Categories
Commentary

Weekly Brief For June 12, 2021

Market Commentary

Key Takeaways: Index futures exit balance, attempt to discover higher prices.

  • One big thing: Inflation temporary.
  • Ahead: FOMC 2-day rate meeting.
  • Indices were divergent but higher. 

What Happened: Last week, the movement was both volatile and mechanical, halting short of key visual references.

This technically-driven trade denotes a lack of interest by institutional participants, at record highs; supply chain uncertainties and rising inflation, fiscal and monetary tightening, COVID-19 concerns, political risks, employment, and the like, are some of the emerging concerns larger participants have been looking to price in.

Further, on Thursday, participants were provided more clarity on the hot topic of inflation. 

Why is inflation such a hot topic? In short, as described in prior commentaries, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive). With the rapid recovery, though, market participants were fearful that rates would rise to protect the economy from overheating. 

Higher rates have the potential to reduce the present value of future earnings, making stocks, especially those that are high growth, less attractive. 

Further, despite hot prices, consumer price index (CPI) data, Thursday, suggested inflation would be temporary. Thereafter, U.S. stock index futures broke balance, and rates on the 10 Year T-Note went lower as participants now thought it was more likely the Federal Reserve would maintain its easy monetary policy.

Coinciding with that breakdown in yields, the Nasdaq 100 and Russell 2000 ended the week strong while the S&P 500 and Dow Jones Industrial Average traded relatively weak, taking back Thursday’s vertical price rise on the CPI number.

Notwithstanding, there has been an inclination to talk taper.

This was evidenced by some big option bets, earlier this year; of interest was one Eurodollar bet – carrying a notional value of $40 billion – focused on a potential surprise at the Jackson Hole symposium, used in the past to signal policy changes. 

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

In a statement, Grant Thornton chief economist Diane Swonk said that despite investors not fearing an immediate change in course on monetary policy, inflation has surprised and will likely be the basis for taper talk at Jackson Hole, later this year. 

“I always expected tapering talk to begin more openly at the Jackson Hole meeting. It hasn’t changed my view. Some people thought the Fed would get closer to full employment before they did liftoff on tapering,” Swonk said.

In terms of the impact on equities, looking back, according to The Market Ear, even during the so-called Taper Tantrum, in the early 2010s, rates settled in a wide range, and equities rallied big. 

Graphic: Nasdaq 100 rallies in 2013 after rates settle in a wide range, via The Market Ear.

Moreover, next week is a large monthly options expiration (OPEX). This is noteworthy because 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. 

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

Gamma: 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.

Aside from the Fed meeting and OPEX, some outlier risks remain; with VIX spreads at their lows, S&P 500 skew – a measure of perceived tail risk and the chances of a black swan event – rose dramatically over the past few weeks. At the same time, sentiment cooled considerably, while individual stock volatility increased the potential for another meme stock de-risking event.

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the $4,227.00 high volume area (HVNode), a pivot on the composite profile.

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.

Given the minimal excess high at $4,249.00, as well as the subsequent liquidation – a typical response – and lower value, participants can trade from the following frameworks.

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. 

Like Friday, in the best case, the S&P 500 trades sideways or higher; activity above the $4,227.00 high volume area (HVNode) puts in play the $4,249.00 minimal excess high. Initiative trade beyond that figure could reach as high as the $4,270.00 161.80% Fibonacci price extension and $4,294.75 127.20% extension.

In the worst case, the S&P 500 trades lower; activity below the $4,227.00 HVNode confirms a failed balance-area breakout. In such a case, the $4,213.75 low volume area (LVNode) comes into play first. Thereafter, if lower, participants ought to look for responses at the $4,206.25, $4,198.75, and $4,177.25 HVNodes.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Note the weakness in the S&P 500 and Dow Jones Industrial Average. 
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the larger cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week.

News And Analysis

Markets | Shorts squeezed; Fed (kind of) buys cryptocurrency bonds. (BBG)

Economy | Fed to announce taper in August or September on inflation. (REU)

Energy | OPEC sees more demand for oil with H2 growth quickening. (S&P)

Economy | The U.S. is experiencing temporary cost-push inflation. (Moody’s)

Economy | Pent-up demand, supply shortages improve credit recovery. (S&P)

Politics | Biden’s China policy emerging – and it looks like Trump’s. (WSJ)

What People Are Saying

Innovation And Emerging Trends

Venture | Funding, new unicorns, exits continue at a strong pace. (CB)

FinTech | G-7 dialogue on crypto to hasten the disintermediation. (Moody’s)

Trading | How to keep the gamma squeeze going with put sales. (SG)

Aviation | In aviation, the revolution likely will not be supersonic. (WSJ)

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
Results

Case Study: Trading A Balance-Breakout Failure In NYMEX WTI Crude

What Happened: On April 20, 2021, market participants attempted to move NYMEX West Texas Intermediate (WTI) Crude Oil futures up and out from balance, an area of recent price acceptance.

