Categories
Commentary

Daily Brief For June 29, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

What Happened

Overnight, equity index futures traded sideways-to-lower, keeping intact the bearish tone from yesterday. Commodities were mixed. Bonds, the dollar, and implied volatility were bid.

At a micro-level, the selling was not similar to that of past market turmoil events. Instead, stocks were sold, but on the back of tame and steady volumes. Adding, the market’s responsiveness to key visual areas may mean that participants with shorter time horizons are more active, pointing to the potential that those with larger horizons are waiting for better entry or more information.

In terms of the news, similar to yesterday, narratives remain uninspiring. The key is that there are signs that inflation may soon turn the corner, as discussed in yesterday morning’s letter. In accordance with that perspective are comments by trader and macro strategist Andy Constan, who this letter’s author spoke with last week and will share insights extracted, below.

Ahead is data on GDP (8:30 AM ET), as well as talks by Federal Reserve (Fed) and European Central Bank (ECB) officials (9:00 AM ET, 11:30 AM ET, and 1:05 PM ET).

Graphic updated 6:40 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Perspectives: This letter’s objective is to provide salient information one may use in developing a tradeable narrative. Today, we’re taking a different approach and adding some diversity to the format by threading important points from the conversation Physik Invest’s Renato Capelj had with trader and macro strategist Andy Constan, the CEO and CIO of Damped Spring Advisors.

Without further ado, here it is.

The University of Pennsylvania alumnus had his start in finance in the 1980s when he joined Salomon Brothers. There, he excelled quickly and was the “go-to for questions.”

At one point, Salomon tapped Constan for his assistance with the 1987 stock market crash where he learned more about self-reinforcing market strains and how dynamic hedging processes may manifest market volatility.

Constan, later, managed Salomon’s derivatives operations, as well as the sale of those services. He said a lot of his success, in those years, was owed to making “everything systematic” and “operat[ing] with a framework.”

He, then, spent some time at Ray Dalio’s Bridgewater Associates where he was key in the firm’s research on volatility as an asset class. The lesson Bridgewater instilled was to “spend time finding the persistent trade,” parameterizing and executing, accordingly.

The alpha stream from the capture of that systemic edge is an asset itself.

Through the decades of experience, Constan eventually pivoted after recognizing that edges built on top of relative value (RV) – “the capture of inefficiencies generated from some form of concentrated positioning that pushes assets out of whack” – would fail on macro happenings.

Most noteworthy were Constan’s comments on the market’s de-rate

As we’ve talked about in this letter in the past, for decades monetary policies were the go-to instrument for stimulation. This money stocked a technological revolution, bolstered the supply of goods, and, by that token, promoted deflation, which was kept at bay by rising asset prices.

Trends in the geopolitical climate, a focus on fiscal stimulation, as well as supply chokepoints, have stoked goods and services inflation. The commitment to addressing inequality, as well as misallocations of capital through a tightening of liquidity and credit has consequences on the economy and asset prices, which are highly connected given multi-decade trends.

Stemming inflation, via supply-side economics, alone, is folly, as explained in the article. Trends like de-globalization are destructive to prosperity.

“The most destructive things to future prosperity are the tendencies that have developed over the last five years, like Brexit, the border wall, and the war in Ukraine. Comparative advantages, which globalization is essential for, generates uninsured supply chains and now we’re spending money on insurance.”

As the article explains, at its core, prices are set by the equilibrium between the supply and demand for goods. Both are not in line, and the stimulative monetary policies that helped keep the supply-side in check are not on the table, all the while supply chain replication is not adding to production.

Though that’s inflationary, political gridlock is a dampener on the trend.

What about the more pressing matter? Are we in a recession? 

The simple answer is yes, and 2022 is likely to be a 1% total GDP year with a 4% inflation rate. That said, an equity market recovery is not off the table.

We’re in a recession — a period of modestly to significantly below-trend growth — and the fiscal side would have to not force the Fed to do more by having a large spending bill which would hurt markets in a meaningful way.”

On the expression of opinions, Constan’s preferred method is to use defined risk options trades structured around his macro theses two to four months out in maturity. 

If volatility is rich, he will lean on selling credit. If volatility is cheap, he will opt to buy spreads. 

“I want deltas and leverage. My macro indicators give me an edge on price and in the worst case, the loss is limited to 10%, if everything has to go against me all at once. I can be 100% invested and only risk 10%.”

Read Full-Text: Former Bridgewater Associate Talks Recession Odds, Capturing A Macro Edge

Follow Andy Constan on Twitter, here.

Positioning: Little has changed. The volatility that the markets are realizing (RVOL) is high and, at times, in excess of that implied (IVOL). 

To cut to the chase, there’s a “higher starting point” in IVOL, and a still-present right-tail (from the positioning for a bear market rally).

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

Both make it so we may, for zero or no cost, trade short-dated structures with asymmetric payouts.

