00 level corresponds with an anchored volume-weighted average price (VWAP), 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.

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

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

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

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

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

News And Analysis

MSCI CEO dismisses concern Chinese stocks are uninvestable.

Federal Reserve policy got Chinese criticism as PBOC diverges.

President Biden praises house adoption of a $3.5B budget plan. 

S&P Global: Global oil demand peak by 2025 under UN pathway.

How U.S. infrastructure investment could boost jobs, productivity.

U.S. on a pace to complete a full Afghanistan withdrawal by 8/31.

Catherine Wood is more optimistic than pessimistic about China.

What People Are Saying

About

After years of self-education, strategy development, 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. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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

Weekly Brief For April 18, 2021

Happy Sunday! Though markets were relatively choppy, they ended higher last week. This came at a time of heightened public attention to the market.

The following commentary on U.S. broad market equity indices will discuss what happened, why it matters, what to expect, and how participants can position themselves for the coming week.

But first, here’s a quote from Sterling professor of economics at Yale, Robert J. Shiller:

“The current widespread fascination with the rising market accompanied by recent concern about a possible downward spiral and strained stock market valuations echo those of 100 years ago.”

Market Commentary

What Happened: The S&P 500, Nasdaq-100, and Dow Jones Industrial Average made new all-time highs before closing the week out with an attempt to balance and validate newly discovered prices.

  • Data suggests economic outlook improving.
  • Earnings pick up, add to clarity on recovery.
  • Risk, reward poor for new entries. Be picky.

Why It Matters: The price rise in U.S. broad market equity indices comes as the economic recovery from the COVID-19 coronavirus pandemic accelerated.

According to S&P Global, the recovery’s acceleration warranted a revision in the firm’s 2021 global GDP growth forecast to 5.5%, a 50 basis point change.

At the same time, it’s S&P’s belief that U.S. inflation fears are overblown. Traders began to price in that realization, last week. 

After a slew of economic releases, yields pulled back dramatically.

In a Bloomberg article, Barclays strategists, including Anshul Pradhan, noted a raising of the bar on reflation; the drop in yields “reflects the fact that expectations for growth, inflation and the hiking cycle have all been significantly revised higher.”

Further, participants saw the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility based on S&P 500 (INDEX: SPX) options, continue a multi-week drop attracting the participation of systemic strategies and opportunistic hedging, as noted last week.

It is important to note that this most recent rally in equity indices, which coincides with a historically bullish period, came soon after Archegos Capital’s default on margin calls which triggered a fire sale by several big Wall Street banks.

SpotGamma, a source for actionable insights based on activity in the options market, in a commentary, attempted to unpack the narrative which suggests the mechanical bid across the broad market is tied to a “tangled web of counterparty risk and hedging,” among other factors.

Moving beyond speculations, a couple of things are true and must be accounted for in our narrative.

First, equity market inflows, over the past 5 months, exceeded inflows of the prior 12 years, total. Second, as the April monthly options expiration (OPEX) passes and the positioning of participants changes, the risks of a near-term pullback have increased substantially. 

Despite the stock market trading in a historically bullish period, as well as declining volatility attracting the participation of systematic strategies, increased put selling, and the like, downside protection is trading cheap relative to its upside counterpart.

Option Expiration (OPEX): Option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.

Should the market turn and customers demand downside protection in an increasing fashion, dealers’ risk exposure to direction and volatility will cause violent crash dynamics to transpire.

An example of this is last year’s sell-off.

In a discussion on rising delta and volatility forcing dealers to sell into weakness to hedge a rapid move in prices, Kris Sidial, a former institutional trader and the co-chief investment officer of The Ambrus Group, a volatility arbitrage fund that looks to exploit changing market structure dynamics, said: “You have this dynamic in the derivatives market where there is a gamma squeeze when people are buying way far out-of-the-money [options], and dealers reflexively have to hedge off their risk,” Sidial said.

Graphic: SqueezeMetrics highlights implications of volatility, direction, and moneyness.

Putting it all together, despite markets being in a position to move higher, should there be a turn and spike in volatility, participants must be ready to accept the possibility of a violent liquidation.

As Market Ear puts it, hedge when you can, not when you must.

What To Expect: An increased potential to correct in time and price.

