Categories
Commentary

Weekly Brief For May 9, 2021

Market Commentary

Key Takeaways: Index futures in price discovery.

  • JPMorgan puts emphasis on reflation.
  • Earnings were great. NFP not so much.
  • Indices diverge. S&P 500, Dow higher.

What Happened: Last week, U.S. stock index futures were divergent with the Nasdaq 100 and Russell 2000 lagging behind the S&P 500 and Dow Jones Industrial Average.

The push-pull between equity indices comes as market participants doubled down on the so-called “reflation” trade. JPMorgan Chase & Co (NYSE: JPM) strategists, led by Marko Kolanovic, warned many managers will “need to quickly switch gears from their deflationary playbook or risk an ‘inflation shock,’” according to Bloomberg.

“We expect a strong pickup in inflation this year, which the market will likely be slow to recognize and is poorly positioned for,” Kolanovic and his colleagues said. “A combination of boomy global growth and significant bottleneck price pressures should keep inflation on an upward trajectory while most central banks remain committed to their very accommodative stances and are looking through the inflation pickups.”

Kolanovic recommends participants cut cash and credit to increase their allocations to cyclical and value assets.

In parallel, while companies look to cut costs and boost prices, the April jobs report failed to meet expectations as people who increasingly looked for jobs had a difficult time getting hired.

Graphic: Bloomberg data shows first-quarter earnings from S&P 500 companies surging.

“We still think growth will be historically strong this year, but today’s jobs report is a reminder that there’s still work to be done,” Ally Inc-owned Ally Invest strategist Callie Cox said. “It’s a big data point for the inflation worries, too. If hiring slows for the next few months, businesses may not be able to pass on higher costs to consumers.”

Adding, though the April payroll miss was big enough to likely limit the Federal Reserve’s taper or rate hike discussions, traders signaled otherwise.

Earlier this week, Bloomberg reported on a large option bet over quicker rate hikes by the Federal Reserve. The Eurodollar bet carries a notional value of $40 billion and is focused on a potential surprise at the Jackson Hole symposium, used in the past to signal policy changes.

Graphic: Eurodollar bet on SHIFT’s institutional platform. The purchase of 98.00 strike put options suggests traders are looking to add “two Fed hikes to [current] expectations.”

Moving on, technically speaking, equity indexes are at an interesting juncture. 

The Dow Jones Industrial Average and S&P 500 resolved their multi-week consolidations, to the upside, while the Russell 2000 is rotating within prior range and Nasdaq 100 is relatively weak, losing support and auctioning into a low-volume area.

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.

Further, the strong break in the S&P 500, which targets the Fibonacci-derived price extension near $4,300, has thus far been validated by numerous hours of trade outside of the consolidation zone (i.e., balance area). To note, though, the structure left behind Friday’s price discovery was very poor, opening the door for potential repair.

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).

Participants ought to be cautiously optimistic given the weakness in heavily-weighted sectors like technology. Should weakness accelerate, the S&P 500 may succumb. 

Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). The Dow is the strongest of the four. The Nasdaq is the weakest.

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the balance area it just broke from.

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above the $4,210.75 boundary targets the $4,235.25 price extension. Initiative trade beyond the price extension could reach as high as the $4,266.50-$4,272.75 confluence of Fibonacci-derived price targets.

In the worst case, the index trades lower; activity below $4,210.75 puts in play the $4,179.50 spike base. Trading below the spike base negates end-of-week bullishness.

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).
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
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 May 7, 2021. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $404.00, which corresponds with $4,030.00 in the cash-settled S&P 500 Index (INDEX: SPX).

News And Analysis

Economy | Forbearance exits soar as more plans expire last week. (MND)

Economy | Demand decline fuels price wars across mortgage industry. (WSJ)

Markets | Focus shifts to U.S. prices after the jobs disappointment. (BBG)

Politics | Infrastructure talks could set course of Biden spending plans. (WSJ)

Markets | New SEC chairman sets sights on firms Citadel and Virtu. (WSJ)

Markets | Pipeline hack may push pump rices to $3, ahead of holiday. (BBG)

Recovery | Fauci says ‘no doubt’ the U.S. undercounted virus deaths. (BBG)

What People Are Saying

Innovation And Emerging Trends

Crypto | German, U.S. regulators tighten focus on the crypto market. (FT)

Space | China’s ambitions in space: national pride or taking on U.S. (FT)

Crypto | Crypto startup Dfinity set to launch a blockchain AWS rival. (FT

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, 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.

