Categories
Commentary

Weekly Brief For September 12, 2021

Editor’s Note: Keeping it light today; the main takeaway is that we’re in a window of volatility and participants should maintain a cautiously bullish stance, for the time being. Skew makes it so we can hedge for little-to-no cost using complex spreads (more on this below).

Please note that levels in the below graphics should only be relied upon as rough areas of resistance and support due to the December contract roll. Updated levels to come later this week, after daily commentaries resume Thursday, September 16.

Thank you and take care!

Market Commentary

Equity index futures trade lower, last week, resolving a multi-week consolidation area.

  • Narratives around slower recovery rising.
  • Equity indices falling; SPX above 50-day.
  • Positioning risks mount case for volatility.
  • A couple trade ideas for the week ahead.

What Happened: U.S. stock index futures resolved lower, last week, alongside the evolution of some important dynamics with respect to the pace of the pandemic recovery and trend growth, non-seasonally aligned flows and positioning risks, as well as divergent sentiment. 

Of interest this week is data on the consumer price index, industrial production, retail sales, and some Fed manufacturing surveys. 

Graphic updated 12:00 PM ET Saturday. Sentiment Neutral if expected /ES open is inside of the prior day’s range. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: During the prior week’s regular trade, on weak intraday breadth and mostly divergent market liquidity metrics, the worst-case outcome occurred, evidenced by trade below a key micro-composite high volume area (HVNode). 

This activity resolved a multi-week consolidation area (ie., balance). 

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

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

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

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

To note, initially, participants had a tough time separating value and expanding range lower. 

This was evidenced by the minimal excess at Wednesday’s regular trade low (RTH Low), coupled with Thursday’s overnight response at the 20-day simple moving average (i.e., a visual level likely paid attention to by short-term, technically-driven market participants who generally are unable to defend retests). 

Graphic: S&P 500 loses the 20-day simple moving average. A loss of that level officially changes the tone; “We maintain a cautiously bullish stance.”

Given that action – the difficulty participants had in moving prices out and away from balance – the path of least resistance was not down; stronger sellers were not yet on board, I explained

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.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.
Graphic: 30-minute profile chart of the Micro E-mini S&P 500 Futures and market liquidity, via Bookmap, for the SPDR S&P 500 ETF Trust (NYSE: SPY) coming into Thursday’s regular trade. Notice the cumulative volume delta (CVD) or buying and selling power as calculated by the difference in volume traded at the bid and offer. So, coming into Friday’s trade, stronger sellers were likely not yet on board.

The tone changed Friday when selling intensified; the 20-day simple moving average was lost and the S&P 500 closed the session on a spike lower, away from value.

Spike Rules In Play: 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). 

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, heightened valuations, the prospects of stimulus reduction, as well as non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

The implications of these themes on price are contradictory

To elaborate, Morgan Stanley (NYSE: MS), Citigroup Inc (NYSE: C), and Goldman Sachs Group Inc (NYSE: GS) cautioned investors about equity outlooks. Of concern, in particular, is a rise in cases of the delta variant, tensions between inflation expectations and yields, as well as seasonality. 

Among other risks, as SpotGamma notes, “markets are fast approaching a window of volatility which could produce some pretty sharp volatility: 9/15 VIX expiration, 9/17 Quarterly OPEX and the 9/22 FOMC. This lineup is particularly interesting as we believe that expiration leads to a pickup in volatility.” Read more on SpotGamma’s perspectives, here

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. Based on his analysis, Pat sees that the “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish,” while “OPEX week returns peaked in 2016 and have trended lower since.”

SqueezeMetrics – which saw “the current combination of weak put flows and large customer vanna exposure” as fragile – echoes the risks of volatility adding “people are overexposed to changes in VIX, and will be hurt more than usual if VIX starts moving up. Historically, this means SPX down, VIX up.”

Moreover, for early trade next week, given an increased potential for heightened volatility and Friday’s end-of-day spike from value, participants may make use of the following framework.