In addition, metrics, like DIX, market liquidity, and speculative derivatives activity, confirm participants’ bullishness and opportunistic hedging ahead of an acceleration in the global restart and a turn in flows, the result of consumers shifting their preferences from saving and investing to spending.

Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending April 16. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $364, which corresponds with $3,640 in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: SHIFT search suggests participants are not as inclined to add call-side exposure, through the month of May, in the SPDR S&P 500 ETF Trust (NYSE: SPY).

What To Do: In the coming sessions, participants will want to pay attention to where the S&P 500 trades in relation to Friday’s open-high-low-close (OHLC). 

Any activity above Friday’s regular trade-low suggests participants are not yet done discovering higher prices. Trading below Friday’s low suggests an inclination by participants to (1) form a consolidation area that denotes acceptance of higher prices or (2) revert to the mean and repair some of the poor structure left behind prior discovery. 

It is important to take note of the minimal excess and cluster of price extensions at $4,200.00, a typical price target based on Fibonacci principles.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

So, in the best case, the S&P 500 makes an attempt to balance or discover prices as high as $4,200.00. In the worst case, participants look to auction the S&P 500 into prior poor structures and low-volume areas (LVNodes) that ought to offer little-to-no support.

More On Volume Areas: A structurally sound market will build on past areas of high-volume (HVNode). Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area (LVNode) which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

News And Analysis

Economy | Housing starts reach the highest level since 2006. (MND)

Recovery | U.S. is unlikely to ‘just cancel’ J&J COVID-19 shots. (BBG)

Markets | Citi to exit banking in 13 markets across Asia, Europe. (BBG)

Markets | Record-high systemic leverage is pressuring rates. (Moody’s)

Economy | S&P Global Ratings expects global rebound to roar. (S&P)

Economy | Projections on global population, aging, urbanization. (REU)

Trade | Amazon sellers slammed with COVID-induced constraints. (S&P)

Recovery | How well COVID-19 vaccines work against variants. (AB)

Markets | SPACs boost credit at targets but carry unique risks. (Moody’s)
Markets | ‘Roaring Kitty’ adds to GME bet after exercising calls. (BBG)

What People Are Saying

Innovation And Emerging Trends

Economy | Looking at the pop culture of the original Roaring Twenties. (NYT)

Markets | Want to take your company public? Here are your options. (CB)

FinTech | Societe Generale adds first structured product on blockchain. (SG)

Exodus | Hedge funds are ready to get out of NY and move to FL. (BBG)

Trading | The answer to how much capital you should be allocating. (TT)

Venture | European venture reaches all-time high in first quarter 2021. (CB)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing leaders such as John Chambers, founder, and CEO, JC2 Ventures, Kevin O’Leary, Canadian businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

 Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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.

Cover photo by eberhard grossgasteiger from Pexels.

Categories
Commentary

Weekly Brief For April 11, 2021

Editor’s Note

Welcome to Market Intelligence, Physik Invest’s response to the many newsletters that seldom provide actionable market insights, free.

Through this newsletter you will get a glimpse into the following:

  • The implications of credit and positioning.
  • Impactful events in finance and technology.
  • Technical commentary for index products.
  • Media on emerging trends and hot topics.

Again, thanks for joining! Physik Invest looks forward to providing you an objective view into the who, what, when, where, why, and how in finance and technology.

Regards,

Renato Leonard Capelj


Market Commentary

Index futures are in price discovery mode.

  • Institutions bullish but risks add up.
  • Earnings season to start this week.
  • Balance-to-higher into April OPEX.

What Happened: U.S. stock index futures closed higher, last week.

What Does It Mean: The S&P 500 closed above $4,100 for the first time as investors looked to price in an economic “‘Goldilocks moment’—fast, sustained growth alongside inflation and interest rates that drift slowly upward.”

According to a letter by JPMorgan Chase & Co’s (NYSE: JPM) Jamie Dimon, strong consumer savings, an increased pace in COVID-19 coronavirus vaccinations, and unprecedented efforts to spur economic activity could mean that a boom lasts as long as 2023. 

This perspective differs from Dimon’s comments a year ago; he warned of a recession in which GDP could fall nearly 35%. Is Dimon one to fade? Likely not, given the fact that (1) he heads one of the biggest banks and (2) most forecasts by other institutions support Dimon’s perspectives.