Categories
Commentary

Daily Brief For May 5, 2021

Market Commentary

Index futures attempt to exit balance.

  • Yellen walks back rate comment.
  • Ahead is employment, ISM data.
  • Divergence grew, low conviction.

What Happened: U.S. stock index futures auctioned higher overnight as Treasury Secretary Janet Yellen clarified her comments on interest rates. 

The Secretary’s note that rates may “have to rise somewhat” to protect the economy from overheating weighed on the market. Most hurt was the Nasdaq 100; higher rates may reduce the present value of future earnings, making innovation-driven growth stocks less attractive.

Graphic updated 8:00 AM EST.

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

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by initiative trade below the $4,167.25 low, which is significant because it was a level that participants, for numerous sessions, supported.

Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). The Dow is the strongest of the four. The Nasdaq is the weakest.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above $4,178.00 high-volume area (HVNode) targets the $4,189.00 POC. Initiative trade beyond the POC could reach as high as the $4,200.00 HVNode and $4,210.75 minimal excess high. 

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 (like HVNodes described above) 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.

In the worst case, the S&P 500 trades lower; activity below the $4,178.00 HVNode puts in play the prior day’s POC near $4,141.00 and the $4,110.50 minimal excess low. Trade below $4,110.50 puts in play the $4,093.00 POC, $4,082.75 HVNode, and $4,067.00 POC.

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.
Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures. Noting the $4,178.00 pivot.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for May 4, 2021. Notable activity in the options market was primarily concentrated on the call-side, in short-dated tenors, in strikes at and around $414.00, which corresponds with $4,140.00, or so, in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: SHIFT search suggests participants are still not as inclined to add call-side exposure, through the month of May, in the SPDR S&P 500 ETF Trust (NYSE: SPY).

News And Analysis

Economy | Biden’s Fed choices add uncertainty for inflation-wary investors. (BBG)

Economy | Post-COVID U.S. births drop to the lowest level since the 1970s. (BBG)

Commodities | IEA: Governments should consider stockpiling battery metals. (BBG)

Markets | Facing chips shortage, Biden may shelve blunt tool used in COVID. (REU)

Economy | Private payrolls show big gain in April but still short of expectations. (CNBC)

Markets | Commodities jump to highest since 2011 on COVID-19 rebound. (BBG)

Economy | Weekly mortgage demand stalls as rates rise, competition hurts. (CNBC)

What People Are Saying

Innovation And Emerging Trends

FinTech | CME exchange plans to permanently close physical trading pits. (REU)

FinTech | Robinhood CEO holds up crypto exchanges as model for settlement. (TB)

Venture | Proposed changes to capital gains could affect VCs differently. (CB)

Crypto | S&P Dow Jones launches series of cryptocurrency benchmarks. (MM)

FinTech | Berkshire Hathaway’s stock price too much for Nasdaq computers. (WSJ)

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.

Categories
Commentary

Daily Brief For May 4, 2021

Market Commentary

Index futures attempt to exit balance.

  • Global reopening, vaccinations rising.
  • Ahead: Vehicle Sales, Factory orders.
  • Markets balance, position for resolve.

What Happened: U.S. stock index futures rejected a breakout attempt and explored lower prices, overnight.

Ahead are earnings, data on trade, factory orders, durable goods, and Fed speak.

Graphic updated 7:30 AM ET.

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

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by trade below the $4,186.75 balance boundary, which is significant because it denoted a clear, visual break-out point.

Adding to our narrative, according to Joseph Fahmy, Investment Advisory Representative at Zor Capital, from here on out, either (1) growth stocks stabilize and move higher, or (2) weak breadth pulls down the overall market. 

Supporting this belief is a weak reaction to earnings, interest rate volatility, tax selling, as well as stretched sentiment.

Still, the market is in a technically bullish position. A break below the S&P 500’s minimal excess low at $4,110.50 would suggest a change in conditions and the potential for lower.

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.

Moreover, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; crossing back into the prior day’s trading range, marked by the $4,181.00 regular-trade low (RTH Low), targets the $4,189.00 POC. Initiative trade beyond the POC could reach as high as the $4,194.25 low volume area (LVNode), and then the $4,205 POC. 