If participants manage to find acceptance (i.e., spend multiple hours of trade) above the $4,467.00 spike base, then the odds of downside follow-through are lower. We’d look to maintain a cautiously bullish stance.

On the other hand, should participants have trouble maintaining prices above the $4,467.00 spike base, then the focus ought to be on big-picture risk management levels like the August 19, 2021 swing low and 50-day simple moving average.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 12:00 PM ET Saturday. Note that the roll to the December contract occurred on September 9, 2021. Therefore, levels in the above graphic should only be relied upon as rough areas of resistance and support. Updated levels to come Thursday, September 16, 2021.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Options offer an efficient way to gain directional exposure. 

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

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

  • Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.
  • Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.
  • Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 
  • Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.
  • Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

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

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

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

Trade Idea 1: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 17 SEP 21 4350/4250 PUT @3.80 LMT

I’m neutral-to-bearish on the S&P 500 and I think the index may travel sideways to lower over the next week, past its key moving averages. I will structure a spread below the current index price, expiring in 1 week. I will buy the 4350 put option once (+1) and sell the 4250 put option twice (-2) for a $3.80 credit. Should the index not move to my target, I keep the $380 credit. Should it move to $4,250.00, past the 50-day simple moving average, I could make $10,380.00 at expiry. Should the index move past $4,150.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower.

If necessary, I will hedge the position by either (A) selling futures, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

Trade Idea 2: SELL -1 1/2 BACKRATIO GOOGL 100 17 SEP 21 2775/2700 PUT @.90 LMT

I’m neutral-to-bearish on Alphabet Inc and I think the stock may travel sideways to lower over the next week, past its key moving averages. I will structure a spread below the current stock price, expiring in 1 week. I will buy the 2775 put option once (+1) and sell the 2700 put option twice (-2) for a $0.90 credit. Should the stock not move to my target, I keep the $90 credit. Should it move to $2,700.00, toward the 50-day simple moving average, I could make $7,500.00 at expiry. Should the stock move past $2,625.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the stock moves lower.

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

News And Analysis

Lenders continue to expect falling profits, refinancing demand.

Manchin seeing delay in Congress for vote on Biden’s agenda.

Massive decline in forbearances, down nearly 67% from peak. 

Oil prices continuing to fall as pandemic worries slow demand.

Moody’s: Democrats are at a fork in the road, may not take it.

COVID-19 and China risks won’t pass for years, some project.

Nasdaq talks market infrastructure, the real trends in volumes.

Bonds turning hot; European Central Bank redefines tapering.

What People Are Saying

Let’s Hang Out

Los Angeles, CA September 10-12

New York, NY September 12-15

Salt Lake City, UT September 28-30

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Weekly Brief For September 4, 2021

Editor’s Note: Before getting into today’s commentary, we take a moment to reflect on the following quote taken from page 123 of The Disciplined Trader by Mark Douglas. 

“For years, many people in the academic community believed that the markets were random; this is a perfect example of their general lack of understanding of human nature. People act as a force on prices in perfectly logical ways, when you understand the logic of their fears.”

Also, given Labor Day, markets are closed Monday, September 6. As a result, Daily Briefs will resume Tuesday, September 7. Thank you and have a great extended weekend!

Market Commentary

Equity index futures traded sideways to higher last week.

  • Reality throwing a wrench in seasonality.
  • Ahead: Light calendar to base decisions.
  • Equity indices rising; SPX above 50-day.
  • Positioning risks mount case for volatility.
  • A couple trade ideas for the week ahead.

What Happened: U.S. stock index futures auctioned mostly sideways to higher, into Friday’s nonfarm payrolls miss.

Next week participants have a light calendar to base decisions around.

Graphic updated 10:30 AM ET 9/4/2021. Sentiment Neutral if expected /ES open is inside of the prior day’s range. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: During the prior week’s trade, on mostly lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by new all-time highs in the S&P 500 and Nasdaq 100. 

This is significant because the sideways to higher trade marks acceptance, or a willingness to transact at higher prices after a v-pattern recovery, above the key 50-day simple moving average.

