Tag: Gap

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Commentary

Daily Brief For April 25, 2022

Editor’s Note: Wow, what a month! Looks like there was a ton of volatility we weren’t able to navigate together.

I’m back now and will be making changes to both the quantity and quality of notes sent. In total transparency, I took on way too much work, and quality suffered a tad. I look forward to making things a bit more sustainable and am grateful for your interest in remaining a subscriber.

Interested in getting this free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below, today!

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What Happened

Overnight, the equity index and most commodity futures explored lower. Bonds and implied volatility metrics were bid.

This is alongside news that China’s reaction to a local COVID-19 outbreak may feed into global slowdowns just as supply pressures, among other things, are pushing the Federal Reserve (Fed) to adopt a more hawkish policy stance.

Notable is the pace at which China’s yuan is falling. 

Per TD Securities, it suggests “the PBOC is utilizing the yuan as another tool to provide stimulus to the economy at a time when they are showing restraint on the monetary policy front.” 

Ahead, there are no important economic events scheduled. See who is reporting earnings, here.

Graphic updated 7:30 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: A push-and-pull, continues.

At a high level, it was surmised that many of the responses to geopolitical tension and inflation were priced in. The economy, since early pandemic disruptions, has strengthened and the need for ultra-accommodative policies is no more.

Graphic: Via S&P Global Inc (NYSE: SPGI).

That means low rates and quantitative easing (QE) – easy money so to speak – are on the way out, at least for the time being.

Recall that QE is a policy to expand the Federal Reserve’s balance sheet “to provide monetary accommodation, typically when interest rates are at a zero-lower bound (when nominal interest rates are at, or near, zero),” as JH Investment Management explains.

With QT, central banks remove assets (e.g., government bonds they bought from the private sector) from their balance sheet “either through the sale of assets they had purchased or deciding against reinvesting the principal sum of maturing securities.”

With that, we note that when bonds rise in value, their yields decline; “when the Fed embarks on bond-buying program[s] to support the U.S. economy, … [it nudges] the prices of these assets higher while pushing yields lower, which also has the effect of driving yield-hungry investors into relatively riskier asset categories that promise high returns.”

Graphic: Via ICI. Taken from The Market Ear.

As a result, participants’ demand for risk assets prompts their divergence from fundamentals. As liquidity is removed and funding costs increase, this may prompt risk assets to converge with fundamentals.

This is because, for investors to take on additional risk for return, they must receive in excess of the risk-free rate (as provided by the Treasury). This excess is the risk premium.

Previously, as the Damped Spring’s Andy Constan had previously commented, “[a]dditional risk premium expansion pressures from these levels is not likely.”

“However, if, in the unlikely event, details of QT do emerge suggesting a start of QT before June and at a greater size than expected, we would no longer be willing to hold [risk] assets as that would cause an end to any risk premium contraction possibilities.”

Well, that’s what happened in early April when Fed members said their debt holdings would be reduced “at a rapid pace” as soon as May, as well as hike rates, faster. 

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery,” the Fed’s Lael Brainard said. 

The Fed may even raise “caps” on the pace of QT.

Graphic: Via The Market Ear. Goldman Sachs Group Inc (NYSE: GS) sees the balance sheet shrinking “to an equilibrium size of just over $6tn by early- or mid-2025, though there is substantial uncertainty about its terminal size.”

Per CME Group Inc’s (NASDAQ: CME) FedWatch Tool, market participants are pricing a near-100% probability that the Fed will move the target rate to 75-100 bps (+50 or +75 bps).

Graphic: Via CME Group Inc. FedWatch Tool suggests a near-100% chance of a Fed hike that moves the target rate between 75 and 100 bps.

At a high-level, rates hikes take time to flow through to the economy while “QT is a direct flow of capital to capital markets or flow out of,” according to statements by Kai Volatility’s Cem Karsan. 

“An increase in the pace of tightening of QT should mean lower stocks, wider credit spreads and a slight reduction in the need for front-end hikes,” explains Kevin Muir of the MacroTourist.

“Using the balance sheet as a tightening tool represents a large change in the Fed’s attitude, and IS NOT priced into the market.”

Graphic: Bloomberg. “Everyone bearish, but redemptions just starting,” said BofA strategists led by Michael Hartnett, adding that the environment of “extreme inflation” and rates shock is just setting in, as the Federal Reserve tightens monetary policy. “75 basis points is the new 25 basis points,” Hartnett said, referring to the scope of future interest-rate hikes.

As an aside, adding to earlier comments on the yuan’s fall, Bob Parker, a senior adviser at Credit Suisse Group AG (NYSE: CS) explains that “When Chinese investors lose confidence in their own economy/markets, capital outflows from China accelerate, … [and] this, then, leads to a central bank which has to prop up the currency by selling some of the country’s huge reserve piles.” 

“Part of their reserves will have been/are in U.S. equities so as the reserves fall, they are natural sellers of the S&P.”

Graphic: Via Refinitiv. Taken from The Market Ear. CNH versus SPX.

Positioning: In a comparison of options positioning and passive buying support, the returns distribution is skewed positive and points to building support for a potential short-term bounce.

Graphic: Via Physik Invest. Data via SqueezeMetrics.

The most recent liquidation resulted in participants reaching for protection and this exacerbated movement to the downside amidst the reflexive hedging.

As this short-dated exposure decays, the counterparts’ hedges are to be tapered and this may assist in the market hammering out a bottom or rallying. 