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.

Initiative Buying (Selling): Buying (selling) within or above the previous day’s value area.

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.

In the worst case, the S&P 500 trades lower; activity below $4,167.25 could reach as low as the $4,153.25 and $4,137.25 high volume areas (HVNodes).

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for May 3. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $413.00, which corresponds with $4,130.00 in the cash-settled S&P 500 Index (INDEX: SPX).

News And Analysis

Politics | Biden open to options on spending as Congress takes over. (BBG)

Economy | Near-term volatility in inflation as economic restart progresses. (BLK)

Markets | Robinhood raked in $331 million from clients’ trading activity. (CNBC)

Economy | Metrics show strong U.S. business sentiment hit a snag in April. (Axios)

Economy | Treasury quadruples borrowing estimates to pay for stimulus. (BBG)

Trade | Truckers expect the U.S. transport capacity crunch to persist. (WSJ)

Banking | Cash-rich U.S. banks moving to reduce corporate deposits. (FT)

Commodities | Broad commodities price boom amplifies ‘supercycle’ talk. (FT)

Economy | Yellen to appoint Senior Fed official to run top bank regulator. (WSJ)

What People Are Saying

Innovation And Emerging Trends

Media | Why Verizon sold AOL and Yahoo for 1% of their peak valuation. (Axios)

FinTech | Mastercard adds 6 startups to Start Path accelerator program. (CT)

FinTech | Canada-based Wealthsimple raises $610M at a $4B valuation. (TC)

FinTech | Founder at Miami-based accelerator talks exits, #MiamiTech. (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.

Categories
Commentary

Daily Brief For May 3, 2021

Market Commentary

Index futures in balance.

  • Global markets quiet on holiday.
  • Ahead: Fed speak, employment.
  • Potential for directional resolve.

What Happened: U.S. stock index futures auctioned higher overnight. The S&P 500, Russell 2000, and Dow Jones Industrial Average are relatively strong compared to the Nasdaq 100.

Aside from earnings, key events this week include a manufacturing data release, as well as talks by Fed Chair Powell, Chicago Fed President Charles Evans, and Cleveland Fed’s Loretta Mester. The Bank of England and Bank of Australia will provide clarity on their monetary policies. Employment data will come Friday. 

Graphic updated 7:20 AM EST.

What To Expect: Monday’s regular session (9:30 AM – 4:00 PM EST) will likely open outside of prior-range and -value, suggesting the potential for immediate directional opportunity. 

Balance-Break + Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. This can come in the form of sideways trade or range expansion.

Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

Adding, during Friday’s regular trade, the best case outcome occurred, evidenced by sideways trade above $4,168.00, which is significant because it marked a prior session’s regular-trade low (RTH Low).

This attempt to move from balance comes after weeks of mechanical trade in the range between $4,186.75 and $4,110.50. It is likely that, given last week’s heavy economic and earnings calendar, participants have more information to initiate a directional move. 

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above $4,197.25 low-volume area (LVNode) targets the $4,205.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,210.75 regular-trade high (RTH High), and then, the Fibonacci cluster between $4,222.50-4,237.50. 

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 (like HVNodes described above) 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.

In the worst case, the S&P 500 trades lower; activity below the $4,186.75 balance-area boundary targets the $4,167.25 RTH Low. Thereafter, if lower, participants should look for responses at the $4,132.00 value-area low (VAL) and the $4,110.50 minimal excess low.

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

News And Analysis

Travel | EU pushes end to travel restrictions for vaccinated tourists. (BBG)

Markets | Ether hits $3,000 as Bitcoin’s crypto dominance declines. (BBG)

Economy | Warren Buffett sees inflation, even if Jerome Powell doesn’t. (Axios)

Markets | Demand surges for New York Fed’s reverse repo facility. (KFGO)

Markets | Abel is likely successor at Berkshire Buffett tells CNBC. (BBG)

Markets | Robinhood’s core business more than tripled in first quarter. (BBG)

Trade | Intel CEO says chip shortage will persist for couple years. (BBG)

Recovery | COVID-19 cases fall sharply in U.S., vaccinations rise. (CNBC)

Economy | Bank of Canada tapers asset purchases, while others wait. (Moody’s)

What People Are Saying

Innovation And Emerging Trends

Trading | London Metals Exchange to announce open outcry decision. (REU)

FinTech | Fintech groups form as industry scrutiny ramps on Capitol Hill. (S&P)

FinTech | Robinhood deepens ties with JPM by using bank for transfers. (CNBC)

FinTech | Digital Dollar Project to launch five U.S. central bank cryptos. (REU)

Travel | Airport security app Clear looks to score with vaccine passport. (REU)

FinTech | TradeTech INX estimates $125M raised in token, equity offer. (REU)

 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.