Further, participants failed to find acceptance beyond the balance area, given WTI’s move back into the prior range. As a result, odds favored (1) sideways or (2) lower trade, as low as the balance area low (BAL) near $62.50, or so.

Adding, the breakdown happened in conjunction with fears that India, a large importer of oil, would impose restrictions as coronavirus infections and deaths soared in the country. Given this news, there was an increased potential to trade below the $62.50 BAL, into prior poor structures and low volume areas (LVNodes) that ought to offer little-to-no support.

In response, the following sequence analysis unpacks how Physik Invest traded options tied to the NYMEX West Texas Intermediate (WTI) Crude Oil futures (Future: /CL).

Note: Click here to view all transactions.

Sequence 1: On April 20, 2021, Physik Invest applied the balance-break and gap scenarios, monitoring for acceptance (i.e., more than 1-hour of trade) outside the balance area. 

Typical Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area.

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.

After a confirmed balance-breakout failure, given a bullish outlook on oil, Physik Invest opportunistically bought the following structure for a $1,410 debit. At this point, if all legs were to remain out of the money (i.e., expire worthless) by May 17, 2021, the maximum loss would have been $1,410.

  • 65.50+2/70.50C-4/75.50+2 /CL long call ratio spread

On April 27, 2021, for a $1,000 debit, the following position was added after participants found acceptance in the aforementioned LVNode.

  • 65.50+2/70.50C-4/75.50+2 /CL long call ratio spread

By 4/29/2021, all positions were closed for a $4,800 credit, a 99.17% return on the initial debit outlay.

The above call-side structures were initiated against the $68.00 rally-high. However, after 3-days of high-paced price discovery, Physik Invest removed all call-side structures on the first sign of responsive selling at $65.40, a minor 127.20% Fibonacci price extension.

Entry Checklist Recap:

  • Setup: Buy failed balance-area breakout liquidation for a move to new highs
  • Target: $68.00
  • Time Frame: 1 month
  • Risk: 2% of account
  • Strategy: Call debit (ratio) spread structured around target

Summary: After a failed balance-breakout setup presented itself, Physik Invest opportunistically bought call-side structures targeting a test of the prior rally-high, risking a standard risk unit in debit, over a time frame of less than one month.

In total, the sequence of trades net a $2,291.76 profit after commissions and fees.

The above strategies were employed in accordance with Physik Invest’s core edge: the trade of ratioed, multi-leg strategies that combine short and long positions to reduce risk and increase returns.

Reflection: The entry and exit were, unusually, well-timed. Though the spread did price higher, closer to expiration, it lost nearly half its value on the responsive selling that surfaced at $65.40, a minor 127.20% Fibonacci price extension.

The correct move would have (1) to narrow the width of the spreads at entry, and (2) cut the position in half at $65.40, the minor 127.20% Fibonacci price extension. Thereafter, spreads could have been added on the liquidation from $65.40.

In all, the target, time frame, and strategy were incorrect.

Expectations should have been tempered; given the time frame, odds of further discovery, up to the $70.50 short strike, were poor.

A better spread to open in size?

  • 64C+1, 66C-2, 68C+1 long call ratio spread
  • 64C+1, 68C-2 long call ratio spread
  • 65C+1, 70C-2 long call ratio spread

Additionally, to lower cost, puts could have been sold at and below the $57.00 support.

Categories
Commentary

Daily Brief For June 11, 2021

Market Commentary

Index futures in balance and divergent.

  • One Big Thing: Inflation temporary.
  • Ahead: UoM Consumer Sentiment.
  • Indices diverge and trade sideways.

What Happened: U.S. stock index futures auctioned within prior range, after recent economic releases increased confidence in the notion that inflation will be temporary. Adding, participants are attempting to price in, also, the potential passage of an infrastructure deal, corporate tax talk, and cryptocurrency scrutiny.

Noting, ahead is data on sentiment.

Graphic updated 7:37 AM ET.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by a failed balance-area breakout.

After the release of the May 2021 CPI, participants attempted to initiate the S&P 500 up and out from balance. The attempt failed, confirmed by lackluster breadth, among other things. The minimal excess left at the 127.20% Fibonacci price extension suggests participants, which were likely short-term (i.e., technically-driven), either (1) lacked conviction or (2) were forced to liquidate because they were not getting paid.