On the contrary, however, as SpotGamma explained in a recent note, “[t]op of mind as we head into new trade on Monday is the likelihood traders will not aggressively sell volatility (i.e., if they sell volatility -> that drives volatility lower -> resulting in hedging flows that support the market) until the FOMC (5/4) and/or some resolution on the geopolitical front.”

“Therefore, [] expect larger trading ranges this upcoming week.”

Technical: As of 6:30 AM ET, Monday’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 $4,247.75 regular trade low (RTH Low) puts in play the $4,274.50 spike base. Initiative trade beyond the spike base could reach as high as the $4,314.75 high volume area (HVNode) and $4,337.00 untested point of control (VPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,247.75 RTH Low puts in play the $4,227.75 HVNode. Initiative trade beyond the $4,227.75 HVNode could reach as low as the $4,177.25 HVNode and $4,129.50 overnight low (ONL), or lower.

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

In a spike up (down) situation, trade below (above) the spike base, negates the buying (selling).

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 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 April 11, 2022

Hey team, you’re going to have to forgive me. Still am traveling through the rest of this month. Therefore, coverage will remain sporadic and less in-depth. Apologies and take care!

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What Happened

Overnight, equity index futures were mixed after last week’s liquidation alongside news that the Federal Reserve was interested in sharper interest-rate hikes and balance-sheet reductions to stem inflation. 

China equities were weak on the implications of COVID-19 outbreaks, among other things. 

Some Russian entities entered into effective default, as ruled by markets. The conflict between Russia and Ukraine, that spurred crippling economic sanctions, is ongoing. 

And, in other news, some Bitcoin (CRYPTO: BTC) pundits suggest weakness in risk assets, like technology, may bring down cryptocurrency. 

Crypto prices “do not trade on the fundamentals of being peer-to-peer, decentralized, censorship-resistant digital networks designed for the transfer of money,” explained BitMEX founder Arthur Hayes on correlations with the Nasdaq 100 trading at record highs. 

Crypto “will lead equities lower as we head into the downturn, and lead equities higher as we work our way out of it.”

Ahead is data on NY Fed median 1- and 3-year expected inflation (11:00 AM ET). Fed-speak by Charles Evans (12:40 PM ET). The quarterly earnings season begins this week. Bank stocks to start reporting Wednesday, April 13.

Graphic updated 6:45 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 ruling narrative, so to speak, is concerned with the management of inflation through monetary policies, credit impulse contractions, as well as the implications of Russia’s invasion of Ukraine, China’s COVID-19 actions, and beyond.

Graphic: Via The Macro Compass.

The Federal Reserve’s (Fed) roadmap for shrinking the balance sheet and raising rates was revealed in the recent release of Federal Open Market Committee (FOMC) minutes. 

“The FOMC stayed far too easy for far too long and has belatedly realized their mistake,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC. 

“They are now scrambling to get policy back to neutral as quickly as they can. Once they arrive at something close to neutral, they will have to ascertain over time how far into restrictive territory they have to move to get inflation back under control.”

Graphic: Via Bloomberg.

Moreover, as talked about in past commentaries, quantitative tightening (QT) amplifies the impact of rate hikes.

Per statements by JH Investment Management, through QT, central banks remove assets from their balance sheet. This is “either through the sale of assets they purchased or deciding against reinvesting the principal sum of maturing securities.” 

With that, we note that when bonds rise in value, their yields decline; “when the Fed embarks on bond-buying program[s] to support the U.S. economy, … [it nudges] the prices of these assets higher while pushing yields lower, which also has the effect of driving yield-hungry investors into relatively riskier asset categories that promise high returns.”

As liquidity is removed, this may prompt risk assets to converge with fundamentals.

Graphic: Via Bloomberg. Bonds continue their losing streak. This is amid end-of-quarter rebalancing inflows; “Bonds performed so poorly in the past month that exchange-traded fund investors were forced to buy in record amounts.”

At present, via CME Group Inc’s (NASDAQ: CME) FedWatch tool, participants are pricing in a heightened probability of a half-point hike next month.

Graphic: Via CME Group Inc. FedWatch tool.

Notwithstanding, per Credit Suisse Group AG (NYSE: CS) research, there has been no meaningful breadth disconnect; breadth remains supportive of higher S&P 500 prices.

Via: Credit Suisse research. Taken from The Market Ear.

At the same time, JPMorgan Chase & Co’s (NYSE: JPM) Mislav Matejka sees continued gains in earnings while equity versus credit and bond yields are still supportive of valuations.

Positioning: Keeping this section light, today.

After quarterly rebalances and options expiries, the reduction in counterparty exposure to positive gamma freed indexes (i.e., unpinned), as expected. 

Why? 

We see counterparties as those participants who take the other side of customer trades. The collapse in realized volatility and the move higher in equity markets solicited counterparties’ decreased (increased) hedging of put (call) options. 

The naive assumption is that counterparties are short (long) put (call) protection. When implied volatility declines and underlyings move higher, counterparties have less (more) exposure to amplified losses (gains). 

To hedge, they sell into strength and buy into weakness, basically.

As participants start to concentrate their bets in shorter-dated expiries, at higher prices, counterparties take from underlying movement in their provision of liquidity. It takes an options expiry, or some exogenous event, to disrupt this balance. 

That happened at the end of last month. Since then, increases in implied volatility and lower underlying equity prices have helped pressure indexes and increase realized volatility.

Technical: As of 6:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle 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 $4,468.75 poor low puts in play the $4,489.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,501.00 VPOC and $4,519.75 overnight high (ONH), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,468.75 poor low puts in play the $4,444.50 weak low. Initiative trade beyond the weak low could reach as low as the $4,409.00 VPOC and $4,395.25 high volume area (HVNode), or lower.