Categories
Commentary

Daily Brief For April 30, 2021

Market Commentary

Index futures in balance.

  • Fundamentals great, risks nearing.
  • Earnings, FOMC pass. What now?
  • May see chop or responsive trade.

What Happened: U.S. stock index futures auctioned lower overnight after a string of positive fundamental developments.

Graphic updated 6:20 AM EST.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM EST) 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, the worst-case outcome occurred, evidenced by initiative trade below the $4,186.75 ledge (also the balance-area high, or BAH). This is significant because it suggests participants did not have the conviction to explore higher prices beyond balance (a dynamic that’s caused by participants searching for more information to base their next move). 

Ledges: Flattened area on the profile which suggests responsive participants are in control, or initiative participants lack the confidence to continue the discovery process. The ledge will either hold and force participants to liquidate (cover) their positions, or crack and offer support (resistance).

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).

As stated in yesterday’s balance-break and gap scenarios, acceptance was key in confirming the higher prices discovered during Thursday’s pre-market trade. Participants failed to find acceptance given the S&P 500’s move into the prior range. As a result, odds favor (1) sideways or (2) lower trade, as low as the balance-area low (BAL) $4,110.50 (a minimal excess low, also). 

All of these nuances — while prices are near all-time highs — are happening in the context of optimistic comments from policy leadership and blow-out earnings.

“All evidence still points to continued support from both fiscal and monetary policy against a backdrop of accelerating corporate earnings,” said Mark Haefele, UBS Global Wealth Management’s chief investment officer. “This reinforces our view that markets can advance further, with cyclical parts of the market — such as financials, energy, and value stocks — likely to benefit most from the global upswing.”

To put it simply, one could say that the equity market is priced to perfection at this stage of the recovery.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,186.75 ledge targets the $4,210.75 minimal-excess high. Initiative trade beyond $4,210.75 could reach as high as $4,228.00 and $4,263.00. In the worst case, the S&P 500 trades lower; activity below the $4,168.00 RTH low targets the $4,164.25 high-volume area (HVNode). Thereafter, if lower, participants could see a test of the opposing end of the balance, or the $4,110.50 minimal excess low.

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.
Graphic: S&P 500 Index (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Updated 9:30 PM EST.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Updated 9:30 PM EST.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for April 29. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $400.00, which corresponds with $4,200.00 in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: Noting a move lower in the % of S&P 500 companies trading above their 100-day simple moving average.

News And Analysis

Economy | U.S. recovery gains steam as spending fuels 6.4% GDP growth. (BBG)

Commodities | Surging U.S. crop prices reversing fortunes in rural Iowa. (REU)

Commodities | Cobalt price jump underscores reliance on metal for EV batteries. (FT)

Trade | Why Apple has chips for iPhones while Ford got caught short. (REU)

Markets | Fundamentals support lower volatility, tight corporate bond spreads. (Moody’s)

Economy | China’s factory activity growth slows on supply bottlenecks, demand. (REU)

Housing | Pending home sales rise less than expected, inventory remains tight. (MND)

Economy | Sawmills are selling boards faster than they can cut them. (FP)

Trade | Caterpillar flags supply-chain risks as global recovery boost earnings. (REU)

Commodities | Oil dipping after rallying on signs of rising global fuel demand. (BBG)

Economy | Joe Biden says tax hikes on rich will fund cuts for many more. (BBG)

Economy | How a bout of mild inflation could knock decarbonization plans. (FP)

Economy | The recovery accelerates amid consumer, housing, industrial gains. (S&P)

Markets | Lockdowns worsen India’s fiscal woes fueled by weak auctions. (BBG)

Recovery | COVID-19 surge in Oregon shows fight against virus not over. (BBG)

What People Are Saying

Innovation And Emerging Trends

Events | Discover tomorrow’s solutions to today’s challenges in fintech. (Finovate)

Trading | Nasdaq does a deep dive into dark, off-exchange trading. (NDAQ)

 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.