Typical Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area.

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.

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.

The resulting profile structure, also, was p-shaped; profile structures denote short-covering as old business looks to cover short exposure. Such activity, contrary to popular belief, can weaken a market as it removes demand (or future demand) from the market (i.e., participants with no short exposure, do not have to buy-to-close an existing position). 

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,227.00 high volume area (HVNode) puts in play the $4,249.00 minimal excess high. Initiative trade beyond that figure could reach as high as the $4,270.00 161.80% Fibonacci price extension. 

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

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

In the worst case, the S&P 500 trades lower; activity below the $4,227.00 HVNode confirms a failed balance-area breakout. In such a case, the $4,213.75 low volume area (LVNode) comes into play first. Thereafter, if lower, participants ought to look for responses at the $4,206.25, $4,198.75, and $4,177.25 HVNodes.

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). Nasdaq is relatively strong.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), yesterday. Activity in the options market was primarily concentrated in short-dated tenors, in put strikes as low as $420.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), yesterday. Noting that, in regards to the NDX, this is a change in tone. In the days prior, longer-dated NDX calls saw more interest. The puts could be used to speculate or hedge a participant’s downside. 

News And Analysis

Markets | Citadel Securities settles with fund on secret algorithm. (BBG)

Economy | Though inflation hotter than expected, it is temporary. (CNBC)

FinTech | Basel suggests strictest risk weighting for cryptocurrency. (BD)

Travel | Uber, Lyft driver shortage is boosting business for taxis. (BBG)

Politics | President Biden to meet Merkel at White House July 15. (Axios)

Energy | Oil thirst projected to surpass pre-COVID by end of 2022. (Axios)

What People Are Saying

Innovation And Emerging Trends

Travel | Airlines are planning to plow billions into flying taxis. (BBG)

FinTech | Why buy-now-pay-later financing is so attractive. (Axios)

FinTech | Central banks are headed toward digital currency. (Axios)

FinTech | Online broker Webull considers $400M U.S. IPO. (BBG)

FinTech | Coinbase strikes deal to let you add crypto to 401K. (Fortune)

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 June 10, 2021

Market Commentary

Index futures attempting to exit balance, resume discovery.

  • U.S. and China resume their talks.
  • Ahead: U.S. inflation data for May.
  • Indexes auction sideways to lower.

What Happened: U.S. stock index futures auctioned sideways-to-lower alongside a resumption in talks between the U.S. and China. 

Key for today is the response to inflation data due an hour before the open. A hot reading may bolster the Fed’s case to withdraw stimulus.

Graphic updated 7:48 AM ET.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open outside of prior-range and -value, suggesting a higher potential for directional opportunity. 

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by the spike below a composite high volume area (HVNode). This is significant because that particular reference denotes a perception of value at higher prices.

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

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

Further, this push-and-pull activity, over the past few sessions, comes as participants position themselves for the next directional move. Thursday’s CPI data will likely allow participants a better understanding of the Fed’s timeline to withdraw stimulus. 

“A new high since the early 1990s is in the expectations and Treasury yields have been sliding,” said Steen Jakobsen, chief investment officer at Saxo Bank. “It is difficult to determine how hot the number would have to be on the upside to jolt this market, while a large downside miss would perhaps be more surprising and elicit a larger market reaction in risk appetite.”

Still, though, the market is stuck in long-gamma.

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.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,227.00 HVNode puts in play the $4,231.00 VPOC. Initiative trade beyond the VPOC could reach as high as the ONH at $4,238.00 and $4,247.75 Fibonacci price extension.

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.

In the worst case, the S&P 500 trades lower; remaining below the $4,224.75 spike base denotes acceptance of Wednesday’s knee-jerk move from value. In such a case, lower prices are likely. Participants ought to focus their attention on whether the low at $4,206.00 holds. If not, the next level of interest is the $4,198.75 HVNode. Thereafter, attention moves to the $4,177.25 HVNode.

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). Note the weakness in Dow, as well as strength in Nasdaq and Russell. Russell’s strength could be construed as a demand for risk.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current in the cash-settled S&P 500 Index (INDEX: SPX), yesterday. On the other hand, in the Nasdaq 100 Index (INDEX: NDX), participants bid call strikes out 1-2 months. This activity is happening in conjunction with a move lower in yields. 