Considerations: 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.

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

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.

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 March 29, 2022

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!

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What Happened

Overnight, equity index futures auctioned higher alongside progress in cease-fire talks between Russia and Ukraine.

Geopolitical improvements could play into the Federal Reserve’s (Fed) pivot toward more aggressive, front-loaded interest-rate hikes.

Ahead is data on the Case-Shiller and FHFA national house price indexes (9:00 AM ET), consumer confidence, as well as job opens and quits (10:00 AM ET). 

Later, the Fed’s Patrick Harker speaks at 10:45 AM ET, followed by the Atlanta Fed’s Raphael Bostic (6:30 PM ET).

Graphic updated 6:50 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: In Monday’s commentary, we discussed the Fed’s intention to tighten policy and yield curve inversions, the implications of quantitative tightening (QT), and other things.

Graphic: Via Bespoke Investment Group. Taken from Bloomberg. The chart “suggests even more tightening than is currently priced by two-year bonds. Nothing as aggressive as this has been seen since Paul Volcker was Fed chair four decades ago.” 

In a nutshell, the gap between shorter and longer yields is smaller, and, in some cases, the shorter yield is above that of the longer yield––the consequence of suppressed yields lifting, now, after the Fed’s historic bond-buying spree and balance sheet growth over the past years.

Graphic: Via Macrodesiac. “The yield curve looks ‘normal’ at the start of the cycle, then flattens mid-cycle (as central banks hike and short-dated yields catch up to growth), then inverts as economic contraction begins. Usually, longer-dated yields are more stable. Economic growth will expand and contract in the short term. Over time it will average out to around 2% per year in developed economies. Shorter-dated yields are more volatile because they’re sensitive to the current market cycle.” 

As Bloomberg’s John Authers explains, “an inverted yield curve is regarded as an alarm for a central bank — it’s taken as the bond market saying that this can go no further, and makes it hard for the Fed or any other central bank to proceed with a tightening.”

There is the “argument that something will break before the central bank gets [inflation back down to 2%].”

Graphic: Via Andreas Steno Larsen. “Policy real rates are basically [at a] record low.”

Though curve inversions often preceded economic slowings, we pointed to the 5-30 curve, yesterday, specifically, which has provided false positives in the past. 

This time things truly are different as, without the Fed’s QE, the fair value of the 2s10s spread could be in the 150bp-200bp range, according to statements by Richard Bernstein Advisors’ Michael Contopoulos says on the potential for steepening via QT.

“Though the Fed is likely to maintain a sizeable balance sheet, thereby keeping yields relatively anchored versus what would be expected had they never bought bonds, there is clearly scope for yields to increase in the long end over coming quarters. Whether or not this happens with ever-higher 2y yields, time will tell, but for now, we would search for other indicators of recession.”

Graphic: Via @mark_ungewitter. Taken from Callum Thomas. “A tell in terms of the lateness-of-cycle.”

Correlation isn’t causation, Authers ends. Markets are reflections of investor psychology and expectations about the future. 

“Just as the Fed now admits that it has been behind the curve, so investors have also been slow on the uptake, and may now be over-compensating. That suggests that a curve inversion here should be treated with some caution.”

Positioning: Alongside participants’ heavy sale of puts and some call buying, implied volatility metrics compressed markedly, and this bolstered a near-vertical price rise in the equity market.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator shows put selling in the SPY coincides with a reversal attempt.

Heading into the end-of-week large quarterly options expiration, comparing buying and options positioning metrics, the returns distribution is skewed positive.

Graphic: Via Physik Invest. Data via SqueezeMetrics.

However, the skew is nothing like what it was in the weeks prior, before the early March reversal period. Caution new buyers.

Graphic: Via Physik Invest. Data via SqueezeMetrics.

As SpotGamma explains, “All else equal, it’s likely the SPX levels out in the $4,600.00 area over the coming sessions as the factors of time and volatility trend toward zero for highly short-dated options exposure concentrated in the end-of-month expiry,” at those higher prices.

“When the gamma of these options increases, as a result, counterparties add liquidity (i.e., sell [buy] more into strength [weakness] against increasing [decreasing] positive delta exposure).”

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, 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 $4,592.75 overnight high (ONH) puts in play the $4,611.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,618.75 and $4,631.75 high volume area (HVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,592.75 ONH puts in play the $4,574.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,546.00 spike base and $4,533.00 untested point of control (VPOC), 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

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).

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 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 16, 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!

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What Happened

Stock index futures were higher after positive developments, abroad.

According to some reports, the talks between Russia and Ukraine are making progress. This is while China vows to stabilize markets with a promise “to ease a regulatory crackdown, support property, and technology companies and stimulate the economy.”

On the China news, the Hang Seng China Enterprises Index (INDEX: HSCEI) rose ~13% (in the context of a ~30% 1-month drawdown).

At home, in the U.S., the Federal Reserve is expected to increase rates by a quarter-point, the first since 2018. Markets are pricing up to seven hikes this year.

Ahead is data on retail sales and import prices (8:30 AM ET). The NAHB home builders index and business inventories (10:00 AM ET). As well as the Federal Open Market Committee (FOMC) announcement (2:00 PM ET) and press conference (2:30 PM ET).

Graphic updated 6:30 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: The 60/40 portfolio is headed for its worst performance since the financial crisis of 2008 as assets are hurt by a mix of slowing economic growth and inflation.