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.
Graphic: S&P 500 maintaining prices above the 50-day simple moving average. This moving average can be looked at as a key dynamic level on any move lower. Losing that particular level likely changes the tone.

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, as well as non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

The implications of these themes on price are contradictory

To elaborate, August, over the past 25 years, has historically been the largest month for equity outflows. According to Goldman Sachs Group Inc’s (NYSE: GS) Scott Rubner, “We have seen none of these outflows and it has been buying the dip (TINA).” 

Given this divergence from the norm, advances are not “welcomed and may lead to a quick right tail hedging … [as] option volume notional is 120% of stock volume notional.” 

To put it simply, an increased share of options being traded expires within two weeks. The hedging of these directionally sensitive options can represent an increased share of volume in underlying stocks. 

As a result, option flows impact the underlying’s price, markedly. 

We couple this so-called right-tail hedging with the structural positioning – the so-called wall of worry – that can drive the market through three factors – change in the underlying price (gamma), implied volatility (vanna), and time (charm) – that are well known to impact an options exposure to directional risk or delta.

“Charm is a major driver for support in the markets,” said Cem Karsan of Kai Volatility Advisors. “All of that support is leading up to and accelerating into that Monday-Wednesday window” ahead of options expiration (OPEX). “And then the window really opens for lack of support. It’s not like there’s a bunch of selling all of a sudden. It’s a window of non-strength; a lack of these supportive flows that have been there prior.”

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. Based on his analysis, Pat sees that the “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish.”

With the August monthly OPEX behind us, the focus shifts now to September. At and around the same time, Morgan Stanley’s (NYSE: MS) Michael Wilson expects a formal signal (which would align with Karsan’s window of non-strength) on the taper of asset purchases, that could lead to a mid-cycle transition and possibly an S&P 500 correction.

“Assuming a stable equity risk premium at 345bp, P/Es would fall to 19x, or 10% lower.”

Graphic: @pat_hennessy breaks down S&P 500 OPEX returns. Pat sees that “OPEX week returns peaked in 2016 and have trended lower since.”

Adding, the eventual reduction in the Federal Reserve’s balance sheet – a removal of liquidity – may exacerbate any sort of risk-off scenario in which participants try to get ahead of whatever cascading reaction may come with a taper.

As Karsan explains: “It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

SpotGamma – in a September 2, 2021 note – echoed the possibility of volatility; “markets are fast approaching a window of volatility which could produce some pretty sharp volatility: 9/15 VIX expiration, 9/17 Quarterly OPEX and the 9/22 FOMC. This lineup is particularly interesting as we believe that expiration leads to a pickup in volatility – however, traders may hold the pause button on selling that volatility due to the FOMC. This could catch less sophisticated vol sellers off guard and lead to some exacerbated volatility.”

Others, like SqueezeMetrics – which sees “the current combination of weak put flows and large customer vanna exposure” as fragile – suggest that volatility risks have risen, too.

Given the big picture context (i.e., status quo – higher prices – in the face of volatility risks) participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,527.75 high volume area (HVNode) pivot puts in play the $4,550.00 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the Fibonacci extensions at $4,556.25 and $4,592.25.

In the worst case, the S&P 500 trades lower; activity below the $4,527.75 HVNode puts in play the $4,510.00 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as low as the $4,495.00 and $4,481.75 HVNodes.

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

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

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 10:30 AM ET 9/4/2021.

Weekly Trade Ideas

Please Note: In no way is the below a trade recommendation. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Options offer an efficient way to gain directional exposure. 

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

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

  • Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.
  • Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.
  • Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 
  • Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.
  • Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

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

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

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

Trade Idea 1: SELL -1 1/2 BACKRATIO GOOGL 100 17 SEP 21 2770/2670 PUT @.15 LMT

I’m neutral on Alphabet Inc and I think the stock may travel sideways to lower over the next couple of weeks, toward $2,770.00, or the volume-weighted average price anchored from the July 28 gap. I will structure a spread below the current stock price, expiring in 2 weeks. I will buy the 2770 put option once (+1) and sell the 2670 put option twice (-2) for a $0.15 credit. Should the stock not move to my target, I keep the $15 credit. Should it move to $2,670.00 I could make $10,015.00 at expiry. Should the stock move past $2,570.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the stock moves lower.