Categories
Commentary

Weekly Brief For April 25, 2021

Happy Sunday! Markets were choppy, ending the week unchanged. This came alongside talk of central bank tapering and an evolution in fiscal policy.

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 Adam Funds CEO, Mark E. Stoeckle:

“To try to guess that this is the right time to be out of the market, you may as well go to Las Vegas.”

Market Commentary

What Happened: The S&P 500, Nasdaq 100, Russell 2000, and Dow Jones Industrial Average closed the week out basing, pricing in new information for the next directional move.

  • All talk and no action from policy leaders, creators.
  • Ahead: Fed meeting, GDP and Sentiment, earnings.
  • Markets balancing, position for directional resolve.
Updated: 10:30 AM EST

Why It Matters: The sideways action during last week’s trade came after a lengthy run, higher.

The S&P 500, in particular, from its March 4 low, is up nearly 13%.

Moreover, just because something is high, doesn’t mean it must come crashing down. To put this into perspective, here’s a quote from Jeff deGraaf, co-founder at Renaissance Macro Research: “Overbought/oversold conditions are useless without first defining the underlying trend of the market.”

So, with that, in maintaining objectivity, we zoom out and ask a few questions: 

  1. Where are we in relation to the prior week’s range? Overlapping, but slightly higher. 
  2. Is the market’s attempt to go in a certain direction supported? Yes, value, defined by the area where 70% of prior trade (i.e., 1 standard deviation) is conducted, is following price.
  3. Is the technical and fundamental narrative supportive of current prices? Technically, the market is in an extended uptrend, but recent activity suggests a validation of higher prices. Fundamentally, the topics of monetary and fiscal tightening have investors worried.

Now, in determining whether to change equity market exposure, we zoom closer in and analyze the risks at hand. 

The Bank of Canada, ahead of other central banks, in light of increased growth and inflation forecasts, cut its bond-purchase target and suggested an increased potential to hike rates earlier than expected.

This is an interesting development. The Federal Reserve, too, last week announced the U.S. economy would see higher inflation, but Chair Jerome Powell expressed the institution’s commitment to limiting any overshoot.

Why the change in tone? Here’s Janus Henderson’s portfolio manager Jay Sivapalan’s take.

“We’ve got inflated asset prices in equities, house prices, and infrastructure, how do you normalize that? You need revenue growth and you need inflation … [b]ut at some point in the future, growth may need to be traded off for financial stability.”

In simpler terms, with prolonged periods of low interest rates and debt expansion, market participants are incentivized to take risks. This is how destabilizing factors begin to brew.

“The growth of structured products, passive investing, the regulatory standpoint that’s been implemented with Dodd-Frank and dealers needing to hedge off their risk more frequently than not” are all part of a regime change that’s affected the stability of markets, said Sidial 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.

Here’s an image to help visualize some of what Sidial is referring to.

Pictured: Newfound Research unpacks market drivers, implications of liquidity.

Also, this week, the White House expressed its desire to raise the federal capital gains tax (CGT) rate to 43.4% for wealthy individuals. Despite the market selling on the news, all losses were recouped prior to the end of the week. Why? As Goldman Sachs Group (NYSE: GS) sees it, Congress is likely to settle on a more modest increase, less than 30%.

Adding, as Bloomberg’s John Authers notes: “The way the market handled the last major CGT increase, at the end of 2012, is instructive. As it grew clear that higher capital gains taxes were coming, the S&P 500 languished and went sideways for the last few months of the year, closing roughly where it had been in March. Then 2013 turned out to be a great year; stocks started their rally at the beginning of January and never really stopped.”

So, if a CGT hike is already being discounted by the market, given Friday’s rapid recovery — which also has something to do with how participants are positioned, but that conversation is beyond the scope of this commentary — then why are some of the largest exchange-traded funds seeing outflows?

In particular, the Invesco QQQ Trust Series 1 (NASDAQ: QQQ) bled nearly $6 billion over the last week, the worst exodus since the dot-com era of 2000.