Graphic: Via Morgan Stanley (NYSE: MS). Stocks and bond relationship upended. Adding, per a Bank of America Corporation (NYSE: BAC) survey, participants believe the markets would have to fall 24% (from peak to trough) – $3,636.00 SPX – to solicit a Fed pivot.

Further, this letter has talked about the “bonds down, equities down” phenomenon before. To borrow from letters published over the past two months, in short, over the past 40 or so years, monetary policy was used as a crutch to support the economy. 

Graphic: Via tastytrade. Asset correlations matrix.

This promoted deflation, innovation, and the subsequent rise in valuations.

With rates lifting, that’s a headwind; coupled with participants’ increased exposure to rate and equity market risk, which can play into cross-market hedging and de-leveraging cascades, 60/40 turns into somewhat of a poor hedge.

Why? Let’s back up for a moment.

For an investor to take on additional risk for return, they must receive in excess of the risk-free rate (as provided by the Treasury). This excess is the risk premium.

As Investopedia details well, therefore, “the total return on a stock is the sum of two parts: the risk-free rate and the risk premium.”

Moreover, higher rates and risk premiums increase the required rate of return.

Higher interest rates, basically, decrease the present value of future cash flows, making stocks, especially those that are high growth, less attractive.

So, at higher rates, shares should fall. At lower rates, shares should rise. Some strategists estimate that annual returns for 60/40 will be less than 5% over the next decade, as a result.

Graphic: Via Bloomberg. The FOMC is likely to signal more hikes.

This conversation has me bringing up a conversation I had with Karan Sood, the CEO and Managing Director, Head of Product Development at Cboe Vest Financial LLC.

“Bonds have been giving you really good returns because interest rates have been going down since the 1970s when they peaked at about 11%,” Sood explained to me. 

“That’s changing now; we’re at the zero bound, and it’s unlikely that will be as a strong of a tailwind. Worse, it could be a headwind if interest rates start to rise.”

Graphic: Via Bloomberg. Federal Reserve to raise rates for the first time in years.

In regards to the Federal Reserve’s balance sheet, Bloomberg explains that participants ought to receive updates on the pace of buying, as well as the sale of assets.

“That may include setting out caps on how many billions of dollars worth of Treasuries and mortgage-backed securities will be allowed to mature every month without reinvestment, something that Powell told Congress earlier this month would be discussed at this meeting.”

Graphic: Via Bloomberg. S&P 500 participants proactively price in the Federal Reserve’s intent to cut support. It is monetary frameworks and max liquidity that enabled markets to diverge from fundamentals.

Positioning: Based on a comparison of present options positioning and buying metrics, the returns distribution remains skewed positive.

Graphic: Via Physik Invest. Data via SqueezeMetrics.

Pursuant to the buying support remark, JPMorgan Chase & Co (NYSE: JPM) strategists say pension and sovereign wealth funds, in rebuilding risk-on positions, may boost markets by as much as 10%. 

“It’s the biggest rebalancing since 2020 in terms of buying equities,” JPMorgan strategist Nikolaos Panigirtzoglou said. An inflow of at least $100 billion and as much as $230 billion could trigger gains of between 5% and 10% to global stocks, he said.

Graphic: Via Bloomberg. “[D]eclines have driven down the value of targeted allocations for the world’s biggest funds, many of which hew to a traditional mix of 60% stocks and 40% bonds. To address the shortfall, they have to buy equities.”

At the same time, expected is further compression of volatility (via the passage of FOMC), as well as the removal of customer puts (and associated hedging pressures) via OPEX (options expiration).

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). 

To note, there is the potential, according to SpotGamma, for some “path dependency,” as “the expiration and/or covering of a large swath of these put hedges may place the market back into an ‘underhedged’ position.” 

In such a case, new demand would add fuel to weakness.

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 upper part of a positively 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 $4,285.25 high volume area (HVNode) puts in play the $4,326.25 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,346.75 HVNode and $4,375.00 untested point of control (VPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,285.25 HVNode puts in play the $4,249.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,219.00 VPOC and $4,177.25 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.

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.

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 March 15, 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!

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What Happened

Overnight, equity index futures explored lower prices alongside most commodities. Bonds and implied volatility metrics were bid, also.

The narrative is that this is follow-on selling as participants look to price in the implications of COVID-19 lockdowns in China, as well as the Russia-Ukraine conflict. Arguably, there is some pre-Federal Open Market Committee (FOMC) positioning going on, too.

Ahead is data on the Producer Price Index and Empire State Manufacturing (8:30 AM ET).

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

Fundamental: Keeping it short, today. Please check out Monday’s commentary, if you haven’t!

Weak start to 2022 as participants look to price slower growth and inflation, tighter monetary policy, geopolitical tensions, a resurgence in COVID-19, potential Russian defaults, and beyond.

Graphic: Via S&P Global Inc (NYSE: SPGI). 

Bolstering inflation pressures are supply-demand challenges. For instance, geopolitical tensions are stifling vehicle production here in the U.S.

Graphic: Via S&P Global Inc (NYSE: SPGI). 

Since Russia’s invasion of Ukraine, gas in the U.S. climbed about $0.80/gallon, also, prompting talk of gas tax holidays.

Graphic: Via Reuters.

Pursuant to these remarks, Goldman Sachs Group Inc (NYSE: GS) economists suggest the probability of recession in the next year is between 20-35% while Morgan Stanley (NYSE: MS) strategists see equity valuations overshooting to the downside with out of control inflation.

Graphic: Via Goldman Sachs Group Inc.

In opposition, JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic suggests there is too much negativity priced in and that investors should add equity risk. 

