Tag: Excess High

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Commentary

Daily Brief For March 22, 2022

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What Happened

Overnight, equity index futures were sideways to higher, and this validates higher prices, more. 

This is as implied volatility metrics – such as the Cboe Volatility Index (INDEX: VIX) – continue to suggest less demand for protection and a potential easing of concern.

As discussed in detail, yesterday, participants are not committing themselves to increased call option (i.e., insurance for shorts or bets on the upside) exposures, a dynamic usually seen at the start of sustained reversals. 

Given this, as well as institutional selling in spite of underinvestment (watch a chat), and the Federal Reserve’s (Fed) commitment to reining in inflation via “aggressive” monetary policy (i.e., hike and taper asset purchases) action, there is concern over the sustainability of this rally.

Ahead is Fed-speak. The New York Fed’s John Williams speaks at 10:35 AM ET. San Francisco Fed’s Mary Daly talks at 2:00 PM ET. The Cleveland Fed’s Loretta Mester talks at 5:00 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: Based on remarks by the Fed’s Jerome Powell, quantitative tightening (QT) will move at a pace of $1 trillion a year. This is a faster pace than that of the prior QT.

Read yesterday’s commentary for more on QE and QT.

According to Joseph Wang’s detailed discussion on the implications of QT, the “[a]nticipation of QT is already widening the spread between Agency MBS and Treasuries but does not yet appear to affect Treasury prices.”

“The supply and demand dynamics suggest that the market may simply be slow to react. In that case, Treasury prices will also have to adjust downward, maybe by a lot.”

Pursuant to that remark, Damped Spring’s Andy Constan explains that quantitative easing (QE), “which decreased risk premiums and increased wealth was inflationary to assets but ineffective in generating inflation of goods and services.”

Essentially, QT is not a good tool to fight inflation.

“Raising rates is the strong tool to fight inflation for the Fed and decreasing the budget deficit growth is the tool for Fiscal policymakers; … the [Fed] will do both QT to reduce the balance sheet and hike rates to fight inflation.”

Moreover, higher bond yields (lower bond prices) are usually not good for stocks. The question is whether participants want to take on the added risk of investing at high valuations?

Graphic: Via S&P Global Inc (NYSE: SPGI). Markets tend not, necessarily, to perform poorly during rising interest rate environments. 

The QT narrative amplifies the impact of rate hikes. 

Lisa Shalett, CIO at Morgan Stanley (NYSE: MS) Wealth Management, discussed recently QT at $80 billion per month (and $500 billion in balance sheet reduction through year-end), as well as how the added risks are to be compensated through lower price-to-earnings multiples in the stock market.

“In tightening terms, that’s the equivalent of another 25-basis-point hike,” Shalett explained. “In contrast, balance sheet run-off totaled $700 billion from 2017 through 2019 before the Fed stopped because markets seized and stocks sold off.”

Graphic: Via Index Indicators. Breadth, here, is measured by the % of SPX stocks above the 50-day average.

Positioning: As discussed before, a feature of falling markets is the demand for protection. 

When this protection is monetized (or decay ensues), options counterparties add to the market liquidity (i.e., buying back short futures hedges).

Graphic: Via CME Group Inc (NYSE: CME). Book depth thickens since early March swing low.

A feature of markets entering a sustainable recovery is the demand for call options.

Based on metrics published by SpotGamma, call-buying was near its lows.

Graphic: Via SpotGamma. “Plots show the premium per trade aggregated each week, with calls in blue and puts in orange. This is only customer flow (i.e. retail, hedge funds). Starting with equities, call buying this past week was at LOWS going back to 2020 (top right).”

Looking at intraday measures, yesterday, we see that participants’ commitment to a change in direction remains low, still.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options trade. The rising blue line denotes put selling (a positive delta impact). The falling orange line denotes call selling (a negative delta impact).

It’s possible that the bottoming process has yet to conclude. Instead, a build of positive options gamma (via the supply of protection – call selling – and more active hedging of call options near the money) may give the market some support.