Graphic: The advance/decline line (A/D), an indicator of breadth, is diverging from Nasdaq-100 prices, via MarketInOut. This dynamic has not presented itself in other broad market indices this commentary covers. 

One explanation: “With earning season starting to heat up, especially for the tech sector next week, it is likely that the expectations for technology companies may be too high,” said James Pillow, managing director at Moors & Cabot Inc. “It’s early still, but just look where the earnings surprises are coming from: materials, energy, and financials, all about 80% or higher. Money will follow performance — and the performance is coming from those sectors.”

So, in summarizing this section, technically, the market is bullish, supported by a healthy rotation.

Fundamentally, though, clouds are forming. Participants are adding shifts in tone, by policymakers, into their narrative. Should fundamental conditions change markedly, odds of a technical breakdown in momentum increase substantially.

Till then, the market is flashing green lights. Any correction may offer participants favorable entry.

What To Expect: An increased potential to correct in time, rather than price.

In addition, metrics, like 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 an increasingly apparent shift in consumer preferences, from saving and investing to spending.

Graphic: SHIFT search suggests participants are still not as inclined to add call-side exposure, through the month of May, 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 its $4,186.75-$4,110.50 balance area. 

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

Any activity above (below) the balance-area high suggests participants are interested in discovering higher (lower) prices. Any activity within the balance area suggests participants are looking for more information to base their next move; in such case, responsive buying and selling is the course of action. 

Responsive Buying (Selling): Buying (selling) in response to prices below (above) area of recent price acceptance.

Initiative trade below the balance-area low suggests an inclination by participants to revert to the mean and repair some of the poor structure left behind prior discovery. Initiative trade above the balance area puts in play the cluster of price extensions at and above $4,200.00, typical price targets based on Fibonacci principles.

Initiative Buying (Selling): Buying (selling) within or above (below) previous price acceptance.

So, in the best case, the S&P 500 makes an attempt to balance or discover prices as high as $4,300.00. 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: 1-day candlestick chart of the cash-settled S&P 500 Index (INDEX: SPX). See Micro E-mini S&P 500 Futures profile chart here.

News And Analysis

Politics | Joe Biden will deliver a ‘joint session of Congress’ this week. (ABC)

Market | The Rise of Carry returns; stock buybacks are kicking into gear. (Axios)

Recovery | The end of U.S. mass vaccination coming sooner than later. (BBG)

Commodities | OPEC says NOPEC bill could put U.S. overseas assets at risk. (REU)

Markets | SPAC deals are far below peaks but are still generously valued. (CB)

Economy | The MBA is forecasting record purchase volume this year. (MND)

Banking | Goldman, JPM talk with the U.K. over business travel corridor. (FN)

Climate | Leaking landfill contributes to world’s mystery methane hotspot. (BBG)

Trade | Beijing hopes U.S. companies will push to scrap China tariffs. (BBG)

Economy | Existing home sales suffer second straight monthly decline. (CNBC)

Markets | Taxes and inflation key themes for markets in the week ahead. (CNBC)

What People Are Saying

Innovation And Emerging Trends

FinTech | On blockchain- and smart contract-based financial markets. (FED)

FinTech | U.K. banks speed plans to ax branches, switch to digital focus. (S&P)

Health | What are all those constant video calls doing to your brain? (TC)

FinTech | Participants identify key operational areas for improvement. (TM)

FinTech | Alpaca intros Broker API that lets you build own Robinhood. (BZ)

FinTech | Public.com app connects users with public company leaders. (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 sklei from Pexels

Categories
Commentary

Daily Brief For April 19, 2021

Market Commentary

Index futures are attempting to balance and validate higher prices.

  • Global pandemic recovery uneven. 
  • Investors await corporate earnings.
  • Indices to correct in time and price.

What Happened: U.S. stock index futures balanced ahead of a fresh round of corporate earnings.

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

Adding, during the prior week, the best case outcome occurred, evidenced by initiative trade that established new all-time highs in the S&P 500, Nasdaq-100, and Dow Jones Industrial Average.