“We believe that the past month’s correction has induced too much negativity in markets, e.g., reflected by our market-implied recession probabilities, on the fear that growth will be severely affected by the war. We stay with a pro-risk stance as we do not believe that we will see a recession or that we have entered a sustained bear market.”

Graphic: Via Bloomberg. “A Moody’s Analytics computer model suggests that the U.S. as a whole would be able to avoid a recession, even if military hostilities are prolonged.”

Positioning: Per Goldman Sachs Group Inc’s derivatives team, “puts are more overvalued than any time over the past five years.”

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.”

Further, it is expected that the compression of volatility (via passage of FOMC), as well as the removal of customer puts and (accordingly) counterparty negative gamma exposure (OPEX) may serve to alleviate some of this pressure.

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “18-Mar has more expiring near-the-money SPX open interest than any expiration since 2019.”

In taking the other side of this demand for protection, counterparties carry exposure to positive delta and negative gamma (losses amplified to the downside). In hedging their own exposure, counterparties will sell underlying(s), and this is where the aforementioned pressure arises.

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).

Given present supply and demand conditions (customer hedging in months prior), the incremental pressure counterparties add with each leg lower is less, if you will. 

Here’s a good explanation:

“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.”

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

Adding to that last remark, as Amy Wu Silverman of Royal Bank of Canada’s (NYSE: RY) capital markets group puts it well: “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 QQQ shows strong put selling 3/14/2022. Divergences often precede reversals in the underlying.

There is the potential, according to SpotGamma, for some “path dependency,” however, as “the expiration and/or covering of a large swath of these put hedges may place the market back into an ‘underhedged’ position.” In such a case, new demand would add fuel to weakness.

Technical: As of 6:15 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited 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 $4,129.50 overnight low (ONL) puts in play the $4,177.25 high volume area (HVNode). Initiative trade beyond the $4,177.25 HVNode could reach as high as the $4,227.75 HVNode and $4,249.25 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,129.50 ONL puts in play the $4,101.25 ONL. Initiative trade beyond the ONL could reach as low as the $4,069.25 HVNode and $4,055.75 LVNode, 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

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.

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 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!

Subscribe

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 March 10, 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!

Subscribe

What Happened

Overnight, equity index futures auctioned lower practically negating the prior day’s advance. Per the news, Ukraine and Russia failed in their efforts to end the war.

Adding, similar to days prior, areas where there are key technical nuances served as supports and resistances. One may construe this as short-term traders’ dominance in the smaller time horizons while the other time frames are positioning for expansive moves (yet to happen).

To note, key metrics under the hood (SpotGamma’s HIRO, among other things) yesterday, further validated the status quo and short-covering.

Moreover, ahead is data on jobless claims and the consumer price index (8:30 AM ET). Later, participants get data on real domestic nonfinancial debt and wealth (1:00 PM ET), as well as the budget deficit (2:00 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

Fundamental: The consumer price index (CPI) is to likely accelerate to 7.8% from a year ago.

This forecast varies widely, however, based on economic analysis with respect to the implications of Russia’s invasion of Ukraine and the sanction that resulted after.  

“There’s going to be a lot of noise in the next six months that’s going to be extremely difficult to disentangle,” said Omair Sharif of Inflation Insights LLC. 

“If you thought it was difficult to figure out what used car prices were doing and whether that was transitory, multiply that by a thousand.”

In a mention on energy market volatility, while today’s economy is less dependent on oil (i.e., less likely to kill the expansion), the action in that market (and the responses it may solicit from policymakers, later) is noteworthy.

Graphic: Via Bloomberg. “When families have to spend more money on necessities, they have less to spend on discretionary items and services. Economists at Barclays Plc expect the spike in energy prices to subtract an annualized 0.3 percentage point from consumption growth on average per quarter through the end of 2023.”

Despite a deterioration in the relationship between prices of crude and inflation, oil is “a major input in the economy – it is used in critical activities such as fueling transportation and heating homes – and if input costs rise, so should the cost of end products,” Investopedia says well.

Further, according to Reuters’ John Kemp, fuel oil inventories fell last week to the lowest seasonal level in more than 15 years.

Graphic: Via John Kemp’s “Best in Energy” note. “Distillate stocks were already looking tight and are now on track to become exceptionally tight before mid-year. Distillate inventories are on course for an expected first-half low of 103 million barrels (with a range of 92-114 million).”

“Stocks are on track to hit an even lower seasonal level than 2008 when the distillate shortages helped propel crude oil prices to a record high at the middle of the year,” Kemp says.

Graphic: Via Physik Invest. The CBOE Crude Oil Volatility Index (INDEX: OVX) reveals signs of peaking.

The highest oil prices ~$150/bbl had printed in 2008. As Alfonso Peccatiello of The Macro Compass hypothesizes, “Oil is denominated in fiat currency, and there has been A LOT of spendable money printing over the last 15 years. If you think the market gets as extreme as 2008, the equivalent oil price in today’s USD would be above $250/bbl.”

Given wage growth and the like, consumers likely start “to feel the heat way below $250.”

Graphic: Via Alfonso Peccatiello. “The red line shows the inflation-adjusted crude price: if you expect a proper tight oil environment, >$150-160 is your number. Also, anything above $120 in today’s prices and sustained for a few quarters would likely hit the demand side. 2013-2014 a good example, with the private sector turning defensive in 2015-2016 and China forced to ease big times to shore up the global economy.”

Why mention any of this? Fast moves higher in some of these commodity markets may impact end-consumer prices and behavior, quickly. In a bid to rein inflation – ”very high CPI in 2022, [and] still high in 2023 – central bankers will tighten. 