News And Analysis

Politics | China and U.S. agree to push forward trade, investment. (BBG)

Markets | Banks to face stiff bitcoin, crypto capital requirements. (BBG)

Markets | The SEC is looking to freshen up equity market structure. (Axios)

Economy | Half of pandemic unemployment may have been stolen. (Axios)

Economy | ECB sticks to bond-buying play despite improving outlook. (FT)

Economy | Global minimum tax ups multinational tax hikes prospects. (Fitch)

Markets | The meme stock frenzy not solely driven by retail traders. (CNBC)

What People Are Saying

Innovation And Emerging Trends

FinTech | Crypto is the ‘wild west’ needing consumer protections. (BBG)

Travel | Heavier passengers on planes mean new safety limits. (WSJ)

FinTech | Tether commercial paper disclosure puts it among giants. (FT)

Energy | G-7 debate accelerating a shift to electric cars, from oil. (BBG)

FinTech | Atom Finance launches white-labeled data experiences. (BZ)

FinTech | State Street adds digital unit to capitalize on crypto craze. (FT)

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 June 9, 2021

Market Commentary

Index futures in balance.

  • Manufacturing, tech bill is passed.
  • Ahead: Wholesale inventory data.
  • Indexes trade sideways overnight.

What Happened: U.S. stock index futures traded sideways overnight alongside the passage of a bill that bolsters U.S. manufacturing and technology initiatives.

At the same time, so-called meme stocks, like Clover Health, rocketed amid speculative commentaries on platforms like Reddit. This comes as risk metrics flash warnings ahead of the Fed’s annual meeting in Jackson Hole which, as discussed in prior commentaries, may mark a shift in policy tone.

Ahead is data on wholesale inventories and policy decisions by the Bank of Canada. 

Graphic updated 8:02 AM ET.

What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity. 

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by responsive buying below balance, at the $4,208.25 high volume area (HVNode). This is significant because it suggested lower prices did not solicit initiative selling.

Responsive Buying: Buying in response to prices below an area of recent price acceptance.

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).

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.

Initiative Selling: Selling within or below the previous day’s value area.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,224.75 HVNode puts in play the $4,232.25 low volume area (LVNode) and $4,238.00 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,247.75 Fibonacci-derived price target.

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

In the worst case, the S&P 500 trades lower; activity below the $4,224.75 HVNode puts in play the $4,213.75 LVNode and $4,208.25 HVNode. If lower, participants ought to look for responses at the $4,198.75 and $4,177.25 HVNodes.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Future.
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).
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for Tuesday. Activity in the options market was primarily concentrated in short-dated tenors, in call strikes as high as $435.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), Tuesday.

News And Analysis

Politics | Democratic, GOP House members pitch infrastructure. (BBG)

Energy | One password allowed hackers to disrupt Colonial Pipeline. (REU)

Politics | U.S. Senate passes sweeping bill to address China threat. (REU)

Economy | The World Bank sees the strongest rebound in 80 years. (BBG)

Economy | Surprise jump in U.S. wages gives inflation debate twist. (BBG)

Politics | Gig companies’ push for state worker laws faces division. (REU)

Economy | Delinquency rates inching closer to pre-COVID levels. (MND)

Politics | Hungary’s Orban calls global corporate tax plan absurd. (BBG)

COVID | Fauci urges U.S. vaccinations as harmful variant spreads. (BBG)

What People Are Saying

Innovation And Emerging Trends

Economy | Bottom 90% of Americans borrowing from the top 1%. (BBG)

FinTech | Man Group-Oxford quants say AI can predict stock moves. (BBG)

Technology | Price of batteries has declined by 97% over 30 years. (OWID)

Economy | Fed paying 0.00%. Such a deal. Depositors are flocking. (BBG)

Crypto | El Salvador passes a law to be 1st country to adopt BTC. (Axios)

Crypto | Hong Kong to explore digital currency, HKMA fintech plan. (SCMP)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing leaders such as John Chambers, founder, and CEO, JC2 Ventures, Kevin O’Leary, 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 June 8, 2021

Market Commentary

Index futures in balance.

  • News: Websites dark, new variant.
  • Ahead: Trade Balance and JOLTs.
  • Indices are volatile, trade sideways.

What Happened: U.S. stock index futures traded within range, overnight, after Monday’s wild, end-of-day price discovery. 

To note, multiple websites including the New York Times and Amazon Web Services came offline. At the same time, news of the government’s retrieval of the ransom paid to the Colonial Pipeline hackers came alongside selling in cryptocurrencies.

Ahead is the April U.S. trade balance and job openings data.

Graphic updated 7:00 AM ET.