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

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

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

In the best case, the S&P 500 trades higher; activity above the $3,821.50 LVNode puts in play the $3,836.25 ONH. Initiative trade beyond the ONH could reach as high as the $3,883.25 LVNode and $3,909.25 MCPOC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $3,821.50 LVNode puts in play the $3,793.25 Ledge. Initiative trade beyond the Ledge could reach as low as the $3,770.75 and $3,735.75 HVNode, or lower.

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

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

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

What People Are Saying

Definitions

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

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 28, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

What Happened

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

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

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

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

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

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

What To Expect

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

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

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

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

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

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

Read: Daily brief for May 18, 2022.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Technical: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the mid-to-upper part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher; activity above the $3,909.25 MCPOC puts in play the $3,943.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,982.75 LVNode and $4,016.25 HVNode, or higher.

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

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

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

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

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

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 15, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

What Happened

The calm before the storm.

Overnight, equity index futures auctioned sideways, inside of a developing balance area. The S&P 500 was glued to the area above $3,700.00.

The Treasury rout cooled. T-Note (FUTURE: /ZN) and T-Bond (FUTURE: /ZB) futures were off their lows. Per Bloomberg, the sell-off in fixed income wiped nearly $10 trillion of value in global bonds, erasing post-Pandemic gains on stimulative central bank intervention.

This letter has talked about the bonds and equities down phenomenon before. It is the shifting in priorities at the policy level – from monetary to fiscal – driving (more) positive correlations.

Abroad, the slump solicited the attention of policymakers. The European Central Bank (ECB) said it would have an emergency meeting to discuss current market conditions. Policymakers are to sign off on the reinvestment of bond purchases conducted during the pandemic.

In other news, the American Petroleum Institute issued policies to unleash American energy and fuel recovery. The U.S. rebuffed China by calling the Taiwan Strait an international waterway as CEOs urge the U.S. Congress to pass a China competition bill. More news of layoffs hit the wire also. Coinbase Global Inc (NASDAQ: COIN) will lay off 18% of its workforce, alongside many other crypto companies. 

Elsewhere, Redfin Corporation (NASDAQ: RDFN) and Compass Inc (NYSE: COMP) are laying off workers, as are automotive manufacturers.

Ahead is a packed calendar. To be released is data on retail sales, import prices, and manufacturing (8:30 AM ET). Later is data on home building and inventories (10:00 AM ET).

Key is the Federal Open Market Committee (FOMC) statement, projections, and news conference (2:00 PM ET).

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

What To Expect

Fundamental: Let’s keep it short and to the point.

As talked about, yesterday, the FOMC is expected to raise rates by 75 basis points in light of new data. Per Bloomberg, “Powell will argue that a supersized move is needed to preempt inflation expectations from unanchoring.”

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

The peak in rates is somewhere in the 3.75-4.00% range out in early-to-mid 2023. Into that date range, there is a 100% the Fed will hike.

Graphic: Via Federal Home Loan Mortgage Corporation (OTC: FMCC). “The housing market is incredibly rate-sensitive, so as mortgage rates increase suddenly, demand again is pulling back.”

On the quantitative tightening (QT) side of things, which is the direct (out) flow of capital from capital markets, the Fed will stop reinvesting the proceeds of maturing Treasuries for the first time since the start of quantitative easing (QE).

Per the Financial Times, in May, FOMC members agreed to cap their monthly balance-sheet run-off at $30 billion in U.S. Treasuries (UST) and $17.5 billion for agency mortgage-backed securities (MBS). 

This will have an effect on prices “as liquidity – the ease with which investors can buy and sell assets – deteriorates as markets grapple with a larger amount of bond supply to absorb.”

Moreover, in the recent sale of bonds, liquidity was “worse than it was leading up to Lehman,” and, accordingly, this has played into repo dislocations.

“As customers sell their position to dealers, there’s limited liquidity in the off-the-run markets so the dealers short-sell currents,” Scott Skyrm of Curvature Securities says on increased buys and sells leading to more settlement activity, which plays into more fails.

“Market participants reduce their investments and leverage and go into ‘cash,’ leaving more actual cash in the repo market.”

Therefore, Treasury securities, across all tenors, have traded below the rate on overnight general collateral repurchase agreements. 

This could “be a sign of another shortage of collateral and that another systemic risk event might come up in the future,” as Fabian Wintersberger well explained in his newsletter.

Graphic: Via Fabian Wintersberger. Data from Bloomberg. 

Wintersberger adds: “All those things suggest that the storm we are currently facing in markets is just the beginning. The war in Ukraine, a rising interest rate environment, energy costs that subdue the outlook for the real economy, and finally, signals of stress in financial markets imply that there might be tough times ahead.”

Positioning: The divergence in volatility implied (IVOL) by participants’ options activity, versus that which the market realizes (RVOL) was resolved.

Graphic: Taken by Physik Invest from Interactive Brokers Group Inc (NASDAQ: IBKR).

