Tag: HSBC – HSBC Holdings PLC

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Commentary

Daily Brief For March 13, 2023

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Graphic updated 6:40 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range./MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

Please check out Friday’s Daily Brief on the letter writer’s discussion with Simplify’s Michael Green. In that letter, we unpacked a variety of topics including the reliability of data, what this means for active management, derivatives trading, strength potential in markets, and things to be optimistic about. 

Regarding today’s letter, we shall take a less pessimistic view of the events that have transpired over the past few days involving the likes of Silvergate Capital Corporation (NYSE: SI) and SVB Financial Group (NASDAQ: SIVB). This too shall pass.

Fundamental

The pandemic stimulus had SIVB taking in “cash deposits as a combination of PPP loans, equity investments in VC and cash from new issues (including SPACS),” says Simplify’s Michael Green who your letter writer spoke to for a Benzinga article. SIVB took these deposits and invested them into longer-dated bonds. At the time, these bonds were yielding 1% or so. SIVB “borrowed short (deposits) and lent long.”

Eventually, monetary policy tightened.

SIVB’s client base, many of who were “money-losing VC startups” drew on cash. With interest rates rising and losses on SIVB’s bond portfolio growing, the bank decided to “designate the securities as ‘held-to-maturity’ where mark-to-market losses would not flow through the income statement.”

Graphic: Retrieved from Bloomberg.

With this HTM designation, the SIVB no longer had to hedge interest rate exposure. Unfortunately, with the rapid pace of interest rate increases, SIVB’s unhedged bond portfolio fell sharply in value while withdrawals continued to increase. 

Graphic: Retrieved from Michael Green of Simplify Asset Management.

Green summarizes it well: “With deposits cratering, SVB is forced to begin selling the HTM portfolio to obtain liquidity. This action will push the unrealized losses from the HTM portfolio onto the income statement and impair SVB’s equity. Hence the need to raise equity capital.”

Moreover, as news of capital raises spread, and given that most depositors’ accounts were valued in excess of the FDIC’s insurance limits, withdrawals accelerated further.

“Roughly 25% of total deposits” flowed out. “There is no bank that can survive this,” Green put forth. The risk with SIVB was fear/panic and contagion; the depositors have employees to pay and their business to conduct (e.g., Circle minting and redemption of USDC, a major source of collateral in the crypto-verse).

Consequently, SIVB entered receivership and the FDIC sought buyers. If the latter were to fail, the FDIC would have sold off SIVB’s assets to make good on deposits.

And, in another case, authorities could safeguard or guarantee uninsured deposits with a new deposit insurance fund banks pay into (i.e., not a cost to taxpayers or a bailout). And, that’s basically what the authorities decided to do.

On Sunday, authorities announced emergency measures to guarantee all deposits of SIVB and shore up confidence in the US banking system.

Per a Wall Street Journal article, the government’s bank-deposit insurance fund will cover all deposits, rather than the measly $250,000.00. Additionally, any losses to the fund would be “recovered in a special assessment on banks and the US taxpayers wouldn’t bear any losses.” The Federal Reserve, in separate statements, said it would make additional funds available to banks through the “Bank Term Funding Program” which offers loans up to a year out with Treasuries and mortgage-backed securities, among other assets owned by banks, pledged as collateral. In short, the program signals banks don’t have to liquidate securities and realize losses to raise cash.

“Many of those securities have fallen in value as the Fed has raised interest rates,” the WSJ adds. “The terms would allow banks to borrow at 100 cents on the dollar for securities trading potentially well below that value, potentially putting the government at risk of losses incurred by banks. Critics said the move would essentially offer a backdoor subsidy to bank investors and management for failing to properly manage interest-rate risks.” 

“The new facility provides cheap and under-secured loans – the exact opposite of good central banking,” former Fed trader Joseph Wang explains. “A bank can take collateral trading at $0.90 and borrow a $1.00 from the facility at below market rates.” This suggests the “Administration has decided to socialize the banking sector.”