What To Expect: On top of poor, low volume structure, the result of emotional trade in the day’s prior, Tuesday’s regular session (9:30 AM – 4:00 PM EST), in the S&P 500, will likely open just outside of prior-range and -value, suggesting a potential for immediate directional opportunity. 

Adding, during prior regular trade, the best case outcome occurred, evidenced by sideways trade above the $4,224.75 high volume area (HVNode). This area is significant because it marked a prior zone of supply.

The sideways-to-higher trade, over the past week, or so, comes alongside a continuation of the Fed’s dovish stance. As a result, traders are seeing a rotation into the technology-driven Nasdaq names, which may support a broader S&P 500 rally.

“We advocate looking through near-term market volatility and remain pro-risk, predicated on our belief that the Fed faces a very high bar to change its easy monetary policy stance,” BlackRock Investment Institute strategists led by Elga Bartsch wrote.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,224.75 HVNode puts in play the all-time, rally-high at $4,238.00. Initiative trade beyond $4,238.00 could reach as high as some minor Fibonacci extensions at $4,240.75 and $4,248.00. 

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.

In the worst case, the S&P 500 trades lower; activity below the $4,224.75 HVNode puts in play the $4,213.75 low volume area (LVNode). Thereafter, if lower, participants can look for responses at the $4,208.25 and $4,199.00 HVNodes.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. 
Graphic: 4-hour candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Relative strength shifts to the Nasdaq.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX). On the other hand, participants were most interested in call strikes at and above current prices in the cash-settled Nasdaq 100 Index (INDEX: NDX), yesterday. This shift in interest may support a broader rally. 

News And Analysis

Politics | Amazon to be covered by global tax deal despite thin margins. (BBG)

Politics | Schumer, Pelosi face new pressure as infrastructure talks stall. (BBG)

Politics | Canada is set to ease quarantine rules for vaccinated travelers. (BBG)

Economy | Lack of homes for sale eventually curbs affordability constraints. (MND)

Markets | Commodities crunch on stingy capital spending has no quick fix. (WSJ)

COVID | Gangrene, hearing loss show new variant may be more severe. (BBG)

Climate | The U.S. must work with allies to secure electric vehicle metals. (REU)

Markets | Meme stocks quickly turning the options market upside down. (WSJ)

What People Are Saying

Innovation And Emerging Trends

FinTech | Crypto exchange is going to extreme lengths on cybersecurity. (BBG)

FinTech | Central bank digital currencies may disrupt financial systems. (Fitch)

FinTech | MicroStrategy is selling corporate bonds to buy more bitcoin. (BBG)

Banking | De-globalization of retail banking, disruption of traditional models. (Axios)

FinTech | Colonial Pipeline ransom recovery a major moment for crypto. (NYT)

Trading | London Metals Exchange pedals back on closing trading ring. (WSJ)

Technology | NY project combines solar power with high-speed broadband. (Axios)

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 3, 2021

Quick Note: As I will be on a short trip, the daily newsletter will be off tomorrow, June 4, and Monday, June 7. 

If you will be in the Miami, Florida area this weekend and would like to network, please let me know.

Market Commentary

Index futures are in balance and attempting to discover lower prices.

  • Russia cutting DXY holding, taper talk.
  • Ahead: PMIs, ISM, Claims, Fed speak.
  • Stock indexes trade sideways to lower.

What Happened: U.S. stock index futures auctioned lower overnight ahead of weekly claims and payrolls data.

The alleged culprit? Geopolitical tensions and concerns over inflation.

Russia said it would eliminate the dollar (DXY) from its National Wellbeing Fund, President Biden announced plans to amend a U.S. ban on foreign investments, and Fed President Patrick Harker suggested the central bank should discuss time frames for taper.

Graphic updated 7:50 AM ET.

What To Expect: Thursday’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. 

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by sideways trade up to the low volume area (LVNode) at $4,215.75. This LVNode is significant because it marks an area on the profile where participants were likely acting out of emotion, triggering stops, and at-market orders. 

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: SPDR S&P 500 ETF Trust (NYSE: SPY) market liquidity, via Bookmap. Note the divergent volume delta, a measure of buying and selling power as calculated by the difference in volume traded at the bid and offer. Such conditions favor more balance (two-timeframe, rotational, or bracket trade).

Further, the broad equity market has been consolidating now for more than a month. This comes as participants look to price in supply chain uncertainties and rising inflation, fiscal and monetary tightening, COVID-19 concerns, political risks, and the like.

There is a possibility that data on U.S. payrolls, this week, may shed a light on the Federal Reserve’s stimulus schedule. Most likely, though, indices chop, remain in range. 