Further, the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility based on S&P 500 (INDEX: SPX) options, traded to its lowest level since February 2020.

At the same time, participants saw blocks of VIX call spreads — bets that serenity won’t last — hit the tape; the unknown participant(s) bought nearly 200,000 contracts.

Graphic 1: Risk graph of the 25/40 VIX call spread in question via MarketEar

“With VIX being priced in the low 17 area, I would imagine we would see more of these larger-sized bets going forward,” Kris Sidial, co-chief investment officer at Ambrus Group, told Bloomberg. “I think smart money understands that, although volatility has contracted a lot in these last two months, we are still seeing signs of excess market fragility appear from many different angles.”

Graphic 2: Volatility declines to its lowest level since February 2020.

As stated last week, the market is in a historically bullish period, ahead of the upcoming corporate earnings season, with structural flows supporting the ongoing narrative into the coming April monthly options expiration (OPEX).

Option Expiration (OPEX) Significance: Option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.

Adding, most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection.

As a result of this activity, options dealers are long upside and short downside protection.

This exposure must be hedged; dealers will sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value.

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints — like the one the market is currently in — followed by rapid de-risking events as the market transitions into “short-gamma.”

What To Expect: Balance-to-higher.

Important to note is that equity market inflows, over the past 5 months, exceeded inflows of the prior 12 years, total. Think about the supply and demand dynamics of the market; in case of an equity market sell-off, a lot of late buyers will have poor location which may leave a thick area of supply above the market, putting a dampener on future rallies. 

“You should definitely be worried about valuations and all the more so when people start justifying extremely high valuations. We are risk-on, but we haven’t put our foot down on the accelerator because of valuations in some parts of the market,” said Fahad Kamal, chief investment officer at Kleinwort Hambros.

Adding to the narrative, metrics, like DIX, confirm increased buying pressure while divergences in options activity suggest opportunistic hedging, especially with puts trading at their cheapest level, relative to calls the same delta.

Graphic 3: 1-month 25 delta risk-reversal, via SpotGamma, suggests puts are trading cheap.
More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.
Graphic 4: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending April 9, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, in put strikes as low as $340, which corresponds with $3,400 in the cash-settled S&P 500 Index (INDEX: SPX).

What To Do: In the coming sessions, participants will want to pay attention to where the S&P 500 trades in relation to Friday’s end-of-day spike higher.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

In the best case, the S&P 500 remains above the $4,104.00 spike base. Doing so means that the participants are validating the prices caused by the late-day knee-jerk rally. 

In the case of higher prices, given that the 161.80% and 127.20% Fibonacci price extensions were achieved, and after-market trade established an overnight high at $4,121.50, participants can target prices as high as the $4,197.25 price extension.

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

Any activity below the $4,104.00 spike base puts the rally on hold and calls for balance or an attempt to digest higher prices.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

In the case of lower prices, participants can look to whether a test of the $4,069.00 high-volume area (HVNode) solicits a response. If not, initiative trade could take prices as low as $3,943.00, the next most valuable price area in the chain.

More On Volume Areas: A structurally sound market will build on past areas of high-volume (HVNode). Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area (LVNode) which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic 5: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

News And Analysis

Economy | No elevated default risk expected until 2023. (Moody’s)

Economy | China looks to curtail loan growth amid bubble fears. (BBG)

Markets | Pre-IPO, Coinbase releases blowout Q1 2021 results. (BW)

Markets | Growing signs that equity bull market overheating. (Axios)

Economy | CFPB warns lenders of a wave of distressed mortgages. (MP)

Markets | Cboe extends global trading for VIX and SPX options. (Cboe)

Markets | Unpacking the feedback loop that is distorting markets. (RV)

Trade | Global trade disruptions after the Suez Canal incident. (S&P)

Economy | U.S. COVID-19 vaccination rates to plateau in April. (Surgo)

Markets | Treasuries rally signaling bets on Fed hikes pared back. (BBG)

Markets | Bitcoin fills a demand for alternatives to fiat currencies. (BBG)

Economy | Powell says the economy poised for stronger growth. (BBG)

Markets | Earnings season starts with banks reporting this week. (WSJ)

Markets | Citadel Securities feels the heat of the political spotlight. (BBG)

Markets | Oil sideways. Gold, DXY higher. Copper, aluminum lower. (REU)