The turmoil has muddied the outlook on interest rates. Higher for longer was the case heading into the end of last week. Traders now think the terminal/peak rate sits at 4.75-5.00%. Following the spring timeframe, traders think the Fed starts to ease.

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

Technical

As of 6:40 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a balanced overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,884.75. 

Key levels to the upside include $3,921.75, $3,945.00, and $3,970.75.

Key levels to the downside include $3,868.25, $3,847.25, and $3,822.25.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

POCs: 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

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For November 1, 2021

Abstract

Equity index futures higher. Commodities mixed. Bonds lower. Volatility expanded.

Ahead is a light day of economic releases, in the face of fundamental narratives and positioning metrics that promote less intraday volatility into FOMC.

What Happened

Overnight, equity index futures auctioned sideways to higher as participants seek clarity on the Federal Reserve’s intent to taper asset purchases and hike interest rates.

Ahead is data on Markit manufacturing PMI (9:45 AM ET), as well as the ISM manufacturing index and construction spending (10:00 AM 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

Action: On divergent intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by a spike away from value in the S&P 500 (INDEX: SPX) (ETF: SPY) (FUTURE: /ES).

Intent: The spike (and overnight gap, out of balance) mark a willingness to continue the trend.

Validation: Sideways to higher trade (above the $4,596.50 spike base) validates the market’s prevailing intent to markup prices ahead of impactful events like this week’s meeting of the Federal Open Market Committee (FOMC).

Consideration: Poor structure left behind prior initiative trade adds to technical instability.

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap.

Context: On no substantial change in volume and expansion of range, we see the Nasdaq 100 (INDEX: NDX) (ETF: QQQ) (FUTURE: /NQ) trading strong, relative to its peers.

Given where the S&P 500’s price is in relation to the yellow volume-weighted average price (VWAP) anchored from 9/2/2021, the average buyer, since that date, is in a winning position.

Generally speaking, sideways to higher trade, above the yellow VWAP, puts in play the Fibonacci resistances overhead.

Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right. The S&P 500, in particular, is out of balance on the daily, weekly, and monthly. Key levels – SPY (S~442.00, R~461.58), QQQ (S~369.66, R~391.52), IWM (S~222.58, R~234.53) where S is support and R is resistance.

Further, the aforementioned trade is happening in the context of peak growth, in the face of inflation, uncertainty around fiscal policy (with respect to dynamics like the debt ceiling), and increased prospects of tapering to Federal Reserve (Fed) asset purchases.

The implications of these themes on price are contradictory. 

To elaborate, Moody’s expects the Fed to taper its asset purchases in December by $15 billion. 

Every single month after, the Fed will continue to reduce purchases by $15 billion with the tapering process expected to be done by mid-2022. Proceeds from maturing assets will be reinvested to prevent balance sheet contraction and rate hikes ought to start in early 2023.

Moody’s notes: “Tapering won’t impact inflation. Though tapering won’t be disinflationary, it could help keep market-based measures of inflation expectations anchored, since tapering is the preamble to the Fed beginning to tighten monetary policy either by allowing its balance sheet to decline and/or by increasing the target range for the fed funds rate.”

In terms of positioning, according to SqueezeMetrics, “middling dark pool sentiment and middling gamma exposure [portends] … 1-month negative returns.”

At the same time, SpotGamma models forecast hedging (by dealers who warehouse options risk) may promote tighter ranges as dealers sell into strength, increasingly. Until event volatility leaves the market, post-FOMC, odds of directional resolve will continue to be limited as higher implied volatility takes away from important dynamics that bolster movement.

Couple that with the intent to normalize policy, the environment “creates a little bit of a challenge for [the] equity market because it does change the drivers of equity performance,” says HSBC Holdings Plc’s (NYSE: HSBC) Joseph Little.

Graphic: A “gentle reminder of the fact tapering matters,” via The Market Ear.