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,177.25 high volume area HVNode puts in play the $4,199.00 HVNode. Initiative trade beyond the $4,199.00 HVNode could reach as high as $4,209.00 point of control (POC). 

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.

In the worst case, the S&P 500 trades lower; activity below $4,177.25 HVNode puts in play the $4,153.25 HVNode. Thereafter, if lower, attention is drawn to the HVNodes at $4,122.25 and $4,069.25.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for June 2. Activity in the options market was primarily concentrated in short-dated tenors, in put strikes below current prices.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), yesterday. Noting, again, the interest in long-dated out-of-the-money Nasdaq calls.

News And Analysis

Economy | Demand back, supply lagging. Both to grow in coming months. (PIIE)

Politics | Russia cuts dollar holdings from a wealth fund amid sanctions. (BBG)

Recovery | COVID-19 cases hit lowest point in U.S. since pandemic start. (Axios)

Economy | Harker says Fed needs to start discussing tapering timeline. (BBG)

Economy | U.K.’s Sunak says U.S. plan to break tax deadlock could work. (REU)

Politics | Biden to amend Trump’s China blacklist, target key industries. (BBG)

Politics | Iran investigates a fire that sank one of its largest navy ships. (WSJ)

What People Are Saying

Innovation And Emerging Trends

Politics | U.S. plows cash into R&D as China triggers a ‘Sputnik Moment.’ (BBG)

FinTech | Crypto firms are failing to meet AML regulations, says watchdog. (BBG)

FinTech | DeFi helping fuel the cryptocurrency market boom and volatility. (WSJ)

Climate | Eight major companies unite to push climate change solutions. (Axios)

Technology | Media industry braces for post-COVID-19 pandemic reality. (Axios)

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 1, 2021

Market Commentary

Index futures in price discovery.

  • Optimism around a recovery mounting.
  • Ahead: Data on manufacturing, OPEC.
  • Stock indexes traded higher overnight.

What Happened: U.S. stock index futures auctioned higher overnight ahead of data on U.S. manufacturing.

Graphic updated at 6:30 AM EST

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, on a gap outside of balance, suggesting a potential for immediate directional opportunity.

Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 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.

Adding, during the prior week’s regular trade, the best case outcome occurred, evidenced by responsive trade after a breakout above the $4,177.25 high volume area (HVNode). This is significant because that HVNode marked a pivot (i.e., above = bullish, below = bearish) on the composite profile.

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

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

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

Further, this bullish price action is happening in the face of supply chain uncertainties and rising inflation, fiscal and monetary tightening, COVID-19 concerns, political risks, and the like. 

However, research by JPMorgan Chase & Co (NYSE: JPM), as well as Goldman Sachs Group Inc (NYSE: GS), suggests equities are still in play. This thinking would help explain the increased interest in S&P 500 and Nasdaq 100 call options.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above last Friday’s $4,217.75 overnight high (ONH) puts in play the $4,224.75 HVNode and $4,227.00 POC. Initiative trade beyond the two aforementioned signposts could reach as high as first the $4,238.00 overnight all-time high (ONH) and then, the $4,294.75 Fibonacci-derived price extension, a typical recovery target.

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. 

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

In the worst case, the S&P 500 trades lower; activity below the $4,217.75 ONH puts in play the $4,209.00 point of control (POC). Then, if lower, comes the $4,177.25 and $4,153.25 HVNode. On a cross of the $4,153.25 HVNode, the $4,122.25 HVNode and $4,071.00 POC come into play, also.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: SHIFT search suggests participants were becoming more interested in call strikes at and above current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week prior. Activity in the options market was primarily concentrated in short-dated tenors, in strikes at and above $425.

News And Analysis

Markets | Meme stock AMC continues rally, jumping on a share sale. (CNBC)

Markets | Cyberattack hits the world’s largest meat processor units. (CNBC)

Politics | Buttigieg: mask mandates on planes are a matter of respect. (Hill)

Economy | Mortgage rates dip beneath 3% again, offering new savings. (Y!)

Economy | Inflation in the euro area climbed to 2% in the month of May. (BBG)

Energy | With oil majors under attack, OPEC’s hand has strengthened. (BBG)

Markets | Bitcoin is unlikely to escape regulation as authorities respond. (BBG)

Markets | Tesla’s vehicle price increases due to supply chain pressure. (REU)

What People Are Saying

Innovation And Emerging Trends

Markets | The 60/40 strategy needs a modern makeover to win skeptics. (BBG)

FinTech | Nasdaq: upstarts are forcing legacy banks to evolve and adapt. (NDAQ)

FinTech | Coinbase Institutional planning the launch of a prime brokerage. (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, 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

Weekly Brief For May 31, 2021

Market Commentary

Key Takeaways: Index futures in balance.