What People Are Saying

Innovation And Emerging Trends

Strategy | Strategies one VC believes made Stripe so successful. (BI)

FinTech | Fidelity, Square, and others, form crypto trade group. (WSJ)

FinTech | WealthCharts expands offer, tackles emerging trends. (BZ)

FinTech | SoftBank invests $500M in mortgage lender Better. (CNBC)

FinTech | Rarible co-founder says NFTs to stay, growth robust. (BZ)

FinTech | JPMorgan’s Dimon acknowledges fintech’s big threat. (BZ)

FinTech | Vesica launches a search engine for the options market. (BZ)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing leaders such as John Chambers, founder, and CEO, JC2 Ventures, Kevin O’Leary, Canadian businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. 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.

Cover photo by Kammeran Gonzalez-Keola from Pexels.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Up, Up And Away’

Key Takeaways:

What Happened: U.S. stock index futures closed higher, last week.

What Does It Mean: The S&P 500 closed above $4,000.00 for the first time.

This comes as investors shifted their focus from the risks of rapidly rising inflation to the increasing pace of COVID-19 coronavirus vaccinations and a rebound in economic activity.

At the time, the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility based on S&P 500 (INDEX: SPX) options, hit the lowest level since February of 2020. This was likely the result of an oversupply in volatility due to contract rolling, signaling a shift in the demand for volatility and options-based hedging.

Graphic 1: Volatility declines ahead of the extended holiday weekend.

Adding, the market is entering into a historically bullish period, ahead of the upcoming corporate earnings season, with structural flows supporting the ongoing narrative, also, at least until mid-April. The reason being, most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection.

Graphic 2: April, historically speaking, is usually a good month for equity investors. 

As a result of this activity, options dealers are long upside and short downside protection.

This exposure must be hedged; dealers will sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value.

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints — like the one the market is currently in — followed by rapid de-risking events as the market transitions into “short-gamma.”

What To Expect: Balance-to-higher into mid-April.

Why? One last hurrah before the reopening accelerates and flows turn. 

When flows turn, it is likely that equity and bond market volatility converge; the ongoing divergence comes alongside an attempt, by market participants, to price in rising debt levels and inflation. As consumers shift their preferences from saving and investing to spending, this divergence ought to disappear.

Graphic 3: Q1 2021 the worst quarter for bonds in decades, via Bloomberg
Graphic 4: Divergence in volatility across the bond and equity market.

Adding, metrics, like DIX, confirm increased buying pressure while divergences in options activity and volume delta suggest opportunistic selling.

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.

Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.
Graphic 5: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending April 4, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, in strikes as low as $330, which corresponds with $3,300 in the cash-settled S&P 500 Index (INDEX: SPX).

What To Do: In the coming sessions, participants will want to pay attention to where the S&P 500 trades in relation to Thursday’s end-of-day spike higher.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

In the best case, the S&P 500 remains above the $4,004.25 spike base. Doing so means that the participants are finding higher prices, above the VWAP anchored from the March 17 rally-high, valuable (i.e., buyers, on average, are in control and winning since the March 17 rally-high).

More On 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. 

In the case of higher prices, given that the $4,015.25 price extension was achieved in after-market trade that established an overnight high at $4,038.25, participants can target the $4,062.00 extension.

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

Any activity below the $4,004.25 spike base puts the rally on hold and calls for balance or digestion of higher prices.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

In the case of lower prices, participants can look to whether a test of the $3,943.00 and $3,908.25 high-volume areas (HVNodes) solicit a response.

More On Volume Areas: A structurally sound market will build on past areas of high-volume (HVNode). Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area (LVNode) which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic 6: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s trade is $4,004.25.

Any activity above this level confirms the bullishness of last Thursday’s end-of-day spike. 

Levels Of Interest: $4,004.25 Spike Base.

Cover photo by Taryn Elliott from Pexels.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Down, Then Up’

Key Takeaways:

What Happened: U.S. stock index futures closed higher, last week.

What Does It Mean: In the face of stretched sentiment and positioning — a heightened appetite for risk — investors shifted their focus from the risks of rapidly rising inflation to the increasing pace of COVID-19 coronavirus vaccinations and a rebound in economic activity.