“The path of least resistance is for the Fed to hike rates from 0% to at least 2% relatively quickly,” Peccatiello explains in a recent post. 

However, the “Last time companies were revising their forward earnings estimates down on a net basis while Central Banks were attempting to tighten monetary policy was mid-2018,” when the markets sold nearly 20%.

Graphic: Via Yardeni Research. Taken from The Macro Compass. “The chart above shows the 3-months average of the MSCI World net earnings revisions: essentially, this metric measures the difference between the number of companies revisiting their forward earnings estimate up versus down.”

With financial conditions tightening, Peccatiello posits the Fed will be receptive to that.

Graphic: Via The Macro Compass. “Credit-default swaps on 5-year US Investment Grade Corporate Bonds are trading at 76 bps at the time of writing: Fed puts (or pivots) became more visible in the past when this measure of credit spreads approached 100 bps.”

Basically, if selling were to continue, the Fed would reassess tightening. At such level of reassessment is the Fed Put, a dynamic we’ve discussed in the past.

Graphic: Via Bank of America Corporation (NYSE: BAC). Retrieved from Callum Thomas.

Chamath Palihapitiya recently posted about this, too. He said: “In 2018, the Fed was concerned about inflation. They were wrong and within a quarter or so, the risk shifted to recession. This chart shows how the equity markets reacted… seems eerily similar.”

“Value then faded and Growth ripped.”

Graphic: Via Morgan Stanley (NYSE: MS).

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 JPMorgan, from Bloomberg.

Obviously, the fundamental picture and the market’s responsiveness to news events – given the negative gamma environment – has us discounting these metrics. It’s noteworthy, nonetheless.

For instance, in the face of some positive developments abroad, fundamentally, markets diverged from what participants in the options complex were doing.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator reveals strong put buying and call selling (a bearish negative delta trade) in the context of Wednesday’s rise.

This divergence resolved itself, some, overnight in the broader market (even in the face of a ~7% price rise of Amazon Inc (NASDAQ: AMZN) large index constituent).

I’d be remiss if I did not point out growing bets on drops in the equity market’s pricing of risk (via the CBOE Volatility Index [INDEX: VIXI]). That would occur if indexes likely rebounded.

Graphic: Via SHIFT. There was heavy buying of the 26 VIX put.

Taken together, it’s difficult to get a grasp of where the market wants to head, in the near term. 

What is for certain: 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.

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

In case of lower prices, according to SpotGamma, the rate at which options counterparties increasingly add pressure on underlying SPX, so to speak, tapers off in the $4,100.00 to $4,000.00 area. Caution.

Graphic: Gamma profile flattens out near the $4,100-4,000 range suggesting less pressure and more counterparty support.

A way to take advantage of this volatility, while lowering the cost of bets, is options spreads. For instance, the Call Ratio (buy 1 call, sell 2 or more further out) can lower the cost of bets on the upside while providing exposure to asymmetric payouts.

Time and volatility are two factors, however, to be mindful of when initiating such spreads. Risk is undefined and if the time to expiry is too long (e.g., in excess of 1-2 weeks), fast moves and increases in volatility may result in large losses. 

For that reason, also, one must be extremely careful with Put Ratio spreads. Consider adding protection far away from your short strikes to cap risk and turn the spreads into Butterflies.

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.

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, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Gap Scenarios Potentially In Play: 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 $4,231.00 regular trade low (RTH Low) puts in play the $4,249.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,285.75 high volume area (HVNode) and $4,319.00 untested point of control (VPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,231.00 RTH Low puts in play the $4,177.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,138.75 and $4,101.25 overnight low (ONL), 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

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 March 7, 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!

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What Happened

Overnight, equity index futures auctioned lower as participants looked to price in the implications of heightened inflation and risk of recession amidst geopolitical tensions.

Ahead is data on consumer credit (3:00 PM ET).

Graphic updated 5:45 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: Hawkishness with respect to monetary policy, in the face of heightened inflation and slowing economic growth, is affecting global markets.

Graphic: Via Bloomberg. European markets trade weak relative to their U.S. peers.

Overseas markets have sold more, relatively, and the pricing of equity market risk in Europe is far outpacing that in the U.S.

Graphic: Via Bloomberg. Divergences in the pricing of risk across markets.

Last week, we unpacked the potential factors behind (and the implications of) divergences in cross-asset volatility. Mainly, the fear in one market tends to feed into the fear of another.

Pursuant to those remarks on this push-and-pull comes as Goldman Sachs Group Inc’s (NYSE: GS) prime brokerage saw hedge-fund clients unloading risk at the fastest rate in three months, while JPMorgan Chase & Co (NYSE: JPM) saw retail buying nearly $4.1 billion, “with money sent to S&P 500-linked ETFs more than 2 standard deviations above the 12-month average.”

Graphic: Via JPMorgan, from Bloomberg.

Per Bloomberg’s John Authers, market professionals likely view reactions to geopolitical tension “as increasing the risk of stagflation, a rare combination of high inflation and a recession.”

Graphic: Via JPMorgan, from The Market Ear.

“This looks like 2007, on the eve of the Global Financial Crisis, with even higher inflation expectations and a yield curve that has not quite yet inverted.”

Graphic: Via Bloomberg. “[A]n outright inversion, which generally signals a recession a matter of months later, now seems an imminent possibility.”

UBS Group AG (NYSE: UBS) ran a machine-learning analysis that “reckons the Russia/Ukraine conflict could send the S&P 500 anywhere from 3,800 to 4,800 – a 26% range – depending on how it resolves.”

Graphic: Via UBS, from Bloomberg.