As I wrote in my commentary for options data and analysis platform SpotGamma, yesterday, pursuant to remarks made in Physik Invest’s recent letters, volatility repriced and that was a boon for participants who bought into the implied skew convexity idea.

Graphic: Taken by Physik Invest from Interactive Brokers Group Inc (NASDAQ: IBKR).

Moreover, $3,700.00 SPX is a key level, per SpotGamma. This is because there is sizeable interest at that level expiring June 17, after FOMC. These options have little time to expiry and, thus, their gamma (options sensitivity to direction) grows rather large, at near-the-money strikes.

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

In theory, we see participants as owning protection against their stock exposures. Therefore, the counterparties are short puts (positive delta) and short stock or futures (negative delta).

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

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

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

That means, depending on what happens with FOMC, if below $3,700.00, associated hedging, less any new reach for protection would pressure markets lower. If above $3,700.00, hedging, less any new sale of protection, would bolster markets higher.

Graphic: Taken by Physik Invest from Interactive Brokers Group Inc (NASDAQ: IBKR).

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

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

In the best case, the S&P 500 trades higher; activity above the $3,768.25 HVNode puts in play the $3,808.50 HVNode. Initiative trade beyond the $3,808.50 HVNode could reach as high as the $3,836.25 LVNode and $3,863.25 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $3,768.25 HVnode puts in play the $3,727.75 HVNode. Initiative trade beyond the $3,727.75 HVNode could reach as low as the $3,688.75 and $3,664.25 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Updated: 6/14/2022.

Definitions

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

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 10, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

What Happened

Overnight, equity index futures continued lower after breaking a multi-day consolidation late yesterday afternoon.

This is amid growth concerns and the European Central Bank (ECB) decision to end asset purchases this month and commit to a 25-basis-point interest rate hike at its next meeting, setting the stage for further rate hikes, potentially 50-basis-points or higher.

Ahead are updates to consumer prices (8:30 AM ET), which may shed further clarity on the path of the Federal Reserve’s policies. Later are updates to consumer sentiment and inflation expectations (10:00 AM ET), as well as the budget balance (2:00 PM ET).

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

What To Expect

Fundamental: The CPI report is a driver of perceptions regarding future Fed activity.

Graphic: Via Societe Generale SA (OTC: SCGLY). Taken from The Market Ear. SocGen’s Kit Juckes explains that “the Fed put its foot down on the accelerator in 2020, harder than ever before, to keep the global economy going. Now it’s put its foot on the brake, equally hard but perhaps, a little bit late. How this plays out will become clearer in the coming weeks.”

Expected is an 8.2% rise year-over-year (YoY) and 0.7% month-over-month (MoM). In April, these numbers were 8.3% and 0.3%, respectively.

Core CPI (which excludes food and energy) is expected to rise by a rate lower than in April, 5.9% YoY and 0.5% MoM, respectively.

Graphic: Via Bloomberg. “For two straight months, fuel, power and grocery-store food have all been rising at double-digit annual rates—and tomorrow’s data is likely to show a further surge. Meantime, stocks fell with growth concerns in focus after the ECB moved to combat inflation.”

What matters most is the latter – core inflation – which the Fed has more control over. If lower than expected, that may warrant more appetite for risk.

“While inflation in some parts of the world [is] yet to peak, there are at least some signs emerging that we may not be too far off in terms of a turning point,” adds Khoon Goh of Australia & New Zealand Banking Group ADR (OTC: ANZBY).

Bloomberg reports semiconductor prices are now down 14% from the middle of last year. Also, the spot rate for shipping containers fell 26% while fertilizer prices are 24% below their record.

Still, the commitment to aggressive contractionary monetary policies is likely to remain. This reduction of liquidity and credit has consequences on the real economy and asset prices which rose and kept the deflationary pressures of monetary intervention at bay.

Positioning: It remains profitable to own options structures as implied (IVOL) underprices the volatility which is realized (RVOL).

This is the result of what options analytics service SqueezeMetrics suggests is an “absolute slamming” (i.e., sale of options) that’s compressing IVOL in shorter-dated tenors. 

It is “[o]nly rational to consider a bulk of them as put underwrites, because completely irrational otherwise.”

Important to note that this is in the context of next week’s large options expirations.

Into those events, typically, the frontrunning of delta hedging flows with respect to changes in time (charm), mainly, and volatility (vanna) provide an added boost. 

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

As stated Monday, however, the marginal impact of further volatility compression, since IVOL was falling from already low levels, was likely to do less to bolster equity upside. 

A lot of the supportive action happened in the days and weeks prior, hence the comments on owning options.

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. 

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

In the best case, the S&P 500 trades higher; activity above the $4,016.25 HVNode puts in play the $4,055.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,071.50 BAL and $4,095.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,016.25 HVNode puts in play the $3,982.75 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,951.00 VPOC and $3,909.25 MCPOC, or lower.