This comes after an outlier 2020; the distribution of S&P 500 1-year returns was ‘unexpected,’ sitting in the far end of the right tail.

Graphic 1: Distribution of S&P 500 1-Year Returns via Bloomberg

Adding, according to S&P Global Ratings, concerns over inflation appear “overblown and [] orderly reflation, around a return to sustainable growth, is a healthy development for both macro and credit outcomes.”

This notion is further validated by history; according to Bloomberg, “Since 2008, markets have consistently priced in a more aggressive path of Fed rate hikes than what ultimately happened. Consider the situation in late 2008: traders were already bracing for several hikes in the years ahead, according to data crunched by JPMorgan Chase & Co. (NYSE: JPM), but policy makers held off on tightening until 2015.”

Due to this mispricing, traders are behind the curve when the Fed finally hikes. Between 2017, through 2018, traders were scrambling to keep up with the Fed’s seven hikes.

Graphic 2: Bloomberg maps out the pricing in of Federal Reserve rate hikes.

“The market has its pricing and perceptions, and what happens can differ from that and has,” Alex Roever, head of U.S. rates strategy at JPMorgan, told Bloomberg News. The market has been testing the Fed by “trying to push further forward the first hike. But Fed officials don’t seem to be having any of it.”

The Fed’s hesitancy to change its stance is warranted; broadly speaking, financial conditions haven’t budged. 

Graphic 3: U.S. financial conditions appear accommodative, via Bloomberg

Analysts at S&P Global Ratings put it best: “Our bottom line is that orderly reflation is, on balance, a healthy development for macro and credit outcomes. This narrative implies that moderate demand and wage pressures have reemerged after a lost decade and that the interest rate structure has the potential to return to more normal levels. While there will inevitably be some market adjustments as credit is repriced, this will lead to better outcomes.”

A natural evolution — trend in rates toward normalcy — would provide monetary authorities ammunition in another downturn, and price credit in a way that rebalances the natural supply and demand dynamics of the market (i.e., non-productive firms are forced out of business).

What To Expect: Directional resolve.

Why? During prior trade, participants lacked conviction. This is evidenced by a failure, by participants, to introduce excess (e.g., tails or range expansion past historical turning points) in the S&P 500.

More On Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants can aggressively enter the market, leaving tails or gaps which denote unfair prices.

Adding, metrics, like DIX, suggest increased buying pressure. This comes after what appears to have been opportunistic buying or short covering into weakness, and some bearish trades in the cash-settled S&P 500 Index (INDEX: SPX), among other products like Chinese technology stocks and U.S. media companies. 

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.
Graphic 4: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending March 26, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, in strikes as low as $361, which corresponds with $3,610 in the cash-settled S&P 500 Index (INDEX: SPX).

What To Do: In the coming sessions, participants will want to pay attention to where the S&P 500 trades in relation to Friday’s end-of-day spike higher, which was likely the result of hedging.

More On Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

In the best case, the S&P 500 remains above the $3,934.00 spike base, taking out Friday’s minimal excess high. Doing so means that the participants are finding higher prices, above the VWAP anchored from the March 17 rally-high, valuable (i.e., buyers, on average, are in control and winning since the March 17 rally-high).

More On 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. 

In case of higher prices, participants can target the $3,978.50 overnight rally-high, as well as the $4,015.25 and $4,062.00 price extensions.

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

Any activity below the VWAP anchored from the $3,978.50 peak may (1) leave the $3,900.00 HVNode as an area of supply, offering initiative sellers favorable entry and responsive buyers favorable exit.

More On Volume Areas: A structurally sound market will build on past areas of high-volume (HVNode). Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area (LVNode) which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high-volume for favorable entry or exit.
Graphic 5: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s trade is $3,934.00.

Any activity above this level confirms the bullishness of last Friday’s end-of-day spike. 

Levels Of Interest: $3,934.00 Spike Base.

Cover photo by Min An from Pexels

Categories
Commentary

Market Commentary For The Week Ahead: ‘Green Shoots’

Notice: Physik Invest’s daily market commentaries will be suspended until further notice.

Please accept our apologies for the inconvenience, thank you for the support, and see you next week!

Key Takeaways:

What Happened: U.S. stock index futures closed lower, last week.

What Does It Mean: Heading into last week’s Federal Reserve policy update, stock index futures were in balanced, two-sided trade as participants looked for more information to base their next move. 