Perspectives: “Every other market is consistent with the idea that the economy is in trouble and there’s stress in the markets,” said Jim Bianco, president of Bianco Research LLC in Chicago. 

“The stock market historically does this — it’s the last market to turn, it’s the slowest market to understand the problems. It’s the market driven by narratives and hope.”

Graphic: Via @exposurerisk from @Callum_Thomas. “Slowly at first, then all of a sudden.”

Alternatively, BCA Research Ltd suggests that “Even if World War III is ultimately averted, markets could experience a freak-out moment over the next few weeks, similar to what happened at the outset of the pandemic. Google searches for nuclear war are already spiking.”

“Despite the risk of nuclear war, it makes sense to stay constructive on stocks over the next 12 months. If an ICBM is heading your way, the size and composition of your portfolio becomes irrelevant. Thus, from a purely financial perspective, you should largely ignore existential risk, even if you do care about it greatly from a personal perspective.”

Positioning: The fundamental picture is clouded by the options market positioning.

At present, in the face of continued passive buying support, the overwhelming demand for downside (put) protection (a negative delta, positive gamma trade) results in counterparty hedging that may exacerbate weakness.

The reason why? The counterparty has exposure to positive delta and negative gamma. If underlying prices print lower and/or measures of implied volatility rise (given increased fear and demand for protection), short puts rise in value (and counterparty losses are multiplied).

To overcome these potential losses, counterparties sell the underlying to hedge. If nothing happens, the protection decays, and counterparties buy back their hedges potentially bolstering the underlying market’s calmness or attempts higher.

As noted earlier and explained in detail last week, the pricing of risk across markets has diverged and the S&P 500, among other U.S. indices, is relatively strong (unlike peers in Europe and Asia). 

Among other things, one dynamic balancing this pressure from puts is negative-delta trade, by customers, on the call side. In selling calls, dealers are long (a positive delta, positive gamma trade that makes money if the underlying rises). To hedge, dealers tend towards selling strength and buying weakness, adding liquidity to the market. 

Still, again, the news is bad, and returns into monthly options expirations (like the one coming up next week) are often weak.

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

So, there is potential that weakness climaxes into the options expiration. Thereafter, the reduction in put-heavy positioning may coincide with less counterparty exposure to the positive delta.

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.”

Still, the return distributions, based on where the implied volatility term structure is at, point to continued chop and expanded ranges.

And, according to some, the “real deleveraging hasn’t hit yet.”

Graphic: Via @FadingRallies.

Technical: As of 5:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a negatively 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 visual $4,282.75 balance boundary puts in play the $4,319.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,346.75 high volume area (HVNode) and $4,375.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,282.75 balance boundary puts in play the $4,249.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,227.75 overnight low (ONL) and $4,177.25 HVNode, or lower.

Considerations: The $4,282.75 level has solicited mechanical responses over the past weeks.

Therefore it is considered to be a level at which short-term participants will lack the wherewithal (both emotional and financial) to respond to a successful break.

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

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 28, 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!

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What Happened

Overnight, equity index futures auctioned lower in light of an escalation of geopolitical tensions between Russia, Ukraine, and the rest of the world.

Western powers imposed harsh sanctions including the exclusion of some Russian lenders from the SWIFT messaging system “that underpins trillions of dollars worth of transactions,” globally.

As the Russian ruble lost ⅓ of its value and costs of insuring Russian government debt rose, the Bank of Russia (BoR) doubled its key interest rate to 20% and imposed some capital controls to take from the risk of a potential run on banks. Policymakers also banned foreign security sales.

The odds of an aggressive lift-off in interest rates by the Federal Reserve declined, accordingly. The market is now pricing in under six hikes for 2022 as crisis opens room for policy mistakes.

Ahead is data on trade in goods (8:30 AM ET), Chicago PMI (9:45 AM ET), and Fed-speak by Atlanta Fed President Raphael Bostic (10:30 AM 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: As of February 27, 2022, there are reports that with its invasion of Ukraine, “Moscow was frustrated by the slow progress caused by an unexpectedly strong Ukrainian defense and failure to achieve complete air dominance.”

Graphic: Via Bloomberg, locations of Russian controls and attacks.

At present, Russia has only committed 50% of its available firepower to the war and solicited the involvement of neighboring allies. Still, even at 50%, it’s rough.

Russian markets, to put it simply, are in turmoil as a result of this conflict. Its policymakers, to stem the bleed, have banned foreigners from selling assets.

Graphic: Via Topdown Charts, Russian assets are imploding.

Accordingly, sentiment is as bad as it was in 2020, 2016, the period spanning 2008-2009, as well as the period just after the topping of the tech-and-telecom bubble. 

Graphic: Via Topdown Charts, “sentiment basically as bad as the COVID crash.”

In light of the world’s response to this conflict, Russia, too, has heightened its nuclear readiness.

Moreover, over the weekend, Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar, in gauging the implications of conflict and sanctions, explained that excluding Russia from SWIFT may lead to missed payments and overdrafts similar to that experienced during March of 2020.

“Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf,” he noted.

“The consequence of excluding banks from SWIFT is real, and so is the need for central banks to re-activate daily U.S. dollar funds supplying operations.”

In light of this, some have advanced a narrative around a potential run on Russian banks.

However, former BoR official Sergey Aleksashenko, in an alarmed yet less pessimistic take on CNBC, suggested a “low likelihood” of a run on the ruble.

Further, in light of the deceleration at home in the U.S., Pozsar concludes that “the Fed’s balance sheet might expand again before it contracts via QT (quantitative tightening).”