Expectations: 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 upper part of a positively skewed overnight inventory, outside of prior-range and -value. This suggests 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 sideways or higher; activity above the $4,596.50 spike base puts in play the $4,618.50 Fibonacci resistance. Initiative trade beyond $4,618.50 could reach as high as the $4,639.00 and $4,664.75 Fibonacci resistances, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,596.50 spike base puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,551.75 low volume area (LVNode) and $4,526.25 HVNode, or lower.

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

What People Are Saying

Definitions

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).

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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

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, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

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

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Categories
Commentary

Daily Brief For October 11, 2021

Editor’s Note: The newsletter schedule has changed.

From now on, you can expect to see Daily Briefs only – Monday through Friday – posted shortly before 8:00 AM ET. The Weekly Trade Idea will be packaged into Monday’s commentary, also.

Thanks again for your continued support. I strive to simplify and add value, as best I can.

Market Commentary

Equity index futures trade sideways to lower with bonds. Commodities were mixed.

  • October bottom; a rip up into EOY?
  • Ahead: No economic reports today.

What Happened: Ahead of a busy start to the third-quarter earnings season, this week, U.S. stock index futures auctioned sideways to lower overnight alongside some mixed narratives.

Last night, it was revealed that Goldman Sachs Group (NYSE: GS) cut its U.S. growth forecast on consumption and a fiscal slowdown. Not even a day later, there is news that Goldman, alongside JPMorgan Chase & Co (NYSE: JPM) strategists, suggests the recent dip is a buy.

Given the Columbus Day holiday, today, no economic reports are scheduled.

Graphic updated 6:20 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. 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. 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: As of 6:20 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting 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.

Further, during the prior week’s trade, on mostly strong intraday breadth and divergent market liquidity metrics, equity index futures established a rounded bottom and minimal excess low.

Then, a swift recovery ensued; initiative sellers lacked the wherewithal to take prices lower, beyond the S&P 500’s $4,363.25-$4,278.00 balance area. Initiative buyers were then emboldened, expanding range and value the opposite way.

During this recovery process, the S&P 500 – as evidenced by p-shaped emotional, multiple-distribution profile structures – established a minimal excess high before momentum from covering shorts was overpowered by responsive selling at key areas of resting liquidity, at and around /ES $4,410.25 (SPY $441.00), the site of a key anchored volume-weighted average price (VWAP) level.

Note: Liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Friday’s session succumbed to divergences in buying and selling power as calculated by the difference in volume traded at the bid and offer, resolving some of the aforementioned emotional structures through what’s called the “cave-fill” process. 

During this process, participants revisited, repaired, and strengthened – building out areas of high volume (HVNodes), or value – areas low volume (LVNodes).

Note: The cave-fill process widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

Moreover, September’s seasonally-aligned weakness saw the Nasdaq 100 lead lower. Last week – alongside improvement amongst some positioning metrics – the tone shifted with the cash-settled Nasdaq 100 (INDEX: NDX) rising 4.35% versus the S&P 500 (INDEX: SPX) rising 3.25%.

That comes as October traditionally marks an end to weakness amidst a cycle of rebalancing and earnings; according to LPL Financial Research, “Stocks rise 3.8% on average during the fourth quarter, but the past seven times the S&P 500 was up 15% year-to-date heading into the home stretch of the year, the fourth quarter was higher every single time, up a very impressive 5.8%.” 

“Earnings for the third quarter should again be strong and mostly outpace expectations,” Leuthold Group chief investment strategist Jim Paulsen adds. “Hours worked in the third quarter rose by about 5% suggesting real GDP for the quarter may be close to 7%. With most companies reporting strong pricing power, solid real GDP growth should result in another surprisingly strong corporate earnings season.”

Graphic: LPL Financial Research unpacks S&P 500 seasonality.
Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right. Spending more than a few hours of trade above trend, VWAP (yellow), and the 61.80% Fibonacci retracement suggest good odds of upside continuation.

Notwithstanding, some risks to be aware of include the Federal Reserve’s tapering initiatives and the prospects of a rise in the Fed funds rate, amidst hot sentiment, a decline in top-of-book depth, as well as back and forth entry (exit) into (from) short-gamma.