  • Best to assume the taper tantrum happened.
  • Ahead: Fed speak and data on employment.
  • Indices traded sideways-to-higher last week.

What Happened: Coming into the large May monthly options expiration (OPEX) and extended holiday weekend, U.S. stock index futures pinned, trading sideways-to-higher.

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

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. 

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.

Furthermore, looking back, the movement in price was both volatile and mechanical.

After a short covering-like rally toward $4,200.00, the S&P 500 was responsively bought and sold at key visual references, suggesting a dominance by short-term participants.

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

The technically-driven trade denotes a lack of interest by institutional participants, at record highs; supply chain uncertainties and rising inflation, fiscal and monetary tightening, COVID-19 concerns, political risks, and the like, are some of the emerging concerns larger participants are looking to price in.

Of all the above risks, inflation remains the hottest topic.

Generally speaking, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive). With the rapid recovery, though, market participants fear that rates will rise to protect the economy from overheating.

Higher rates have the potential to reduce the present value of future earnings, making stocks, especially those that are high growth, less attractive. 

To note, however, rates remain range-bound; rates on the 10 Year T-Note sit below their March high and are likely to continue higher, which the market may absorb

How may the market absorb a rise in rates? During the so-called Taper Tantrum, in the early 2010s, rates settled in a wide range, and equities rallied big. Adding, some strategists, like Kit Juckes of Societe Generale SA (OTC: SCGLY) suggest it may be best to assume a tantrum has already happened.

“U.S. 10-year yields rose from a low of 1.4% in 2012 to 3% during their tantrum. In this cycle, the rise has been from 0.5% to a high just below 1.8%. That’s comparable in relative terms. The eventual peak in U.S. yields in 2018 was 3.25%. Can’t we accept that the taper tantrum has already happened? The important difference is that in the tantrum cycle, core CPI never got above 2 ½%. A bet on further bond weakness is a bet on inflation proving to be stickier than the Fed can cope with.”

Adding, research by JPMorgan Chase & Co (NYSE: JPM), as well as Goldman Sachs Group Inc (NYSE: GS), suggests equities may be getting cheap with reflationary themes being the go-to play. This sentiment would help explain the increased interest in S&P 500 and Nasdaq 100 call options.

Graphic: Equity valuations at their cheapest, relative to the macro in March 2009 and in the depth of the 1982 recession, according to Goldman Sachs Group Inc (NYSE: GS), via The Market Ear.
Graphic: SHIFT search suggests participants were becoming more interested in call strikes at and above current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week prior. Activity in the options market was primarily concentrated in short-dated tenors, in strikes at and above $425.

Outlier risks remain, though; aside from the seasonally weak period, S&P 500 skew – a measure of perceived tail risk and the chances of a black swan event – rose dramatically over the past few weeks. At the same time, sentiment cooled considerably, while individual stock volatility increased the potential for a repeat of the GameStop Corporation (NYSE: GME) de-risking event.

Graphic: Goldman Sachs Group Inc (NYSE: GS) unpacks outlier risks based on the implied volatility of S&P 500 out-of-the-money options, via The Market Ear.

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the $4,197.25 high volume area (HVNode).

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

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

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above $4,197.25 has the potential to reach the $4,227.00 point of control (POC). Initiative trade beyond the POC could reach as high as first the $4,238.00 overnight all-time high (ONH) and then, the $4,294.75 Fibonacci-derived price extension, a typical recovery target. 

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. 

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

In the worst case, the index trades lower; activity below the $4,177.25 HVNode puts in play the $4,153.25 HVNode, first. Thereafter, if lower, the $4,122.25 HVNode and $4,071.00 POC come into play. 

On a cross through the $4,050.75 low volume area (LVNode), long-biased traders should beware of a rapid liquidation, as low as first the $4,015.00 and $4,001.00 POCs. In such a liquidation, odds favor a test of ~$3,970.00 50.00% retracement, as well as the $3,918.00 61.80% retracement and HVNode.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Nasdaq is primed for upside and has the potential to pull the S&P with it. 