Then, Federal Reserve Chairman Jerome Powell discussed his organization’s commitment to an inclusive recovery. At the same time, the central bank announced it expects real GDP to grow 6.5% and inflation to rise as high as 2.4% this year.

The comments were immediately followed by a vertical price rise.

Thereafter, participants that caused the vertical price rise traded out, evidenced by the index trading lower into Friday’s derivative expiry.

Important to note is that despite the attempted pricing in of rising debt levels and inflation, a divergence in bond and equity market volatility persists. Historically, fear across markets tends to move in tandem. That hasn’t been the case for a number of weeks, now (e.g., Graphic 1).

Graphic 1: Divergence in volatility across the bond and equity market. 

What To Expect: Directional resolve.

Why? The passage of a large derivative expiry, the resolve of the vertical price range that occurred in the face of Federal Reserve policy updates, as well as market liquidity metrics suggesting opportunistic buying or short covering into weakness, and increased buying pressure (as witnessed through measures like DIX and options activity).

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.

More On Option Expiration (OPEX): Option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.
Graphic 2: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending March 19, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, in strikes as high as $435, which corresponds with $4,350.00 in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic 3: Index option traders add to call buying and put selling, a bullish dynamic. 

What To Do: In the coming sessions, participants will want to pay attention to the VWAP anchored from the $3,978.50 overnight rally-high, as well as the high-volume area (HVNode) near $3,900.00.

Volume-Weighted Average Prices (VWAPs): Metrics 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.

More On Volume Areas: A structurally sound market will build on past areas of high-volume (HVNode). Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area (LVNode) which denotes directional conviction and ought to offer support on any test). 

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

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

In the best case, the S&P 500 remains above the $3,900.00 volume area, and VWAP anchored from the $3,978.50 peak, taking out Friday’s minimal excess high. This would suggest buyers, on average, are in control and winning since the March 17 rally-high.

More On Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

Any activity below the VWAP anchored from the $3,978.50 peak may (1) leave the $3,900.00 HVNode as an area of supply, offering initiative sellers favorable entry and responsive buyers favorable exit.

Graphic 4: Profile overlays on a 30-minute candlestick chart of the Micro E-mini S&P 500 Futures.
Graphic 5: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s trade is $3,900.00.

Any activity at this level suggests market participants are looking for more information to base their next move. Anything above (below) this level increases the potential for higher (lower).

Levels Of Interest: $3,900.00 HVNode.

Photo by Ylanite Koppens from Pexels.

Categories
Commentary

Market Commentary For 2/12/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: As the new administration pushes approval of a $1.9 trillion coronavirus relief plan, alongside the approval of another $14 billion for pandemic-hit airlines and signs of improve in the labor market, U.S. stock index futures traded sideways, in prior-balance and -range.

What Does It Mean: Market’s were range-bound after a rapid de-risking event associated with the GameStop Corporation (NYSE: GME) crisis, and subsequent v-pattern recovery.

Pictured: 4-hour profile chart of the Micro E-mini S&P 500 Futures

The tight trading range is most attributable to the large February monthly options expiration (OPEX), after which, the interest at the $3,900.00 S&P 500 option strike will roll-off. Why’s this? Most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection.

As a result of this activity, option dealers are long upside and short downside protection.

The exposure must be hedged: dealers sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value.

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints, followed by rapid de-risking events as the market transitions into “short-gamma.”

If the interest near $3,900.00 S&P 500 is not rolled up in price and out in time, then option hedging requirements will change.

The absence of strong fundamentally-driven buying (as we’ve seen with such things as DIX), can have serious implications on price action.

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.
Pictured: DIX by Squeeze Metrics

However, it is important to note that, in recent days, some exposure has been rolled up in price and out in time.

One such example can be seen below.

Pictured: Purchase of call positions higher in price and farther out in time in the cash-settled S&P 500 Index

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open inside of prior-balance and -range, suggesting limited potential for immediate directional opportunity.

Given dynamics discussed in the prior section, the odds of substantial change are low, so long as broad market indices, like the S&P 500, remain in balance (i.e., range-bound).

Also, trading in a prominent area of high-volume ($3,900.00) will likely make for a volatile session as such areas denote the market’s most recent perception of value and offer favorable entry and exit, hence the two-sided trade.