“What we see in the equity space is a lot of sensitivity to higher real yields,” Joseph Little, chief global strategist at HSBC Holdings Plc (NYSE: HSBC) Asset Management, said. “We are seeing policy normalization everywhere. That creates a little bit of a challenge for [the] equity market because it does change the drivers of equity performance.”

Graphic: A “gentle reminder of the fact tapering matters,” via The Market Ear.
Graphic: Sentiment elevated, “generating a 96% historical probability of down markets in the next 12 months at current levels.”

In addition, to balance some of our Q4 bullishness, in a quote highlighted by The Market Ear, Bank of America Corporation (NYSE: BAC) explained: September 30 “was the 24th time since 1928 that the S&P experienced two or more 3-sigma shocks in 10 trading days, … [and] only in 3 of 23 episodes (and 1 in the last 50yrs) did the S&P surpass the prior month’s peak in the month following the second shock.”

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,363.25 high volume area (HVNode) puts in play the $4,393.00 untested point of control (VPOC). Initiative trade beyond the $4,393.00 VPOC could reach as high as the $4,415.00 VPOC and $4,437.75 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,363.25 HVNode puts in play the $4,346.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,332.25 low volume area (LVNode) and $4,299.00 VPOC, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:20 AM ET.

Definitions

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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.

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

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.

News And Analysis

Banks bought epic amounts of safe assets; forget inflation.

The Fed is likely to side with growth and keep policy easy.

Merck seeks emergency use authorization for COVID pills.

Europe Economic Snapshot: Faster-than-expected restart.

Latin America settles into new post-pandemic slow growth.

S&P talking stock-flow confusion again – QE and tapering.

What People Are Saying

Weekly Trade Idea

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.

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Categories
Commentary

Weekly Brief For September 26, 2021

Editor’s Note: Market commentaries to pause until Monday, October 4, 2021, due to travel commitments. As a result, I go in-depth today and offer a strong trade idea for the week ahead.

Also, if you’re in a rush, focus on the bolded text!

Market Commentary

Equity index futures recover. Yields break higher. Volatility implodes.

  • Indices have recovered 60% of sell-off.
  • Buying-the-dip psychology is breaking.
  • Watching: Taper, shutdown, debt risks.
  • Fed may stamp out life in the economy.
  • Trade Idea: Capitalizing on TSLA skew.

What Happened: After a series of outlier moves, U.S. stock index futures ended the week range-bound when responsive sellers – as confirmed by measures of market liquidity – stepped in at key moving averages and anchored volume-weighted average price levels.

Ahead is a busy week in terms of economic releases; important data on durable goods orders, consumer confidence, home sales, personal income and spending, PCE deflators, as well as manufacturing data are slated to come out.

Graphic updated 9:00 AM ET Sunday. 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. 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. 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: Be patient with me, there is a lot to condense. 

During the prior week’s trade, on mostly strong intraday breadth and divergent market liquidity metrics, equity index futures briefly liquidated; the S&P 500 went as low as $4,300.00. 

Then, a swift recovery ensued; participants took back nearly 60% of the most recent sell-off.

During the recovery process, the S&P 500 – as evidenced by emotional, multiple distribution profile structures – established a minimal excess rally high at $4,455.00 before the momentum from covering shorts was overpowered by responsive selling at key areas of resting liquidity, at and around $4,455.00, or so. 

Friday’s session, however, resolved some of the aforementioned emotional structures through what’s called the “cave-fill” process; revisiting, repairing, and strengthening – building out areas of high volume (HVNodes), or value – areas low volume (LVNodes). 

To put it simply, the cave-fill process widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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

Further, the aforementioned trade is happening in the context of narratives surrounding a taper to Federal Reserve asset purchases, a government shutdown, and the debt ceiling.