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

Standard Balance-Break + Gap Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) is occurring.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 

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. 

Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

Definitions

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

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 9, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

What Happened

U.S. markets were weighed by action abroad before recovering late in the overnight session. 

This was ahead of a European Central Bank (ECB) decision that likely results in a tightening of monetary policies in that region of the world. The expectation is that the ECB will end its bond purchases this month. Then, hike rates in July and September. 

At home, in the U.S., the Securities and Exchange Commission (SEC) is looking to change the business model of wholesalers. In consideration is a model in which different firms compete with each other to fill investors’ trades. Some suggest this would increase trading costs.

Elsewhere, one of the largest U.S. export plants of liquified natural gas (LNG) is to shut down due to a facility explosion, raising the risk of shortages in Europe, according to Reuters.

Ahead is data on jobless claims (8:30 AM ET), as well as real household net worth and domestic financial debt (12:00 PM ET).

Graphic updated 6:40 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

In the past week, a narrative on bearish bets in funds such as the iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG) surfaced.

The ETF saw some of the largest volumes since March of 2020, presumably as traders looked to hedge for low cost, the Federal Reserve’s (FED) hawkishness. 

Graphic: Via Bloomberg. “Given that HYG’s realized volatility is still relatively low, it’s an inexpensive way to hedge the impact of tightening monetary policy on corporate credit.”

According to The Ambrus Group’s Kris Sidial, “a lot of banks continue to push credit vol[atility] as a cheap hedge. Every month, at least four banks push the theme on that trade because of ‘value.’”

This is “also, another reason why every month you see HYG put spreads hit the tape with big size, relatively speaking,” he adds.

Adding, Bridgewater Associates, which was founded by Ray Dalio in 1975, is betting on the sale of corporate bonds via credit default swaps (CDS), which are used to transfer and hedge credit exposure on fixed income products.

Bridgewater’s Co-Chief Investment Officer Greg Jensen explained their bet against corporate bonds is based on inflation remaining stubborn, resulting in the Fed to “tighten in a very strong way, which would then crack the economy and probably crack the weaker [companies].”

Here’s why that matters. 

The firms facing challenges, “are creations of easy credit,” according to Bloomberg and, now, for some of them, their time is running short as they “aren’t earning enough to cover their interest expenses, let alone turn a profit.” 

“When interest rates are at or close to zero, it’s very easy to get credit, and under those circumstances, the difference between a good company and a bad company is narrow,” said Komal Sri-Kumar of Sri-Kumar Global Strategies. 

“It’s only when the tide runs out that you figure out who is swimming naked.”

Graphic: Via Bloomberg.

Despite many of these companies having debt that could last them “months, even years,” Vincent Reinhart explains that “[a]s rates rise, it pushes more of those firms into distress, and amplifies the tightening by the Fed of financial conditions and credit availability.”

As stated yesterday, financial conditions are “the mechanism through which the Fed [impacts] the economy,” and “if the data doesn’t slow, financial conditions will need to tighten more,” potentially feeding into a freezing of credit and a harder hit on still-frothy areas of the market “with the greatest systemic risk.”

As we quoted Simplify Asset Management’s Mike Green explaining in early May, we’re more than halfway through a dot-com type collapse that’s happened “underneath the surface of the indices.” 

That’s noteworthy since still-strong passive flows continue to support the largest stocks within the index.

That said, with bonds “not acting as a hedge and appear to be becoming less ‘money’ like due persistent declines in price and elevated rate vol,” per Joseph Wang, who was a trader at the Fed, “[i]nvestors in both bonds and stocks are reaching for cash by selling their assets, driving further asset price declines. For non-bank investors, ‘cash’ means bank deposits.”

How to think about trades?

As explained, yesterday, the marginal impact of further volatility compression is likely to do less to bolster equity market upside. Heading into the Federal Open Market Committee (FOMC) event, next week, according to SpotGamma, short-dated, pre-event volatility is likely to get sold (further promoting market consolidation) while that which is farter-dated is likely to be bought.

To capitalize on a resolution of the index-level pinning, participants, too, could sell short-dated volatility (which capitalizes on pinning and the rapid decay of soon-to-expire options) and use those proceeds to fund farther dated options. 

Such a structure would assist in lower the cost of directional exposure.

Graphic: The risk profile of a long put calendar spread, via Fidelity.

Alternatively, if bearish on volatility, one could buy a butterfly (short two times at the money and long above and below out of the money options). 

Graphic: The risk profile of a long call butterfly spread, via Fidelity.

In such a case, the trader becomes long implied skew convexity. This is a play on the comments above, coupled with the fact that the Cboe VVIX Index (INDEX: VVIX), the expected volatility of the 30-day forward price of the VIX, or the volatility of volatility (a naive but useful measure of skew), dropped off largely, too, in comparison to the VIX, itself.