News And Analysis

Trade | One of the world’s top ports expects delays on an outbreak. (BBG)

Markets | PBOC raises reserve ratio for foreign exchange holdings. (BBG)

Economy | Recovery solidifies in U.S., Europe, while EM faces risks. (Moody’s)

Markets | China bars banks from selling commodity-linked products. (REU)

Economy | Fed security purchases draw fire in hot U.S. housing market. (S&P)

Energy | Global oil demand is seen eclipsing India, Iran’s uncertainty. (S&P)

Economy | U.S. won’t experience stagflation over next few years. (Moody’s)

Economy | Non-government loans seeing a jump in forbearances. (MND)

Economy | U.S. speculative-grade corporate default rate to fall to 4%. (S&P)

Markets | Inflation, higher oil, stronger yuan point in same direction. (BBG)

Economy | U.S. retailers face headwinds from slowing sales, inflation. (S&P)

Markets | Everyone with bonds to liquidate had ample time to do so. (BBG)

What People Are Saying

Innovation And Emerging Trends

Markets | How recent growth in leveraged finance affects investors. (BZ)

Politics | Tech growth overshadowed by regulatory risks, challenges. (S&P)

Markets | Chamath: SPACs need more oversight and regulation. (BBG)

Politics | China moves to a three-child policy to boost its birthrate. (BBG)

Markets | Shakeout stirs debate over ether’s long-term potential. (BBG)

FinTech | Which banks are positioned for low rates, digital adoption. (S&P)

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 May 24, 2021

Quick Note: From May 25 to May 28, the daily newsletter will be off as I will be on a trip. It would not be fair for me to provide lackluster content since I won’t have all the tools at my disposal.

Market Commentary

Index futures in balance.

  • The U.S. may be facing deflation.
  • Ahead is CFNAI data, Fed speak.
  • Stock indexes sideways to higher.

What Happened: U.S. stock index futures auctioned higher overnight alongside renewed political tensions, cryptocurrency volatility, as well as a crackdown by China on commodity speculation.

Graphic updated 7:50 AM EST.

What To Expect: Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity. 

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.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by the responsive selling that surfaced at and above the $4,177.25 high volume area (HVNode). This is not all too significant given the large monthly options expiration. Still, according to SpotGamma, “[w]hile roughly 1/3 of total QQQ gamma rolled off on Friday, … [the] QQQ remains under the control of put options,” a source of potential volatility in the Nasdaq 100.

Responsive Selling: Selling in response to prices above area of recent price acceptance.

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.

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

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.

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.

As stated in Sunday’s weekly note, equities are in a seasonally weak period. At the same time, inflation and uninspiring economic data are major worries investors are attempting to price in. That said, however, during the May 19 reversal, in the S&P 500 and Nasdaq 100, participants increased exposure to the upside with relatively cheap, longer-dated calls.

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

In the best case, the S&P 500 trades sideways or higher; activity above $4,177.25 puts in play the $4,227.00 point of control (POC). Initiative trade beyond the POC could reach as high as the $4,238.00 overnight all-time high. 

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.

Initiative Buying: Buying within or above the previous day’s value area.

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

In the worst case, the S&P 500 trades lower; activity below $4,177.25 puts in play the $4,122.25 HVNode. Thereafter, if lower, key references include the $4,071.00 POC and $4,050.75 low volume area (LVNode). Long-biased traders are cautioned on trade below the LVNode. 

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 Nasdaq is regaining relative strength. A rotation would be bullish, or supportive of a new leg higher (if one were to happen).
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for last week. Though activity in the options market was primarily concentrated in short-dated tenors, increased trade in farther-dated call-side strikes is observed as a commitment to higher prices.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week. To note, however, participants began paying up for longer-dated upside exposure (evidenced by call activity).

News And Analysis

Economy | Cathie Wood: U.S. “setting up for a massive period deflation.” (BBG)

Economy | European labor market’s capacity to absorb shocks varies. (Moody’s)

Markets | How a global minimum corporate tax could impact markets. (WSJ)

Markets | Goldman sees oil hitting $80/bbl despite likely supply return. (REU)

Security | Three disasters show gaps in the $1.7T infrastructure plan. (BBG)

Markets | Mainstream markets shrug volatile $1T crypto flash crash. (BBG)

Trade | Sea change: global freight sails out of the digital dark ages. (REU)

Politics | EU weighs sanctions over so-called ‘hijacking’ of Ryanair jet. (BBG)

What People Are Saying

Innovation And Emerging Trends

FinTech | HSBC CEO says bitcoin, cryptocurrencies are not for them. (REU)

FinTech | Robinhood to allow users to buy into IPOs ahead of debut. (REU)

FinTech | VCs are predicting new areas of consumer fintech disruption. (BI)

Environment | Unpacking the problems with reinforced concrete. (Convo)

Markets | First warning sign in global commodity boom flashes in China. (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.