Coming into this week, though equity markets are positioned bullishly, there exists an increased potential to correct in time and price. Adding, should there be a turn and spike in volatility, participants must be ready to accept the possibility of a violent liquidation, given the poor structure left behind prior price discovery and increased put selling, among other factors highlighted in Sunday’s commentary.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,161.75 regular trade low targets the $4,171.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,183.50 regular-trade high and the cluster of Fibonacci price extensions above $4,187.00. In the worst case, the S&P 500 trades lower; activity below $4,171.00 is likely to solicit responsive buying near the $4,157.00 high-volume area (HVNode). Thereafter, if lower, $4,137.00 and $4,123.00 are other valuable areas to do business. 

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 (like HVNodes described above) 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.

Responsive Buying: Buying in response to prices below area of recent price acceptance.
Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
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).

News And Analysis

Markets | Crypto stock mania tested by sliding prices, bitcoin drop. (BBG)

Markets | China opens borders to billions of dollars of gold imports. (REU)

Markets | Key takeaways from Q1 results of the investment banks. (Moody’s)

Travel | Airlines can’t get the world flying despite a big U.S. boom. (BBG)

Trade | TSMC says trade tensions may disrupt chip equipment supply. (BBG)

What People Are Saying

Innovation And Emerging Trends

Startups | Tips for those that are joining a startup for the first time. (FRR)

Space | Why flying a four-pound helicopter on Mars is a big deal. (BBG)

FinTech | U.S. banks deploy AI to monitor customers and workers. (REU)

Spirits | Whisky world at war as tech allows for instant spirit aging. (FT)

Crypto | Bank of England, HM Treasury create a CBDC taskforce. (BoE)

Technology | Clubhouse closes round of funding, raising value. (REU)

 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.

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

Daily Brief For April 16, 2021

Market Commentary

Index futures initiate out of balance and explore higher prices.

  • Economic data fuels strong rally.
  • Ahead: Housing, sentiment data.
  • Market is accepting higher prices.

What Happened: U.S. stock index futures auctioned higher alongside strong economic data, over the past 24 hours.

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

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by initiative trade above $4,137.00, which is significant because it marked Wednesday’s POC, the fairest price to do business. 

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.

Yesterday, the Dow Jones Industrial Average pushed through $34,000. Peter Essele, Head of Portfolio Management for Commonwealth Financial Network, in a statement on the development, said: “[I]nvestor appetite for future growth prospects is spilling over into more value-oriented names. The industrial heavy index has trailed its more tech-oriented counterparts over the last year (S&P 500 and NASDAQ), a trend that has started to reverse as of late. The demand for industrials and more cyclically-oriented areas should continue as the vaccines take hold and earnings potentially come in higher than originally expected.”

Obviously, there are a lot of reasons to be highly bullish on the stock market and economy, in general. However, 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, 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.

In the simplest way, as Market Ear puts it, hedge when you can, not when you must. 

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,166.75 regular-trade high could reach as high as the $4,174.50 price extension. Initiative trade beyond $4,174.50 could reach as high as the confluence of Fibonacci price extension near $4,187.00-$4,197.25. In the worst case, the S&P 500 trades lower; activity below the $4,154.25 overnight-low (ONL) could reach as low as the $4,137.00 POC and $4,113.00 minimal excess low.

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.
Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for April 15. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $385, which corresponds with $3,850 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).

News And Analysis

Markets | There’s a New Jersey deli valued at $105 million. Not good. (BBG)

Markets | Record amount of assets in ETFs and ETPs listed globally. (MM)

Markets | Yields dropped Thursday, despite strong economic data. (CNBC)

Technology | Regulators are seeking to revoke Robinhood’s license. (REU)

Markets | Coinbase’s retail popularity tops that of GameStop, Tesla. (FN)

Investing | Family offices target 800% returns with SPAC economies. (BBG)

Markets | JPMorgan sells $13B of bonds in the largest bank deal. (BBG)

Economy | China’s GDP grows at a record pace as recovery speeds. (REU)

Economy | City of London Brexit hit worst than expected, says study. (REU)

Economy | Retail sales jumped nearly 10% in March amid reopening. (Axios)

What People Are Saying

Innovation And Emerging Trends

Crypto | Miami-Dade County may get a cryptocurrency task force. (TB)

Markets | Unpacking what happens to IPOs over the long-term. (NDAQ)

Travel | Porsche’s electric Taycan sales on course to eclipse 911. (BBG)

Travel | Elon Musk’s Boring Company finds paradise in the desert. (BBG)

Crypto | Brevan Howard to invest nearly 1.5% in cryptocurrencies. (TB)

Markets | Coinbase direct listing alters landscape for fintech startups. (TC)

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.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Fast Moves’

Key Takeaways:

  • U.S. Senate passes a $1.9T relief package.
  • COVID vaccination timeline is sped up.
  • Equities are recipients of $12B in inflows.
  • Treasury yields aren’t at worrisome levels.
  • VIX term structure suggests no real panic.
  • Real GDP growth to be over 6% this year.