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

Trade Idea 2: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 10 SEP 21 4480/4430 PUT @.25 LMT

I’m neutral on the S&P 500 and I think the index may travel sideways to lower over the next week, toward its key moving averages. I will structure a spread below the current index price, expiring in 2 weeks. I will buy the 4480 put option once (+1) and sell the 4430 put option twice (-2) for a $0.25 credit. Should the index not move to my target, I keep the $25 credit. Should it move to $4,430.00, past the 20-day simple moving average, I could make $5,025.00 at expiry. Should the index move past $4,380.00 or so, beyond the 50-day simple moving average, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower.

If necessary, I will hedge the position by either (A) selling futures, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

News And Analysis

Moody’s Weekly Market Outlook on Ida, gas, and inflation. 

Reinventing tail risk: a fresh look at market crash protection.

Kansas City Southern mulls $27B CP Rail bid after ruling.

ARK Invest on commodities, innovation, economic signals.

Taliban relies on financing from China following withdrawal.

Hedge Funds cut exposure to stocks that count on China.

Three hours a week: China has put limits on video gaming.

Global gas prices threatening to dent economic recovery.

Are Treasuries in a cautious stance as debt story unfolds?

Could the macro theme/picture be an edge for day traders?

George Soros: Investors in China face a rude awakening.

400,000 homeowners enter the final month in forbearance.

Let’s Hang Out

Los Angeles, CA September 10-12

Salt Lake City, UT September 28-30

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For May 11, 2021

Market Commentary

Index futures in balance.

  • Inflation fears stoking weakness.
  • Ahead is JOLTS data, Fed speak.
  • Index futures lower, tech weighs.
Graphic updated 7:55 AM EST.

What Happened: U.S. stock index futures auctioned lower, overnight, alongside fears of rising inflation. Most affected were heavily-weighted index constituents (e.g., Facebook, Netflix, Google, Microsoft, Amazon, Nvidia, and Tesla), or stocks that have the most to lose in an environment that favors cyclical and value assets.

Adding, despite the Federal Reserve’s commitment to limiting talk of taper and rate hikes, traders are positioning themselves for a change in tone. Activity in the 98.00 put strike options, in the Eurodollar, suggests traders are betting on a potential surprise at the Jackson Hole symposium.

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

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will open far from prior-range and -value, suggesting a limited potential for immediate directional opportunity. Reason being — a state of shock, as a result of a severe overnight drop.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by initiative trade below the $4,216.00 low volume area (LVNode). The HVNodes at $4,199.25, $4,190.75, and $4,177.25 (a major pivot) all were in play, yesterday.

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

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

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,169.75 overnight pullback high targets the $4,177.25 HVNode pivot. Initiative trade beyond the pivot puts in play the $4,191.25, $4,199.25, $4,211.50, and $4,224.75 HVNodes. 

In the worst case, the S&P 500 trades lower; activity below the $4,177.25 pivot targets the $4,141.00 VPOC. Thereafter, if lower, participants may look for responses at the $4,137.25 and $4,122.75 HVNodes. Auctioning through $4,130.25 increases the odds of trade to the poor structure at $4,110.50.

POCs: POCs (like HVNodes described above) are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). The Dow is the strongest of the four. The Nasdaq is the weakest.
Graphic: SHIFT search suggests participants were very interested in put strikes at and below $4,200.00 in the cash-settled S&P 500 Index (INDEX: SPX), May 10.