Graphic: Alfonso Peccatiello of The Macro Compass. He says “YTD: 2022 hikes priced in up from 3 to 6-7. Curves big-time flatter. Inflation expectations 10 bps lower. Real yields higher 40-50 bps. Credit spreads wider. Cyclical growth impulse fading away. Not a risk-on environment.”

Interactive Brokers Group Inc’s (NASDAQ: IBKR) Chief Strategist Steve Sosnick adds: “The tide of money is still positive, and it should provide a cushion for nervous markets as long as that remains the case. But when we consider that monetary conditions are supposed to be changing, volatility should persist if the monetary tide actually ebbs as expected.”

Perspectives: “​​Geopolitical catastrophes tend to be worse than believed in the short term but less than believed in the long term,” Ophir Gottlieb of Capital Market Laboratories notes. 

Similarly, JPMorgan Chase & Co’s (NYSE: JPM) head of global equity strategy Mislav Matejka says that “If one is selling on the back of the latest geopolitical developments now, the risk is of getting whipsawed.”

“Historically, [the] vast majority of military conflicts, especially if localized, did not tend to hurt investor confidence for too long, and would end up as buying opportunities.”

Graphic: Via Tier1Alpha. Taken from The Market Ear. 

Positioning: Strong passive buying support persists in the face of a lower liquidity, negative-gamma, high-volatility regime.

Graphic: Via Bloomberg. Taken from The Market Ear.

Adding, in light of the liquidation into last Thursday’s open (after which there was a large reversal), the VIX futures term structure, though in backwardation, was not as steep as in past moments of true panic.

IBKR’s Sosnick explains that “Even though VIX futures [were higher on Thursday morning] across the board and the curve has further steepened, neither the spot level nor the curve are yet demonstrating panic.” 

“I interpret the message of the market to be that we should continue to expect volatility – remember that volatility encompasses moves in both directions – but not to expect that a major bottom was put into place in recent sessions.”

With realized volatility is heightened and implied volatility not performing, so to speak, @darjohn25 explains, try to avoid “any short gamma on all short-dated tenors—you want to own the short term stuff for the foreseeable future.”

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

Gap Scenarios Potentially In Play: 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 $4,285.50 high volume area (HVNode) puts in play the $4,345.75 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,371.00 VPOC and $4,395.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,285.50 HVNode puts in play the $4,227.75 HVNode and overnight low (ONL) area. Initiative trade beyond the HVNode/ONL could reach as low as the $4,177.25 HVNode and $4,137.00 VPOC, 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.

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.

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

Volume-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 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 25, 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!

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What Happened

Overnight, equity index futures auctioned sideways, providing some more validation to Thursday morning’s reversal fueled by aggressive short-covering.

Geopolitical tensions and monetary tightening are the two major narratives news outlets are assigning to the volatility. 

The U.S. and its allies applied more sanctions on Russia for its invasion of Ukraine and markets are still pricing around six quarter-point rate hikes by the Fed.

Ahead is data on personal income, consumer spending PCE inflation, core inflation, disposable income, durable goods orders, and core capital equipment orders (8:30 AM ET), University of Michigan sentiment, inflation expectations, and pending home sales (10:00 AM ET).

Graphic updated 6:35 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: Must keep it short, today.

Per JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic, “While Equities are down year-to-date due to rising rates, we note that historically the initial volatility around rate liftoff didn’t last and equities made new all-time highs 2-4 quarters out.”

“The start of policy tightening is usually a confirmation that the cycle has legs, rather than the signal of its end. As we don’t see the yield curve inverting or real yields reaching problematic levels this year, it is premature to talk about end-of-cycle worries.”

Graphic: Via Haver. Retrieved from The Market Ear. Macro conditions are more supportive than during the Global Financial Crisis.

Pursuant to Kolanovic’s remarks, Andreas Steno Larsen of Heimstaden explains that bond yields remain governed by demographics, and this is good news for tech.

“I still think that inflation and bond markets will be governed by other structural trends over the medium term,” he said. “Just look at the growth rate of the working-age population (10 years forward) versus the term premium of US Treasury bonds. The current bond bear market is not standing on structural pillars.”

Graphic: Via Andreas Steno Larsen, “Bond yields remain governed by demographics over the medium-term. Low(er) for longer.”

Positioning: Based on a variety of metrics, some of which were pointed to in yesterday’s commentary, there were no clear signs of capitulation. 

For instance, one of the largest ETF products that track the Nasdaq 100 (QQQ) “has seen persistently illiquidity (daily range / $ volume). There was not much volume (participation) behind the move in price. The 1-week return distribution gets pretty wild.”

Graphic: Via @HalftersPower.

Similarly, “1 Month relative volume (today’s volume / 1-month average) on SPY today (1.66) doesn’t have a capitulatory look to it. Bottoms in the past year occurred at 2+.”

Graphic: Via @HalfersPower.

There was, however, a massive covering of short (negative delta) exposures. The gap lower presented participants a “gift” and many took it as an opportunity to monetize downside bets.

Despite metrics pointing to continued accumulation, and buying support, equity products are in negative gamma wherein the hedging of put-heavy exposures results in whip-saw action (i.e., options counterparties hedge in a manner that exacerbates moves to upside and downside).

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 balanced 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 $4,249.25 low volume area (LVNode) puts in play the $4,290.25 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,332.75 high volume area (HVNode) and $4,358.75 minimal excess high, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,249.25 LVNode puts in play the $4,177.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,137.00 untested point of control (VPOC) and $4,101.25 overnight low (ONL), 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

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.

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 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.