To explain, in accordance with the HIRO graphic above, we surmise counterparties are long calls and therefore tend toward selling into strength (buying into weakness) amid increasing (decreasing) positive delta exposure.

As short-dated activity clusters in the area just north of the most recent price rise, and this protection decays, dealer exposure to positive delta (gamma) falls (rises).”

“Taken together, dealers add to the market liquidity. When there is rising liquidity, volatility (a measure of how ample liquidity is) falls,” SpotGamma adds. 

“Was the SPX to liquidate, again, demand for protection and increases in volatility likely have us targeting options-based support.”

Graphic: Via SpotGamma. Key levels of interest.

In other words, based on the information we have at the moment, the market is prone to sharp drops lower, and the rally is questionable. Caution.

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 upper 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 $4,464.75 low volume area (LVNode) puts in play the $4,499.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,526.25 high volume area (HVNode) and $4,565.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,464.75 LVNode puts in play the $4,438.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,409.00 and $4,355.00 VPOC, 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.

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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.

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

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.

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.

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 November 19, 2021

What Happened

Overnight, equity index futures diverged as the S&P 500 attempted a breakout, failed, and rotated back into range, leaving some signs of excess (i.e., a proper end to auction) on the composite volume profile. Learn about the profile.

This comes ahead of a weighty options expiration that ought to resolve this market of the dynamics that promoted sideways trade over the past couple of weeks. Attention, after today, shifts to weakening breadth, seasonality, emerging fundamental nuances, and the like, as a result.

Ahead is some Fed-speak and no major economic releases. 

Graphic updated 6:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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

Yesterday, on nonparticipatory intraday breadth and market liquidity metrics, the best case outcome occurred; the S&P 500, after liquidating against a divergent volume delta (i.e., a metric that may reveal participants’ commitment to buying and selling as calculated by the difference in volume traded at the bid and offer) was responsively bought at its lows.

The low-of-day coincided with the $4,674.25 micro-composite point of control, the place at which two-sided trade was most prevalent over numerous day sessions, and the volume-weighted average price (i.e., the place at which liquidity algorithms are benchmarked and programmed to buy and sell) anchored from the Federal Open Market Committee (FOMC) event, weeks ago. 

The aforementioned activity left behind a double-distribution profile structure; participants initiated from one area of acceptance to another, closing just beyond what analysis provider SpotGamma sees is the options strike with the highest Absolute Gamma.

As discussed day after day, leading up to today’s monthly options expiration (OPEX), this cluster of options positioning was to restrain (i.e., make it difficult for) directional resolve.

The reason is, as OPEX nears and participants concentrate their activity on shorter-dated expiries (such as the one rolling off today), there’s an increased share who are willing to bet the market won’t move higher. In expressing this bet, participants opt to sell-to-open call exposure, for instance, leaving the counterparty/dealer warehousing exposure to positive options gamma. 

As this trend continues (and time to expiry narrows), dealers’ exposure to positive options gamma rises. In offsetting this risk, they sell to open (buy-to-open) the underlying as price rises (declines). This responsive buying and selling are what causes the market to balance (i.e., trade sideways) in a tight range. It ought to end after OPEX, as that options exposure rolls off. 

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance and not ready to break).

Context: The aforementioned trade is happening in the context of dynamics I touched on in weeks prior, as well as yesterday’s commentary. 

This is, specifically, the bond market’s pricing of risk.

According to Bloomberg, based on an “erratic … handling [of] large transfers of risk,” as evidenced by the Merrill Lynch Option Volatility Estimate (INDEX: MOVE), the bond market’s pricing of risk, so to speak, has diverged from the pricing of equity market risk, via the CBOE Volatility Index (INDEX: VIX).

Graphic: “The ICE BofA MOVE Index, which measures implied volatility for Treasuries, is close to the steepest level since April 2020,” via Bloomberg.

That said, fear in one market tends to feed into the fear of another; regardless of the cause, equity and bond market participants are not on the same page.

What is the fear all about? Well, at its core, the fear coincides with “broad uncertainty about the direction of the economy and monetary policy amid surging prices, labor shortages and yields that are holding well below the rate of inflation,” according to Bloomberg.