More On Volume Areas: A structurally sound market will build on past areas of high-volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area which denotes directional conviction and ought to offer support on any test). 

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

Going forward, participants will look to the overnight rally-high at $3,928.25, and low-volume structure beneath the $3,880.00 HVNode, which offered responsive buyers favorable entry during Wednesday’s intraday liquidation break.

More On Overnight Rally Highs: Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process.

More On Liquidation Breaks: The profile shape in the S&P 500 suggests participants were “too” long and had poor location.

That said, the following frameworks apply.

In the best case, the S&P 500 remains rotational, at or above the $3,900.00 HVNode. In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,880.00 HVNode, would favor continuation as low as the $3,830.75 HVNode.

As stated yesterday, major change will be identified with trade above the $3,928.25 overnight rally-high, and below the $3,878.50 regular-trade low.

Levels Of Interest: $3,928.25 overnight rally-high, $3,900.00 HVNode, $3,878.50 regular-trade low.

Categories
Commentary

Market Commentary For 2/8/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures established record all-time highs overnight, alongside hopes of a speedy economic recovery, as a result of pandemic relief efforts.

What Does It Mean: After a quick de-risking event and v-pattern recovery, U.S. stock indexes are positioned for further upside, as high as the 100% price projection, which happens to be above $4,000.00, a primary target in the S&P 500. According to The Market Ear, similar risk rallies have happened after hedge fund de-grossing events; now, “Equities are rising along higher yields, dollar and [volatility], and the magic word here is discounting inflation.”

Important to note also is the persistent presence of bearish undercurrents, as evidenced by non-participatory speculative flows and delta, as well as a divergence in the DIX.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation. 

More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market making side) — we can measure buying pressure.

More On Speculative Flows: Participants looking to capitalize on either upside or downside through the purchase and sale of options, the right to buy or sell an asset at a later date and agreed upon price.

What To Expect: Monday’s regular session (9:30 AM – 4:00 PM ET) will likely open on a gap, outside of prior-balance and -range, which — in normal circumstances — suggests the potential for immediate directional opportunity. However, market participants must not discount how far the discovery process has come.

Over 11 sessions (overnight and regular-trade), participants traversed nearly 7%, a non-typical weekly trading range. Adding, the S&P 500 took out its $3,900.00 price extension (i.e., a typical recovery price target) overnight, before leaving minimal excess at the high (i.e., a proper end to price discovery).

Now, in light of the low historical probability associated with overnight rally-highs ending the upside discovery process, the odds favor (1) backfilling or (2) balance before a participants restart the upside discovery process.

So, in the best case, the S&P 500 does some backfilling to repair poor structures left in the wake of strong initiative buying. In such a case, participants would look for responsive buying to surface at or above the $3,840.00 high-volume area (HVNode). In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,840.00 HVNode, would favor continuation as low as the $3,794.75 and $3,727.75 HVNodes.

More On Volume Areas: A structurally sound market will build on past areas of high-volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area which denotes directional conviction and ought to offer support on any test). 

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

Today’s go/no-go level is the $3,880.00 HVNode. Below, would portend downside discovery and structural repair. At or above denotes balance, a sign that the market is awaiting new information to make its next move.

Levels Of Interest: $3,880.00 HVNode.

Bonus: It’s very tough to read the market at this juncture.

Buying has run out (as evidenced by the aforementioned bearish undercurrents) and it’s as if market risks are not being priced in correctly, an opinion shared by Nomura’s Charlie McElligott.

According to McElligott, crash and tail risk is holding back dealers from supplying volatility amid “a near-endless need for skew/forward vol/convexity from hedgers.” In an environment in which true fundamental buying is absent, flows as a result of activity in the derivatives market become increasingly impactful.

Adding, as the Heisenberg Report states, “markets are increasingly susceptible to the self-referential, flows-volatility-liquidity feedback loop (colloquially: the ‘doom loop’) and other manifestations of VaR shocks. Long periods of apparent calm hide an underlying fragility in true ‘stability breeds instability’ fashion.”

As a result of this new regime, as stated in the “What To Expect” section above, dealers have a difficult time taking the other side. Due to this, market participants see a persistent bid in volatility, a factor preventing many systematic and hedge fund strategies from going “all-in” on the long-side.