The implications of these themes on price are contradictory; to elaborate, in the most recent meeting of the Federal Open Market Committee (FOMC), it was announced that the economy made substantial progress toward the central bank’s goals and, if progress continued as expected, a moderation in the pace of asset purchases was likely. 

“Powell said that the tapering process could be wrapped up by mid-2022, which would require either an earlier start or larger reductions,” Moody’s said. 

“In other words, as long as September employment isn’t a disaster, the Fed will begin tapering at its November meeting. Therefore, it would skip a formal announcement and a one-meeting delay to dive right into the tapering process. It seems we’re headed for an eight-month taper, or [a] $15 billion reduction per month.”

The Fed’s dot plot saw movement, too; there are increased odds of a rate hike in 2022.

In regards to the debt ceiling, which caused a kink in the Treasury bill curve and may portend financial market volatility if not resolved, Powell voiced concern, noting that it must be raised. 

This is a likely development given that “lawmakers know that voting against raising the debt ceiling would have enormous economic costs,” Moody’s noted.

Graphic: “​​The spread between 5- and 30-year yields dropped below 100 basis points after the FOMC meeting, for the first time since just before last year’s Jackson Hole’s conference. Such a flat curve … signal[s] that the bond market thinks the Fed is going to make a hawkish mistake, and stamp out the life in the economy when previously there had been a belief that the Fed would be easy and let inflation move higher.” The source is Bloomberg.

Adding, after the September 17 options expiry which cut S&P 500 dealer gamma in half and opened the window to volatility, alongside threats posed by China’s Evergrande complications, the tone changed markedly, given a fraying in the buy-the-dip psychology.

While strategists at JPMorgan Chase & Co (NYSE: JPM) suggest the selling was knee-jerk and technical, the truth is that, according to Reuters, “global stock funds lost the most since March 2020 as investors moved in [favor] of cash where they [plowed] in $39.6 billion of funds.”

Still, in the face of comments by the Fed, as well as the Evergrande and debt ceiling debacle, the liquidation resolved some fragility with respect to positioning and stocks rallied, affirming the beliefs held by Goldman Sachs Group Inc’s (NYSE: GS) Peter Oppenheimer and HSBC Holdings Plc (NYSE: HSBC) strategists that dip-buying is a go as “we’re still in the relatively early stages of this economic cycle.” 

To put it differently, per one Bloomberg article, “the lasting impression … is that for markets the tapir no longer has the power to induce fear in the way that it did eight years ago, … [and] [t]he post-Evergrande bounce has some life in it. It’s no dead cat.” A 4,700 or 5,000 S&P 500, as some strategists see it, could be in the cards.

Moreover, for next week, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,455.00 minimal excess high puts in play the $4,481.75 HVNode. Initiative trade beyond the HVNode could reach as high as the $4,510.00 LVNode and $4,526.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,455.00 minimal excess high puts in play the $4,415.75 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,393.75 HVNode and $4,365.25 LVNode, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 9:00 AM ET Sunday.

Definitions

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. 

Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. 

The former exacerbates volatility. The latter calms volatility.

Options Expiration (OPEX): Option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire worthless) and the reduction dealer gamma exposure.

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

More On Volume-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.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. 

To note, inflation and rates move inversely to each other. 

Low rates stimulate demand for loans (i.e., borrowing money is more attractive). In conjunction with the rapid recovery, lower rates solicit hawkish commentary as policymakers look to inhibit inflation.

Weekly Trade Idea

News And Analysis

Weakening U.S. economy threatens swelling corporate debt mountain.

Ongoing debt limit fight is as much about 2022 politics as fiscal policy.

Alhambra Investments: Next steps to watch for a scarcity of collateral. 

From New York To Sydney: See the supply shocks spanning the globe.

Economic Outlooks U.S. Q4 2021: The rocket is beginning to level off.

Nancy Pelosi: The infrastructure plan will likely pass House this week. 

Treasuries at risk as Federal Reserve paves way for breakout in yields.

The SEC’s Gary Gensler doesn’t see cryptocurrencies lasting that long.

Bear market is unlikely, but stumble in stocks may lead to a bigger fall.