As asked, yesterday, in combating high inflation, policymakers ought to raise rates, right? 

That’s precisely what economists at institutions like JPMorgan Chase & Co (NYSE: JPM) believe may happen as soon as next September, earlier than once forecasted.

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive to own.

As the market is a forward-looking mechanism, the implications of this seem staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Eventually, fear on the part of bond market participants may feed into equity market positioning.

In rounding out this section, I, again, want to mention the pinning in the broad market, as well as the performance of underlying constituents. If you’ve paid much of any attention, there is some bloodshed going on; breadth is divergent and the indices are sideways to higher, basically.

Graphic: Internally, the market is weak. Externally, via price, the market seems strong. 

The concern is that after OPEX, the absence of supportive vanna and charm flows (defined below), for which we can attribute some of the trends in extended day outperformance, alongside that sticky gamma hedging, so to speak, frees the market for directional resolve. 

Whether or not that resolve is up or down, we know that (as SpotGamma talks more about), participants are underexposed to downside protection. Should volatility pick up, these participants are likely to reach for that protection forcing dealers to reflexively hedge in a destabilizing manner. 

As volatility rises and customers demand out-of-the-money put protection, counterparties are to hedge by selling into weakness. The conditions worsen when much of the activity is in shorter-dated tenors where options gamma is more punchy if we will.

Pictured: SqueezeMetrics highlights implications of volatility, direction, and moneyness. The left orange marker is reflective of a basic reaction to call-buying (as observed during the rise of meme stocks). The right orange marker reflects a reaction to put-buying (as observed during the COVID-19 sell-off).

Expectations: As of 6:15 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 balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Failure: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) nearly occurred on a higher time frame.

In monitoring for acceptance (i.e., more than 1-hour of trade) outside of the balance area, we saw an overnight rejection (i.e., return inside of balance). This portends a move to the opposite end of the balance. 

Given OPEX, though, we ought to give more weight to continued balance (i.e., sideways trade).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 high volume area (HVNode) puts in play the $4,723.50 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, or lower.

Click here to load today’s updated 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. Learn about the profile.

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.

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.

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

Options: If an option buyer was short (long) stock, he or she would buy a call (put) to hedge upside (downside) exposure. Option buyers can also use options as an efficient way to gain directional exposure.

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

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

Options Expiration (OPEX): Traditionally, 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) and the reduction dealer gamma exposure. 

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.

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

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.

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Categories
Commentary

Daily Brief For November 3, 2021

Abstract

Equity index futures and commodities were mixed. Bonds sideways to higher. Volatility bid.

Ahead is a heavy day of economic releases, in the face of fundamental narratives and positioning metrics that may later support directional resolve.

What Happened

Overnight, equity index futures were flat as participants wait to initiate the next leg – higher or lower – until they are provided clarity on monetary policy frameworks, the pace of the economic recovery, and the like.

Ahead is ADP employment (8:15 AM ET), Markit services PMI (9:45 AM ET), ISM services index and factory orders (10:00 AM ET), as well as Federal Reserve statements (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

Action: On lackluster breadth and market liquidity metrics, the best case outcome occurred, evidenced by participants’ exploration of new prices in the S&P 500.

Intent: The intraday excess high marks potential exhaustion (or willingness to end trend). Also, the rounding of the composite profile (i.e., developing ledge) suggests participants are either painting themselves into a corner or there is a lack of conviction to take price higher.

Validation: Sideways trade, above the $4,590.00 balance area high (BAH), and overlapping value areas, validates the market’s intent to pause ahead of new information.

Consideration: Poor structure left behind prior initiative trade (as evidenced by the presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures which denote short-covering and a lack of material, new-money buying) adds to technical instability.

Should the market crack, participants will likely look to check old value (i.e., revisit, repair, and strengthen) these pockets of low-volume. This is called the “cave-fill” process, in volume profile terms.

Graphic: Flat delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: Federal Open Market Committee (FOMC) announcement later today.

The announcement will provide participants with color on the economic recovery and the Federal Reserve’s intent to continue supporting the economy, at the rate it has. 