News And Analysis

Economy | The Fed is playing with fire by clinging to emergency policies. (WSJ)

Economy | Homebuying sentiment negative despite economic improvement. (MND)

Markets | Pipeline shutdown could push prices at the pump above $3 a gallon. (CNBC)

Economy | Near-term activity data unlikely to affect Fed’s policy rate outlook. (BLK)

Economy | COVID one year on, global infrastructure proves its resilience. (Moody’s)

Recovery | New U.S. COVID infections fall to the lowest level in 11 months. (FT)

What People Are Saying

Innovation And Emerging Trends

Markets | What happens to stocks after the Fed stops raining money? (WSJ)

Housing | Americans moved during the pandemic. Where did they go? (WSJ)

Commodities | The role of critical minerals in the clean energy transition. (IEA)

Markets | More whacks around the head for investors after jobs data. (BBG)

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For April 28, 2021

Market Commentary

Index futures balance, trade sideways.

  • Traders honed in on a Fed taper.
  • A heavy day of earnings, FOMC.
  • Expect chop or responsive trade. 

What Happened: Ahead of key economic developments, U.S. stock index futures auctioned sideways-to-lower overnight. Yields and the dollar rose.

This activity comes alongside reports of strong earnings from heavily weighted index constituents. Alphabet Inc (NASDAQ: GOOGL), Microsoft Corporation (NASDAQ: MSFT), and Pinterest (NYSE: PINS) were some of the most anticipated reports.

Today, Joe Biden will unveil his “American Families Plan” in an address to Congress, the Federal Reserve will provide clarity on its monetary easing plan, and Apple Inc (NASDAQ: AAPL), among others, will report their earnings.

Graphic updated at 8:20 AM EST.

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

Adding, over the past few sessions, volumes have dwindled and responsive trade has been the course of action. This is in anticipation of impactful fundamental developments, like the FOMC meeting, today.

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

Goldman Sachs Group Inc (NYSE: GS) expects the Fed to keep rate hikes off the table until mid-2023. Given that labor slack remains high, the odds of tapering are rather slim.
Graphic: Goldman Sachs’ timeline for Federal Reserve tapering, via ForexLive.

That said, today’s trade will likely be volatile and participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,186.75 ledge targets the $4,191.75 overnight high (ONH). Initiative trade beyond the ONH may introduce excess and could reach as high as the Fibonacci-derived price targets, $4,197.25-$4,263.00. 

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

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

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

In the worst case, the S&P 500 trades lower; activity below $4,166.75 regular-trade low (RTH Low) targets the $4,164.25 high-volume area (HVNode). Thereafter, if lower, participants can look for responses at the $4,163.25, $4,137.25, and $4,122.75 HVNodes.

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

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

As long as prices remain within the prior day’s range, responsive trade is the course of action. Participants should approach today’s session with extra caution, given the potential for headline-driven initiative activity. Big picture, though, the bullish narrative remains intact unless the S&P 500 is able to auction and spend time below the $4,110.50 minimal excess low (also the balance-area low). 

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

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).
Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: SHIFT search maps out the trade of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for April 27. Activity in the options market was primarily concentrated in short-dated tenors, in strikes near current prices. Data suggests participants, in insignificant amounts, added call-side exposure into the beginning of May. Sentiment flips into the end of May, beginning of June. 

News And Analysis

Economy | Biden unveils a massive family aid plan funded by taxing the rich. (BBG)

Economy | Fed to stay patient as U.S. outlook improves: decision-day guide. (BBG)

Commodities | Goldman sees commodities rallying over the next six months. (FP)

Markets | Tesla accused by EPA of auto-coating emissions reporting failure. (BBG)

Markets | Airbus unit has pleaded guilty to corruption over Saudi contracts. (BBG)

Commodities | OPEC+ is sticking to plan to ease oil output cuts from May 1. (REU)

Markets | Local banks, like their giant rivals, are finding loan growth elusive. (BBG)

Markets | Turning tide signals ebbing of liquidity ocean, analysis suggests. (REU)

What People Are Saying

Innovation And Emerging Trends

Markets | Chatting with Cathie Wood, the CEO, and CIO at ARK Invest. (MM)

FinTech | Trader-inspired brokerage Edge Clear launches new platform. (BZ)

FinTech | Barclays taps amount over end-to-end digital banking solutions. (BZ)

Financing | IRR in emerging tech hubs starting to overtake Silicon Valley. (TC)

FinTech | ICE introduces ultra-low-latency wireless services in Europe. (MM)

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Market Commentary For 2/3/2021

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

What Happened: After strong earnings from Amazon.com Inc (NASDAQ: AMZN) and Alphabet Inc (NASDAQ: GOOGL), alongside stimulus optimism, market participants traded responsively in Tuesday’s regular trading range, suggesting an acceptance of higher prices.