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

Technical: As of 6:40 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher; activity above the $4,129.25 low volume area (LVNode) puts in play the $4,149.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,164.25 regular trade high (RTH High) and $4,189.25 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,129.25 LVNode puts in play the $4,101.25 LVNode. Initiative trade beyond the LVNodes could reach as low as the $4,073.25 weak high/low and $4,055.75 LVNode, or lower.

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

Definitions

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 11, 2022

Editor’s Note: The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

On reports that there was progress in talks between Russia and Ukraine, stock index futures advanced putting the S&P 500 back inside a large consolidation area.

Thus far, trade has been volatile and responsive to key visual levels suggesting that the larger other time frame (non-technical) participants are waiting for more information to initiate trades.

Ahead is data on the University of Michigan Sentiment (10:00 AM ET) and inflation expectations (10:00 AM ET).

Graphic updated 6:45 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: Yesterday’s letter covered a lot of ground. Check it out if you haven’t already.

Volatility is heightened and the narratives we may attribute that to are concerned with the intent to tighten monetary policy, slower economic growth, and geopolitics.

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “We are downgrading our US GDP forecast to reflect higher oil prices and other drags on growth related to the war in Ukraine.”

In comparison, though, U.S. equity product volatility is less than that in Europe and this points to the “risk premium for investing in Europe’s markets that are teeming with cyclical stocks acutely vulnerable to growth and inflation risks,” among other things.

Adding to the turbulence was the European Central Bank’s pivot toward hawkishness; the institution will accelerate the wind-down of its monetary stimulus. Pursuant to this decision, Euro-area equity funds had their largest weekly outflows on record.

Graphic: Via Bloomberg. 

U.S. policymakers are expected to ramp their tightening efforts, next week, also, as inflation expectations are surging.

Graphic: Via Bloomberg. “[T]he central bank is widely expected to announce a 25-basis point increase Wednesday, along with fresh projections for the economy and path of interest rates.”

Per CME Group Inc’s (NASDAQ: CME) FedWatch Tool, participants are pricing a near 100% chance of a hike in the target rate.

Graphic: Via CME Group Inc (NASDAQ: CME). Participants price in an increased probability of a shift in the target rate. Click here to access the FedWatch Tool.

In the face of all the bearish narratives, however, many products – at the single-stock level – have been de-rating now for nearly a year. 

Ahead of bullish seasonality and rebalancing flow (from fixed income into equities), JPMorgan Chase & Co (NYSE: JPM) strategists suggest that “we could be through [the] worst of it.” 

“When either All Strats or Equity L/S net leverage fell by at least 1.5z or more, the SPX generally rallied over the next 1wk and 4wks,” a bulletin published by The Market Ear read. 

Positioning: Based on a comparison of present options positioning and buying metrics, the returns distribution is skewed positive, albeit less so than before. 

Graphic: Via Physik Invest. Data via SqueezeMetrics.

Adding, over the past weeks, we talked about the SPX and VIX down dynamic. This in part has to do with the supply and demand of protection, at the index level. Hyperlinked are our past conversations.

Graphic: Via Bloomberg. S&P 500 (INDEX: SPX) down, CBOE Volatility Index (INDEX: VIX) down.

“We’re back to another point of people being well hedged and well-positioned,” Amy Wu Silverman of Royal Bank of Canada’s (NYSE: RY) capital markets group, said. 

“You’re also seeing people selling that volatility and doing some overwriting. That can probably dampen volatility.”

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator for the SPDR S&P 500 ETF Trust (NYSE: SPY). Into the S&P 500’s March 8, 2022 decline, participants sold volatility on both sides of the options chain.

“When implied volatility is high, that same 1% move lower is much more ‘expected’ so there generally won’t be the same upward pressure on volatility and in fact it might decline,” said Christopher Jacobson, a strategist at Susquehanna Financial Group LLP.

“Along the same lines, investors at that point have had more opportunity and time to hedge, so those same market moves may not lead to as much hedging activity.”

Graphic: Via SpotGamma. “Netting call & put delta, you can see we’re near extremes in terms of put:call positions. Often large put positions are removed by expirations, which seems to coincide with market lows. Many of these are quarterly expirations which coincide w/FOMC meetings – such as next week.”

Taking this together, in accordance with metrics referred to earlier, “we could be closer to the end than the beginning of the discretionary de-risking,” as JPMorgan analysts best explain.

Further, the compression of volatility (via passage of FOMC) or removal of counterparty negative exposure (via OPEX) may serve to alleviate some of this pressure

Until then, participants can expect the options landscape to add to market volatility.

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

Balance-Break + Gap Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) is occurring.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 

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. 

Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades higher; activity above the $4,314.75 high volume area (HVNode) puts in play the $4,346.75 HVNode. Initiative trade beyond the $4,346.75 HVNode could reach as high as the $4,375.00 untested point of control (VPOC) and $4,395.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,314.75 HVNode puts in play the $4,285.75 HVNode. Initiative trade beyond the $4,285.75 HVNode could reach as low as the $4,249.25 low volume area (LVNode) and $4,227.75 HVNode, or lower.