Nordea’s Andreas Steno Larsen states: “Jay Powell will have to walk on eggshells to prevent an acceleration of the front-end of the USD yield curve. Arguments for the Fed to tighten policy keep piling up and hence we see a swift tapering process (30B a meeting) and a first hike in June.” 

“The combination of 1) even higher inflation prints during Q4 (with several extremely volatile base effects), 2) a removal of USD liquidity, 3) a historically weak credit impulse into 2022 (due to a massive credit expansion 20/21) sounds like the perfect flattener setup to us,” which may weigh on sentiment and long term investments.

Graphic: “Keep flattening the yield curve during tapering,” via Nordea.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was a touch higher, while spreads across the VIX futures term structure widened with demand coming in at the front.

Such a situation, as touched on yesterday, in addition to the long-gamma environment (in which counterparties hedge their warehoused options risk by buying underlying into weakness and selling into strength), has the effect of making it difficult to resolve directionally.

The reasons are: (1) options will slide down their term structure (vanna) and (2) skew decays (charm). When this happens, we expect to see supportive flows as dealers cover their short equity/futures hedges. 

With volatility bid, the effect of vanna and charm is dulled. As a result, it is likely that participants see more movement after the FOMC announcement.

To note, the potential for upside resolve comes down to how participants take the FOMC announcement. We know that, according to SpotGamma, there is increased capital being committed to higher and higher options strikes, a development often seen as bullish.

Expectations: 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 middle part of a neutral overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance (Two-Timeframe Or Bracket) Is The Status Quo: Rotational trade that denotes current prices offer favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,620.25 high volume area (HVNode) pivot puts in play the $4,628.50 Fibonacci extension. Initiative trade beyond $4,628.50 could reach the $4,639.00 and $4,664.75 Fibonacci levels, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,620.25 HVNode puts in play the $4,590.00 balance area high (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 low volume area (LVNode), or lower.

Click here to load today’s updated 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. Learn about the profile.

What People Are Saying

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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.

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.

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).

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

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

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.

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Categories
Commentary

Weekly Brief For July 3, 2021

Market Commentary

Key Takeaways: U.S. equity index futures diverge in their attempt to discover fair prices for two-sided trade.

  • Economy is set for sustained boom.
  • Ahead is a light economic calendar.
  • SPX, NDX, DJI higher. RUT coiling.

Summary: Last week, U.S. stock index futures auctioned sideways to higher into Friday’s employment report. The release showed an addition of 850,000 jobs in June, the strongest employment gain since last summer. 

The S&P 500 and Nasdaq 100 led the week-long rally, while the Dow Jones Industrial Average followed closely behind. Though the Russell 2000 did end lower, it has been building energy for a break.

Considerations: It was the beginning of April JPMorgan Chase & Co’s (NYSE: JPM) Jamie Dimon wrote strong consumer savings, an increased pace in COVID-19 coronavirus vaccinations, and unprecedented efforts to spur economic activity could mean that a boom lasts as long as 2023.

Dimon’s comments remain valid. Months after, officials are hard at work in helping the U.S. reach herd immunity with vaccines that produce antibodies for the most well-known variants of COVID-19. Additionally, the economy is making progress toward meeting the Federal Reserve’s objectives for employment and inflation; just a couple of weeks ago the institution brought forward the time frame on when it will raise interest rates. 

In a statement, BlackRock strategists noted: “We believe the Fed’s new outlook will not translate into significantly higher policy rates any time soon. This, combined with the powerful restart, underpins our pro-risk stance.”

Alongside that news, the equity market sold violently, into Quadruple Witching, or the large expiry of futures and options. Thereafter, indexes staged a massive reversal, and the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility, traded to its lowest level since February 2020.

According to SpotGamma models, up to 50% of the gamma in and across the S&P 500 complex was taken off the table that expiry.

This, as SpotGamma has said in the past, “creates volatility because, as large options positions expire[], are closed and/or rolled, dealers have large hedges they need to adjust.”

Put more simply, the initial action, into the expiry, may have been attributable to the sale of long stock that hedged expiring short exposure above the market (i.e., call side).