What Does It Mean: Late last week, market’s were in a good position for downside discovery. Since then however, conditions have changed markedly.

Further, given the retracement, the S&P 500, in particular, is in a position to digest the recent advance. In other words, two-sided trade that repairs some of the poor structures (as evidenced by low-volume areas) left in the wake of initiative buying would be the most positive outcome.

In the simplest way, high-volume areas can be thought of as building blocks. A structurally sound market will build on past areas of high-volume. Should the market trend for long periods of time, it will lack sound structure. If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of value for favorable entry or exit.

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

Currently, the S&P 500 is rotating at the $3,842.00 high-volume area (HVNode).

As stated, HVNodes can be thought of as building blocks — they also denote areas of supply and demand. In this case, $3,842.00 can be thought of as an area of supply. The primary strategy is to respond to probes into these supply (i.e., selling responsively) and demand (i.e., buying responsively) areas as they offer favorable entry and exit.

Important to add is the presence of divergent speculative flows (Graphic 1) and the decline in a proxy for buying derived from short sales (i.e., liquidity provision on the market making side), per Graphic 2.

Graphic 1: Speculative derivatives activity for February 2, 2021.
Graphic 2: DIX by SqueezeMetrics suggests divergence between price and buying intact.

Given that the market will likely open in-range, participants should look to whether the advance holds (i.e., a market will transition from up and down, to sideways trade). Holding the gap would suggest initiative buyers are in control, near-term. Auctioning below Tuesday’s regular-trade low ($3,799.00) would be the most negative outcome.

In the best case, the market will initiate above, or find acceptance at (in the form of rotational trade) the $3,842.00 HVNode. In the worst case, responsive sellers appear and restart the downside discovery process. Any break that finds increased involvement below the $3,799.00 regular-trade low, would favor continuation as low as the $3,727.75 HVNode.

The go/no-go for upside is the $3,843.50 overnight-trade high. The go/no-go for downside is $3,799.00 regular-trade low. Anything in-between portends responsive, non-directional trade.

Levels Of Interest: $3,843.50 ONH, $3,799.00 regular-trade low.

Categories
Commentary

Market Commentary For 2/2/2021

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

What Happened: Ahead of big earnings from Exxon Mobil Corporation (NYSE: XOM), Amazon.com Inc (NASDAQ: AMZN), Alphabet Inc (NASDAQ: GOOGL), alongside stimulus optimism, initiative buyers extended Monday’s broad market rally overnight.

What Does It Mean: Despite being in a good position for downside discovery due to deleveraging, inversion of the VIX term structure, a shift into short-gamma, and a rise in purchases of downside protection with time, market participants responded to probes into prior value.

As a result, stock indexes are at an interesting juncture. The S&P 500, in particular, took back all of Friday’s selling, and is now resting at the $3,794.75 high-volume node (HVNode).

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open on a gap, outside of prior-balance and -range, suggesting the potential for directional opportunity and high volatility.

Currently, the S&P 500 is rotating around the $3,794.75 HVNode.

As stated in the past, high-volume areas can be thought of as building blocks. A structurally sound market will build on past areas of high-volume. If participants were to auction and find acceptance into areas of prior low-volume (as they did Monday), then future discovery ought to be volatile and quick (as it was) as participants look to areas of high-volume for favorable entry or exit (where we are at now).

Given that the market will likely open on another gap, participants should look to whether the advance holds (i.e., a market will transition from up and down, to sideways trade). Holding the gap would suggest initiative buyers are in control, near-term. Auctioning below Monday’s regular-trade high ($3,777.00) would be the most negative outcome.

In the best case, the market will initiate and find acceptance (in the form of rotational trade) above the $3,794.75 HVNode.