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

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

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

What People Are Saying

Definitions

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

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

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

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

About

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

Capelj is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor developing insights around impactful options market dynamics.

Disclaimer

Physik Invest does not carry the right to provide advice.

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 February 24, 2022

Editor’s Note: The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Overnight, equity index futures added to losses after news that Russia invaded Ukraine

The MOEX Russia Index fell nearly 50% while, at home in the U.S., equity index futures were off about 3%. Bonds rose with commodities which were led by crude oil (up ~9%). 

The CBOE Volatility Index (INDEX: VIX), a measure of implied volatility or participants’ forecast of likely movement in prices, printed 37.79 a ~7.00 jump from Wednesday.

This high-level context suggests to us the need for patience. Ranges will be wide. Positioning will compound headline-driven moves. Technical analyses will fail. Caution.

Ahead is data on jobless claims, gross domestic product, gross domestic income (8:30 AM ET), as well as new home sales (10:00 AM ET).

Graphic updated 6:45 AM ET. Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: “The ‘bad news = good news’ narrative for markets doesn’t work if the Fed is tightening amidst a slowdown and a military escalation risk. In this case, bad news = bad news.”

Pursuant to this remark by Alfonso Peccatiello, Russian equities fell the most on record (nearly 50%) after President Vladimir Putin ordered the demilitarization of Ukraine. 

Graphic: Via Bloomberg.

According to Bloomberg, this crisis comes “after the U.S. and its allies crossed Russia’s ‘red lines’ by expanding the NATO alliance.”

In terms of the economic implications of Russia sanctions, it is “Cyprus and eastern European countries [that] are the most reliant on Russian imports in the EU.” 

Ukraine’s crisis also throws a wrench at monetary tightening initiatives, abroad; “the European Central Bank will put even greater emphasis on its flexibility and options as it exits stimulus measures and shifts toward raising rates,” Governing Council member Francois Villeroy de Galhau said.

Graphic: Via Bloomberg.

Positioning: Implied volatility expands as heightened demand for protection is priced in.

Graphic: VIX term structure shifts higher, especially at the front-end. This denotes the heightened potential for instability.

This comes after, according to views expressed by The Ambrus Group’s Kris Sidial, “we saw larger inflow[s] into equity funds, outflow[s] out of money markets, larger buying in the ATSs, with no real put buying.”

Graphic: Via EPFR, Barclays, and Bloomberg. Taken from The Market Ear.

In other words, measures of implied volatility were not performing; participants opportunistically buying the dip witnessed an SPX down, VIX down environment in which hedges were not being marked up accordingly.

Graphic: Per Tier1Alpha, “In the past, when the $SPX/ $VIX correlation goes back to negative, there have been some pretty memorable volatility events. Worth keeping in mind.”

The implications of this action are staggering. 

As stated yesterday, as most participants, at least at the index level, own protection, the counterparties to this trade are short protection. 

These counterparties, therefore, have positive exposure to delta (i.e., as index falls [rises], position loses [makes] money) and negative exposure to gamma, or delta (directional) sensitivity to underlying price changes (i.e., as the index moves against short option exposure, losses are multiplied). 

With measures of implied volatility expanding, as is the case when there is heightened demand for downside put protection, protection is bid and the dealer’s exposure to positive delta rises, which solicits more selling in the underlying (addition of short-delta hedges).

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 market maker long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

To monitor for capitulation, we may look for when the volatility expectations of implied volatility metrics rise to extremes. Learn more about VVIX, here.

Graphic: Charting the CBOE Volatility-Of-Volatility Index (INDEX: VVIX). In that reach for highly “convex” options, counterparties react in a manner that exacerbates underlying price movement.

We may also measure for one-sidedness in sentiment by looking to naive metrics like the put/call ratio. Learn more about PCALL, here.

Graphic: Using the put/call ratio to gauge sentiment.

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

Gap Scenarios: 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.

In the best case, the S&P 500 trades higher; activity above the $4,122.25 high volume area (HVNode) puts in play the $4,177.25 HVNode. Initiative trade beyond the HVNodes could reach as high as the $4,212.25 regular trade low (RTH Low) and $4,249.25 low volume area (LVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,122.25 HVNode puts in play the $4,055.75 LVNode. Initiative trade beyond the latter could reach as low as the $3,978.50 LVNode and $3,943.25 HVNode, or lower.

Considerations: If you are not well-versed in navigating trade at heightened levels of volatility, it is best to sit on your hands (SOH) or trade with a smaller size. Often, on large gaps, indexes may move sideways (and not up or down). This can be frustrating. 

Also, in high volatility, negative-gamma environments, headlines matter, and technical analyses often fail. Do not think “this time is as others” and let this event lead to your demise. Caution.