After that exposure was cleared, the prospects for a rally improved, boosted by the buying back of short put hedges as volatility imploded.

Last week, though, things became a tad frothy with the number of put options sold-to-open seeing heightened levels.

Graphic: SpotGamma’s analysis suggests equity put options were sold-to-open (red arrow). 

Put sales, which can be part of sophisticated volatility-based trading strategies, often suggest increased confidence as market participants look to options for income, and not insurance.

Historically, the returns after such developments are mixed; more often the appearance of strong initiative buying surfaces (e.g., August and January 2020) before a liquidation helps correct excess inventory, and bring sense back into the market. 

Kris Sidial – co-chief investment officer at The Ambrus Group, a volatility arbitrage fund – and I recently held a conversation regarding meme stock volatility, market structure, and regulation. He noted that ongoing risk-on dynamics can be traced back to factors like Federal Reserve stabilization efforts, and low rates, which incentivize risk-taking.

“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, Sidial notes. “These dislocations happen quite frequently in small windows, and it offers the potential for large outlier events,” like the equity bust and boom during 2020. “Strength and fragility are two completely different components. The market could be strong, but fragile.”

That dynamic is playing out as Cem Karsan, founder at Kai Volatility, notes volatility is dramatically oversupplied. As a result, as implied volatility drops, options gamma – an option delta’s sensitivity to market price changes – rises. Associated hedging forces make it so there’s more liquidity and less movement. In other words, the market tends to pin.

Still, in line with Sidial’s comments, Karsan believes expected distributions are fat-tailed, given “fragility.” In other words, it’s hard for the market to unpin. Should it unpin, however, there’s “not enough liquidity” to absorb leverage on the tails.

Given this, Karsan finds it interesting to sell at-the-money option structures to fund out-of-the-money structures. Alternatively, knowing what forces – e.g., charm or the rate at which the delta of an option changes with respect to time – decay poses on so-called “dealer positioning,” going into the July option expirations (OPEX), one could look into long calendar put spreads on the S&P 500.

In such a case, traders are short puts in July and long puts on forward. This way, you’re collecting decay as a result of realized pinning. Here’s Karsan’s full take, from the source.

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

After mid-July, though, the window for fundamental dynamics (e.g., a shift in preferences from saving and investing to spending, monetary tightening, seasonality, or a COVID-19 resurgence) to take over is opened. 

In a note on COVID resurgence, to not venture too far off into the abyss, I cite strategists led by JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic who last year correctly suggested equities would continue rallying on the basis of low rates, improved fundamentals, buybacks, as well as systematic and hedge fund strategies. 

“The delta variant should not have significant repercussions for the pandemic situation in developed markets (e.g. Europe and North America, which have [made] strong progress in vaccinations) due to the level of population immunity.”

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to Friday’s $4,323.00 untested Point of Control (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.

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above the $4,323.00 POC puts in play the $4,347.00 excess high. Initiative trade beyond the excess high could reach as high as the $4,357.50 Fibonacci-derived price target.

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.

In the worst case, the index trades lower; activity below the $4,323.00 POC puts in play the untested POC at $4,299.00, as well as the POC and micro-composite HVNode at $4,285.00. Thereafter, if lower, participants may look for responses at the $4,263.25 LVNode, $4,247.75 LVNode, as well as the $4239.25 HVNode and $4,229.00 POC.

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.

For a full list of important levels, see the 65-minute profile and candlestick chart, below.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were committing the most capital to 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 denotes (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside. Also, there was a meaningful bid in September puts on the S&P 500 and Nasdaq 100. This dynamic suggests participants, despite their commitment to higher prices, are hedging against near-term risks, like the Jackson Hole Economic Symposium.