In the worst case, responsive sellers appear and continue the downside discovery process. Any break that finds increased involvement below the $3,727.75 HVNode, would favor continuation as low as the $3,611.50 and $3,556.00 HVNodes.

The second to last HVNode corresponds with the $361 SPY put concentration, which may serve as a near-term target, or bottom, for this sell-off, given last week’s activity at that strike (below graphic).

Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust, for the week ending January 30, 2021.

The go/no-go for upside is the $3,804.00 overnight-trade high. The go/no-go for downside is $3,717.25 regular-trade low. Anything in-between portends responsive, non-directional trade.

Levels Of Interest: $3,804.00 ONH, $3,717.25 regular-trade low.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Euphoria Is The Status Quo’

Key Takeaways:

  • Higher-time frame breakouts remain intact.
  • Volatility rises; markets are a tad euphoric
  • Equity funds went all in at the top, literally
  • Corporate credit outlook enhanced greatly. 
  • Earnings could rise faster than anticipated. 
  • Blue wave implies more stimulus, spending.
  • The bull market broadens as sectors rotate
  • M2 and yields break out; the Fed could act.

What Happened: As investors looked beyond a weak jobs report and political uncertainty, to added economic stimulus and the coming earnings season, U.S. index futures hit new highs.

Graphic 1: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures

What To Expect: Friday’s session in the S&P 500 found initiative buying surface after a test of $3,774.75, the lower boundary of the low-volume area left in the wake of Thursday’s opening drive.

The long-liquidation and subsequent recovery left the market with minimal excess (i.e., a proper end to discovery) at the highs, and a strong close, taking out the overnight stat at $3,817.75 (which had low odds of remaining, given that overnight all-time highs rarely end the upside discovery process).

Noting: Excess forms after an auction has traveled too far in a particular direction and portends a sustained reversal. The absence of excess, in the case of a high, suggests not enough conviction; in such case participants will liquidate (i.e., back off the high) and strengthen the market, before following through.

In light of the market’s search for an area to establish balanced, two-sided trade, participants will come into Monday’s session knowing the following: 

  1. The multi-month upside breakout targeting S&P 500 prices as high as $4,000.00 remains intact.
  2. Prices are above all major moving averages, including the year-to-date volume-weighted average price (VWAP). 
  3. After the resolution of last Monday’s long-liquidation, the market shifted into price discovery mode, evidenced by higher prices and value migration.
  4. For numerous sessions, profile structures denoted the presence of short-covering, the result of old, weak-handed business emotionally buying to cover short positions, causing swift movement followed by a stalled advance, or two-sided intraday trade.
  5. The week ending January 8 established a v-pattern recovery, a price sequence that ought to be followed by further price discovery, as high as the 100% price projection, which happens to be near the multi-month upside breakout target at $4,000.
  6. Unsupportive speculative flows and delta (e.g., commitment of buying or selling) in some instances, as can be viewed by order flow graphics 2 and 3 below. 
  7. Alongside the long gamma narrative, in which dealers buy dips and sell rips to hedge their exposure, record options activity, among other dynamics, the S&P 500 closed near $3,800, a high open interest strike. For sustained upside directional resolve, participants would look for this exposure to roll up. 
Pictured: Divergent delta in the iShares Russell 2000 ETF (NYSE: IWM), one of the largest ETFs that track the Russell 2000
Pictured: Order flow in the SPDR S&P 500 ETF Trust (NYSE: SPY), the largest ETF that tracks the S&P 500
Graphic 4: S&P 500 tests the $3,800 high open interest strike, per SpotGamma

Given the above dynamics, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 remains above its $3,762.25 high-volume node (HVNode). Expectations thereafter include continued balance or a response followed by initiative buying to take out the price extension at $3,847.75. 

Noting: Any structure that denotes meaningful buying continuation, not short-covering, would feature elongated, upside range expansion on committed volumes, as well as the migration of value. 