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

What People Are Saying

Definitions

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

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

About

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

Capelj is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor developing insights around impactful options market dynamics.

Disclaimer

Physik Invest does not carry the right to provide advice.

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

Categories
Commentary

Daily Brief For July 28, 2021

Market Commentary

Equity index futures trade higher ahead of key fundamental events.

  • ECB comments, COVID, geopolitics.
  • Ahead: Trade data, FOMC, earnings.
  • Mixed bag. No follow-through lower.

What Happened: U.S. stock index futures auctioned sideways to higher ahead of some key fundamental developments.

In addition to the 8:30 AM release on advance trade in goods, as well as key earnings from heavily-weighted index constituents like Facebook Inc (NASDAQ: FB), participants will look to also price in the 2:00 PM ET Federal Open Market Committee (FOMC) announcement and Fed Chair Jerome Powell’s press conference.

As stated in the Weekly Brief, the U.S. is in a different place from the rest of the world and is likely to eliminate its output gap this year which would call for a tightening in policy and dollar strengthening, helping douse inflation.

Moody’s strategists note: “The impressive growth in value across many asset classes is projected to taper off within the next couple of years as supportive policy is unwound. The 10-year Treasury yield will rise above 2% by 2022 and the fiscal tailwinds will also have faded by then.”

Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

What To Expect: As of 7:00 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 Tuesday’s volatile trade, the best case outcome occurred, evidenced by the S&P 500’s trade above a developing Volume Weighted Average Price (VWAP) pinch. This suggests the average buyer since the overnight high – $4,416.76 ONH – is in a winning position.

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

Moving on, it’s important to take note of some topline and internal divergences. 

After establishing the new ONH, weakness in China spilled over; U.S. equity index futures, led by the Russell 2000 and Nasdaq 100 sold fast and heavy up until the Nasdaq 100 found responsive buyers at a key technical level – the 20-day simple moving average – that corresponded with a thick base of resting liquidity. After, the entire market reversed and closed in range.

In terms of internal divergences, breadth was significantly weaker on the Nasdaq side.

Graphic: Equity indexes traded lower as internal metrics – like the ratio of advancers to decliners – weakened.

Given the technical context, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,392.25 high volume area (HVNode) pivot likely puts in play the $4,406.25 low volume area (LVNode). Trade beyond the LVNode could reach as high as the $4,416.75 ONH and $4,428.25 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below the $4,392.25 HVNode pivot likely puts in play the $4,381.75 LVNode. Trade beyond the $4,381.75 figure could reach as low as the $4,364.50 LVNode and $4,353.00 untested Point of Control (VPOC).

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. Graphic updated 6:55 AM ET.

News And Analysis

The COVID trauma has changed economics forever. 

Credit Suisse probe is showing due diligence failings.

Spiraling debt crisis confronts Evergrande billionaire.

American job market optimism reached 21-year high.

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

Daily Brief For June 21, 2021

Market Commentary

Index futures attempt to balance.

  • Yield curve flattens, China eyes BTC.
  • Ahead: CFNAI. ECB and Fed speak.
  • Indices auctioned sideways to higher.

What Happened: U.S. stock index futures auctioned higher and yields dropped.

After a big shift in the Federal Reserve’s so-called dot-plot, bond yields on the short-end of the curve rose while long-dated yields dropped in line with projections future inflation is easing. This flatter yield curve is a negative for cyclical stocks which can’t pass on increased costs, thereby impacting sales and margins.

Given the divergence across major, broad market indices, the implications of a flatter yield curve are apparent. Investors sold, heavily, cyclical stocks, evidenced by relative weakness in sectors like financials and transportation. 

In other areas, bitcoin fell after China cracked down on crypto-related transactions. Oil held its highs on a slowdown in talks between the U.S. and Iran. 

Ahead is data on the Chicago Fed National Activity Index (CFNAI). Also, today, members of the ECB and Fed will speak. 

Graphic updated 7:10 AM ET.

What To Expect: Monday’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, the worst-case outcome occurred, evidenced by initiative trade below the $4,177.25 high volume area (HVNode) and end-of-day spike liquidation to and through $4,161.00, a strong support going into Friday’s derivative expiry.

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: SpotGamma analysis suggested minimal support below $4,200.00, in the S&P 500.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,161.00 spike base puts in play the $4,177.25 HVNode. Initiative trade beyond the $4,177.25 HVNode could reach as high as the $4,199.25 HVNode.

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 $4,161.00 suggests an acceptance of Friday’s knee-jerk move from value. In such a case, participants are cautioned on further downside. First comes the $4,153.25 HVNode. Thereafter, if lower, participants can target the overnight low (ONL) at $4,126.75 and HVNode at $4,122.25.

Overnight Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
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). Noting, seasonality supports the Nasdaq 100’s relative strength. 
Graphic: SHIFT search suggests participants were most interested in call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside.