What People Are Saying

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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.

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Categories
Commentary

Daily Brief For September 23, 2021

Market Commentary

Equity index futures trade higher with yields. VIX and most commodities sideways to lower.

  • Buy-the-dip mantra slowly fading.
  • Fed is eyeing a taper, raise rates.
  • SPX to 4.7-5K at end of the year.
  • Positioning: Still at a key juncture.

What Happened: U.S. stock index futures auctioned higher alongside news the Federal Reserve held advanced talks on paring back its asset purchase program and raising rates. 

In other news, JPMorgan Chase & Co (NYSE: JPM) strategists suggest the buy-the-dip mantra is at risk.

Ahead is data on jobless claims (8:30 AM ET), Markit manufacturing and services PMI (9:45 AM ET), leading economic indicators (10:00 AM ET), as well as real household net worth and nonfinancial debt (12:00 PM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. 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. 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: As of 6:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on strong intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by mostly sideways trade and higher value areas.

This is significant because sideways-to-higher trade and an intent to separate value (i.e., break from balance, higher) reflects a willingness to check and resolve some unfinished business (e.g, $4,425.00 untested point of control or VPOC).

We’re carrying forward the overhead supply; the 20- and 50-day simple moving averages, as well as the anchored volume-weighted average prices (VWAP), north of the $4,425.00 VPOC, are some key dynamic levels that must be taken to change the tone. 

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

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

Further, the aforementioned trade is happening in the context of a fraying in the buy-the-dip psychology, as well as a belief that companies will continue to do good into year-end. The implications of these themes on price are contradictory. 

On one hand, as discussed yesterday, JPMorgan Chase & Co’s Marko Kolanovic stated that despite “technical selling flows (CTAs and option hedgers) in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks,” the equity market would continue higher with the S&P 500 ending 2021 at 4,700, with the potential to break 5,000 next year.

On the other hand, strategists led by JPMorgan Chase & Co’s Nikolaos Panigirtzoglou wrote that the psychology of buying the dip is fraying; “Observing flows for signs that this change in behavior would prove more persistent is important over the coming days” as the S&P 500 continues to trade below its 50-day simple moving average alongside concerns over waning stimulus, inflation, the debt ceiling, and China’s debt crisis.

Adding, Goldman Sachs Group Inc’s (NYSE: GS) Peter Oppenheimer, alongside HSBC Holdings Plc (NYSE: HSBC) strategists, believes dip-buying is a go as “we’re still in the relatively early stages of this economic cycle.” 

In terms of positioning, SpotGamma data suggests the S&P 500 is still at an intersection (i.e., short gamma) that portends increased volatility, should the index continue lower.

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,393.75 high volume area (HVNode) puts in play the $4,425.00 VPOC and balance area low (BAL). Initiative trade beyond the VPOC could reach as high as the $4,481.75 HVNode and $4,510.00 low volume area (LVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,393.75 HVNode puts in play the $4,365.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,294.00 regular trade low (RTH Low) and $4,233.00 VPOC, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. 

Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. 

The former exacerbates volatility. The latter calms volatility.

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.

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.

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.

News And Analysis

U.S. default this fall would cost 6M jobs, wipe $15T.

Central banks aim to limit digital currency disruption.

New York faces more than water-related climate risk.

Fed signals the possibility of 6 to 7 rate hikes, taper. 

Building the future depends on building more homes.

Fed officials believe ‘transitory’ inflation lasts longer.

Platform backed by Fidelity, Goldman digitizes IPOs.

Slower car production hit the pricing of commodities.

Founder of volatility-hedging program eyeing a drop.

The Emerging Ecosystem: Digitalization of markets.

JPMorgan team says flows show buy-the-dip fading.

China pumped $17B, tells Evergrande to not default.

ARK Invest’s Wood to sell Tesla if it reached $3,000.

Goldman’s Oppenheimer said a 10% dip is buyable.

What People Are Saying

About

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

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

Disclaimer

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

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