In the worst case, the S&P 500 initiates below its $3,762.25 HVNode. Expectations thereafter include a test of the minimal excess low near $3,732.75 (a LVNode). A break of Monday’s regular session (9:30 AM – 4:00 PM ET) low would jeopardize the bullish thesis. 

Two go, no-go levels exist; trade that finds increased involvement above $3,824.25 and below $3,775.25 would suggest a change in conviction. Anything in-between favors responsive trade.

Conclusions: In a GMO article, Jeremy Grantham expressed his opinion on recent market activity.

I am long retired from the job of portfolio management but I am happy to give my opinion here: it is highly probable that we are in a major bubble event in the U.S. market, of the type we typically have every several decades and last had in the late 1990s. It will very probably end badly, although nothing is certain. I will also tell you my definition of success for a bear market call. It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market. That is to say, he will have saved money by being out, and also have reduced risk or volatility on the round trip. This definition of success absolutely does not include precise timing. (Predicting when a bubble breaks is not about valuation. All prior bubble markets have been extremely overvalued, as is this one. Overvaluation is a necessary but not sufficient condition for their bursting.) Calling the week, month, or quarter of the top is all but impossible.

Continuing, in addition to market participants reckoning with the uneven recovery, stimulus, trade, inflation, among other risks, they must also worry about something that’s arguably more important: price and value.

As of now, all broad-market indices are in an uptrend, evidenced by higher prices and value. A break below $3,600.00 in the S&P 500 would denote a substantial change in tone.

Levels Of Interest: $3,762.25 HVNode, $3,732.75 LVNode, $3,824.25 rally high, as well as the $3,847.75 price extension.

Bonus: Some opportunities unfolding in the week ahead.

Photo by Valdemaras D. from Pexels.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Hello, Goodbye’

Key Takeaways:

What Happened: Coming into the extended holiday weekend, on tapering volumes, U.S. index futures balanced for four regular trading sessions (9:30 AM – 4:00 PM ET), before breaking out.

Pictured: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures

What To Expect: Thursday’s session found initiative buying surface above the $3,731.00 high-volume node (HVNode), the market’s most recent perception of value.

Given four-sessions worth of unchanged value, and the failure to fill the gap beneath a weak low (i.e., a visual level that attracts the business of short-term, technically-driven market participants) at $3,714.50, participants will come into Monday’s session knowing the following:

  1. Amid Thursday’s late-day buying, price diverged from value.
  2. The overnight rally high at $3,747.75 was recovered (i.e., based on historical trade, there were low odds that the overnight all-time high would end the upside discovery process).
  3. The multi-month upside breakout targeting S&P 500 prices as high as $4,000.00 remains intact.

In light of the above dynamics, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 remains above its $3,731.00 HVNode. Expectations thereafter include continued balance, or a response followed by initiative buying to take out the price extension at $3,756.75.

In the worst case, the S&P 500 initiates below its $3,731.00 HVNode. Expectations thereafter include a test of the weak, minimal excess low at $3,714.50, and subsequent follow-through as low as the $3,691.00 break-point. 

Noting: Excess forms after an auction has traveled too far in a particular direction and portends a sustained reversal. Absence of excess, in the case of a low, suggests minimal conviction; participants will cover (i.e., back off the low) and weaken the market, before following through.

Two go, no-go levels exist; trade that finds increased involvement above $3,752.75 and below $3,714.50 would suggest a change in conviction. Anything in-between favors responsive trade.

Conclusion: From an uneven recovery, stimulus, elections, trade, and the like, it helps to boil it down to what actually matters: price and value. 

Though risks remain, markets are pricing in the odds of a continued rebound. All broad-market indices are in an uptrend. A break below $3,600.00 in the S&P 500 would denote a substantial change in tone.

Pictured: Retest of the upside breakpoint on a weekly candlestick chart of the cash S&P 500 Index

Levels Of Interest: $3,752.75 rally-high, $3,714.50 weak low, $3,731.00 HVNode, $3,756.75 price extension, $3,691.00 break-point.

Bonus: Here is a look at some of the opportunities unfolding.

Photo by Max Walter from Pexels.