News And Analysis

Markets | The premium Elon Musk adds to Tesla, other ventures. (Kyla)

Markets | Forward-looking indicators point to improving credit trends. (S&P)

Travel | TSA screenings surpassed 2019 levels in a pandemic first. (CNBC)

Energy | WH is worried about high oil prices, sees enough supply. (REU)

Energy | An overview of data from IEA’s Energy prices database. (IEA)

Energy | OPEC ends Friday’s meeting without a deal for agreement. (CNBC)

Agriculture | Dry weather damage spells trouble for U.S. spring crops. (S&P)

Economy | States ending jobless benefits early hit labor milestones. (REU)

Markets | Spotlight turning to mergers, acquisition for fintech SPACs. (S&P)

Economy | Jobs gain largest in 10 months; employers up wages. (REU)

Energy | Cal-ISO, utilities ask consumers to conserve amid heatwave. (S&P)

Economy | Economic growth hiccup to derail credit spread stability. (BBG)

Markets | Record S&P 500 masks fear trade gripping stock market. (BBG)

Innovation And Emerging Trends

FinTech | BTC mining now easier, more profitable after crackdowns. (CNBC)

FinTech | ‘Flight to quality’ as private insurtechs draw big investments. (S&P)

FinTech | Bank customers cement relationships with digital channels. (S&P)

Markets | Money-losing companies sell record stock, flashing signal. (CNBC)

Markets | Wall Street rebels warning of ‘disastrous’ $11T index boom. (BBG)

Mobility | When do electric vehicles become cleaner than gas cars? (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, 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.

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Commentary

Market Commentary For 11/27/2020

What Happened: On hopes of a sustained economic rebound, stock index futures are trading higher, in balance, suggesting acceptance of higher prices in the S&P 500.

What Does It Mean: In Wednesday’s regular trading, participants balanced, accepting higher prices near the $3,630 balance-area high, as evidenced by the non-presence of range expansion.

Now, buyers extended their gains, auctioning into Tuesday’s excess high, which ended the upside discovery process when responsive sellers were found near the $3,650 mark, a balance-area projection.

As a result, participants come into Friday’s session knowing that (1) the market has accepted Tuesday’s advance, (2) the auction is trading into a prior excess high, above the $3,630 balance-area boundary, and (3) the odds do not favor range expansion during a shortened, holiday session.

Therefore, today will likely further confirm Tuesday’s activity was the start of a new trend to the upside. Since the auction below $3,625, into Tuesday’s poor profile structure, did not attract further selling, initiative buyers remain in control. Thus, participants must monitor for signs of (1) continuation or (2) balance.

In case of the former, participants ought to take out the $3,655 overnight rally high first. In case of the latter, the auction ought to find responsive buyers near $3,630, a prior resistive balance-area high. An initiative drive below below that figure would put the rally on hold, and would target first $3,620, and then the node near $3,610.

Levels Of Interest: $3,655 overnight high, $3,630 balance-area high/high-volume node.

Categories
Commentary

Market Commentary For 11/25/2020

What Happened: As investors await a flurry of economic data including GDP estimates, stock index futures are trading in range after a day of active discovery that found acceptance near the $3,630 balance-area high in the S&P 500.

What Does It Mean: In Tuesday’s regular trading, initiative buyers dominated the auction, after a break of the low-volume node at $3,580. Later in the session, buyers established an excess high, suggesting an end to the upside discovery process.

Overnight, however, buyers extended their gains before finding responsive sellers near the $3,650 mark, a balance-area projection.

As a result, participants come into Wednesday’s session knowing that (1) the market has made a substantial advance, (2) numerous high-profile economic releases are to be revealed, (3) the prior day’s p-shaped profile structure is weak and indicative of short-covering.

Therefore, today’s session may confirm if yesterday’s activity was the start of a new trend to the upside. Auctioning into Tuesday’s profile structure, below $3,625, may portend a rapid liquidation down to the $3,610 high-volume node, which ought to offer responsive buyers an opportunity to buy at lower prices and initiative sellers a favorable area to profit take. Spending time below yesterday’s value points to further balance.

In case participants accept higher prices, upside targets include the overnight high, as well as the November rally high at $3,668.75. An initiative drive through $3,610 would be the most bearish outcome, and would target the balance-area low and then the low-volume node at $3,580.

Levels Of Interest: $3,610 high-volume node, $3,655 overnight high, $3,668.75 rally high.