News And Analysis

Energy | Natural-gas glut has evaporated, driving prices higher. (WSJ)

Economy | Supply chain risks extend into 2022, stoking inflation. (WSJ)

Travel | American Air cuts some flights to avoid potential strains. (WSJ)

Politics | House bills put big tech step closer to antitrust regulation. (Fitch)

Markets | Goldman, JPMorgan pin emerging-market bets on hawks. (BBG)

Politics | Infrastructure bill talks continue; China comes in focus. (Moody’s)

Travel | Europe’s air traffic reaches 50% of 2019 amid recovery. (BBG)

Travel | Canada won’t fully reopen border until 75% vaccinations. (BBG)

What People Are Saying

Innovation And Emerging Trends

Technology | GM plans to expand its fuel-cell business beyond EVs. (CNBC)

Technology | Why the big automakers are pouring money into robotics. (TC)

Education | The pandemic’s effects have depressed college enrollment. (Axios)

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 April 21, 2021

Market Commentary

Index futures auction within prior range, position for directional resolve.

  • Virus surges, earnings accelerate.
  • Calendar light. ECB rate decision.
  • Buyers responded to lower prices.

What Happened: U.S. stock index futures auctioned sideways, overnight, after strong downside discovery the day prior.

ING Group Strategists“Markets remain very much caught between the rock of improving macroeconomic conditions and the treacherous waters of geopolitical risks and alarming Covid-19 case growth in some corners of the world.”

What To Expect: Wednesday’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 beyond the $4,142.00 regular trade low, down to the $4,122.75 HVNode, which is significant because denotes an area of prior two-sided trade.

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, in a nutshell, the market explored higher prices and is now probing into pockets of old value to drum up increased participation. The market is doing what it is supposed to — move to the area where participants want to do business. Given the remaining price targets at $4,200.00 and minimal excess (i.e., flat high) left behind last Friday’s price discovery, odds are participants lacked conviction and the market was unable to advertise higher prices.

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.

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). 

This is generally a bullish dynamic. Why? Think of there being unfinished business at the all-time high. As stated earlier, a market moves to where there is business to be conducted.

Moving on, the two-day liquidation has pushed the S&P 500 down into short-gamma territory. This is not good. Why? Short-gamma is opposite to the forces that crush volatility and promote lengthy bursts of momentum.

Liquidation Breaks: The profile shape suggests participants were “too” long and had poor location.

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: SPDR S&P 500 ETF Trust (NYSE: SPY) in short-gamma territory, via SpotGamma.

Due to occurrences discussed in the weekend commentary, such as increased put selling during market strength, volatility expansion and a rise in delta (i.e., exposure to the underlying asset) will force put-side option sellers to sell into weakness, to hedge off their risk, thereby exacerbating volatility.

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

In the event that some exogenous event (e.g., COVID-19 resurgence, tax-hike) was to surface, odds favor increased volatility and potential for downside.

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

In the best case, the S&P 500 trades higher; activity higher than the $4,142.00 regular trade low targets the $4,155 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,171 VPOC. In the worst case, the S&P 500 trades lower; activity below $4,122.75 targets the $4,104.00 low volume area (LVNode). Initiative trade beyond that figure puts in play the $4,082.75 and $4,069.25 HVNodes.

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.
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 April 20. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $381, which corresponds with $3,810 in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: SHIFT search suggests participants lack directional conviction in the SPDR S&P 500 ETF Trust (NYSE: SPY).

News And Analysis

Science | Man-made lakes in U.S. West and Mexico to shrink to historical lows. (AP)

Markets | Mortgage rates come down as the bond market regains strength. (MND)

Markets | Federal Reserve will limit any overshoot of inflation target, Powell says. (REU)

Travel | Washington says travel warnings will cover 80% of the world’s nations. (BBG)

Policy | On the verge of a realignment of politics, economic policy, and living. (Ritholtz)

Markets | MIAX expanding futures division with new hires from Cboe and Citi. (TT)

Markets | U.K. scaps MiFID II requirements in ambitious capital markets reform. (TT)

Economy | While lumber prices are soaring, actual logs remain very dirt cheap. (BBG)

What People Are Saying

Innovation And Emerging Trends

Innovation | Lessons from Jeff Bezos’ annual letters to Amazon shareholders. (CB)

Markets | How Robinhood made trading easy and maybe even too hard to resist. (BBG)

Space | International crew, recycled capsule: SpaceX is preparing to launch. (AMN)

Venture | A look at Stripe, the most highly valued venture-backed private company. (CN)

FinTech | Fintech IPOs: Four foundational keys to success, preparing for IPO. (FM)

FinTech | U.K. creates a new fintech sandbox for distributed ledger technology. (S&P

FinTech | Venture capital interest in Latin America swells as fintech takes flight. (PB)

FinTech | Insurtech startups are leveraging rapid growth to raise big money. (TC)

FinTech | China’s central bank plans to build out a fintech cloud infrastructure. (SCMP)

 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.