What Happened: U.S. stock index futures ended the week mixed.

This came after U.S. non-farm payrolls grew by 379,000, versus a consensus of ~180,000, improvement in sales and manufacturing data, as well as news that COVID-19 coronavirus vaccinations were accelerating.

Dynamics Unpacked: On a relative basis, the Nasdaq-100 is weaker, while the S&P 500, Russell 2000, and Dow Jones Industrial Average are stronger. This push-pull dynamic, in prior sessions, made it hard for participants to resolve directionally, evidenced by volatility.

On Friday, after an attempt by market participants to resolve lower, via a break of consolidation, stock indexes made a vicious rebound.

Why did stock indexes make a sudden reversal? Well, despite indexes being best positioned for sideways or lower trade, technically, near-term downside discovery reached its limit, based on market liquidity metrics and the inventory positioning of participants.

As stated in Friday’s morning commentary, according to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggested there was more risk to the upside than downside.

More On 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 1: SqueezeMetrics data suggested a near-term turnaround after Thursday’s violent liquidation.

Adding, also, coming into Friday’s session, market liquidity suggested (1) buying pressure was increasing and/or (2) sellers were absorbing resting liquidity (opportunistic buying or short covering into weakness), while speculative options activity was concentrated on the call-side.

In simple terms, one could argue, based on the aforementioned dynamics (e.g., speculative derivatives activity), that participants bought last week’s dip.

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 February 26, 2021. Noting activity in short- and long-dated tenors, near the $380, a strike that corresponds with $3,800.00 in the cash-settled S&P 500 Index (INDEX: SPX).

Important to note, though, is the S&P 500’s long-term trend break, prior to Friday’s dramatic reversal and higher close, as well as Friday’s divergent volume delta in ETFs that track the S&P 500, Nasdaq-100, and Russell 2000.

Graphic 3: Long-term uptrend in the cash-settled S&P 500 Index (INDEX: SPX) was broken.
More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

What To Expect: Directional resolve and volatility, given news that the U.S. Senate, on Saturday, passed President Joe Biden’s $1.9 trillion COVID-19 coronavirus relief plan, as well as the (2) short-gamma (Graphic 4) environment (i.e, volatility is exacerbated due to dealer hedging requirements), as mentioned in the prior section.

Graphic 4: SpotGamma data suggests Nasdaq-100, the weakest index discussed in this commentary, is below the “Short-Gamma” juncture.

What To Do: In the coming sessions, participants will want to pay attention to the VWAP anchored from the $3,959.25 peak, the $3,720.50 minimal excess low, as well as the $3,837.75 high-volume area (HVNode).

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 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.

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.

In the best case, the S&P 500 opens and remains above the $3,837.75 volume area. Auctioning above the VWAP anchored from the $3,959.25 peak would suggest buyers, on average, are in control and winning since the February 15 rally high.

In such a case, participants can look to the $3,892.75 HVNode for favorable entry and exit, the $3,934.25 profile ledge, and $3,959.25 overnight rally-high.

More On Ledges: Flattened area on the profile which suggests responsive participants are in control, or initiative participants lack confidence to continue the discovery process. The ledge will either hold and force participants to liquidate (cover) their positions, or crack and offer support (resistance).

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 $3,959.25 peak may leave the $3,837.75 HVNode as an area of supply — offering initiative sellers favorable entry and responsive buyers favorable exit.

In such a case, participants can look to other areas of high-volume (i.e., $3,795.75 and $3,727.75) for favorable entry and exit, as well as the repair of the $3,720.50 minimal excess low.

Graphic 5: Profile overlays on a 65-minute candlestick chart of the Micro E-mini S&P 500 Futures.
Graphic 6: 4-hour chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s trade is $3,837.75.

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: $3,837.75 HVNode.

Cover photo by Chris Peeters from Pexels.