Categories
Commentary

Daily Brief For May 5, 2021

Market Commentary

Index futures attempt to exit balance.

  • Yellen walks back rate comment.
  • Ahead is employment, ISM data.
  • Divergence grew, low conviction.

What Happened: U.S. stock index futures auctioned higher overnight as Treasury Secretary Janet Yellen clarified her comments on interest rates. 

The Secretary’s note that rates may “have to rise somewhat” to protect the economy from overheating weighed on the market. Most hurt was the Nasdaq 100; higher rates may reduce the present value of future earnings, making innovation-driven growth stocks less attractive.

Graphic updated 8:00 AM EST.

What To Expect: Wednesday’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 limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by initiative trade below the $4,167.25 low, which is significant because it was a level that participants, for numerous sessions, supported.

Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). The Dow is the strongest of the four. The Nasdaq is the weakest.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above $4,178.00 high-volume area (HVNode) targets the $4,189.00 POC. Initiative trade beyond the POC could reach as high as the $4,200.00 HVNode and $4,210.75 minimal excess high. 

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.

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 the $4,178.00 HVNode puts in play the prior day’s POC near $4,141.00 and the $4,110.50 minimal excess low. Trade below $4,110.50 puts in play the $4,093.00 POC, $4,082.75 HVNode, and $4,067.00 POC.

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.
Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures. Noting the $4,178.00 pivot.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for May 4, 2021. Notable activity in the options market was primarily concentrated on the call-side, in short-dated tenors, in strikes at and around $414.00, which corresponds with $4,140.00, or so, in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: SHIFT search suggests participants are still not as inclined to add call-side exposure, through the month of May, in the SPDR S&P 500 ETF Trust (NYSE: SPY).

News And Analysis

Economy | Biden’s Fed choices add uncertainty for inflation-wary investors. (BBG)

Economy | Post-COVID U.S. births drop to the lowest level since the 1970s. (BBG)

Commodities | IEA: Governments should consider stockpiling battery metals. (BBG)

Markets | Facing chips shortage, Biden may shelve blunt tool used in COVID. (REU)

Economy | Private payrolls show big gain in April but still short of expectations. (CNBC)

Markets | Commodities jump to highest since 2011 on COVID-19 rebound. (BBG)

Economy | Weekly mortgage demand stalls as rates rise, competition hurts. (CNBC)

What People Are Saying

Innovation And Emerging Trends

FinTech | CME exchange plans to permanently close physical trading pits. (REU)

FinTech | Robinhood CEO holds up crypto exchanges as model for settlement. (TB)

Venture | Proposed changes to capital gains could affect VCs differently. (CB)

Crypto | S&P Dow Jones launches series of cryptocurrency benchmarks. (MM)

FinTech | Berkshire Hathaway’s stock price too much for Nasdaq computers. (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, Canadian businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others, afforded him the perspective and know-how very few come by.

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

Disclaimer

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

Categories
Commentary

Market Commentary For 3/8/2021

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

What Happened: After the Senate’s passage of a $1.9 trillion COVID-19 relief package, overnight, bond yields rose and U.S. stock index futures fell.

What Does It Mean: U.S. stock index futures ended last week mixed after non-farm payrolls grew by 379,000, versus a consensus of ~180,000, improvement in sales and manufacturing data, as well as news that COVID-19 coronavirus vaccinations were accelerating.

Further, on Friday, after an attempt by market participants to resolve lower, via a break of consolidation, stock indexes made a vicious rebound as near-term downside discovery reached its limit, based on market liquidity metrics and the inventory positioning of participants.

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

During Friday’s trade, the best case outcome occurred, evidenced by a failure to breach the $3,720.50 minimal excess low and upside range expansion.

More On 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.

For today, participants can trade from the following frameworks.

In the best case, the S&P 500 either (1) remains rotational — trading responsively between the $3,861.25 low-volume area (LVNode) and $3,762.25 high-volume area (HVNode) — or (2) auctions higher, past the $3,861.25 LVNode, putting in play the $3,892.75 HVNode.

In the worst case, the S&P 500 auctions lower, through the $3,784.25 LVNode, which may portend a test of the $3,762.25 HVNode. Thereafter, if lower than $3,762.25, participants can target a repair of the $3,720.50 minimal excess low.

More On 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.

Levels Of Interest: $3,861.25 LVNode.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Missed Approach’

Key Takeaways:

  • High doses of stimulus yet to be fully felt.
  • Hedge funds add to long, short exposure.
  • Economies eye growth, uneven recovery.
  • Powell kept stressing inflation downsides.
  • Traders price in a quarter-point rate hike.
  • 10-yr yield, S&P 500 dividend yield cross.
  • Bond, equity market volatility separations.
  • JPMorgan does not see a market bubble.

What Happened: U.S. stock index futures auctioned lower.

This came alongside (1) a material divergence in bond and equity market volatility, as well as (2) a convergence in the 10-year Treasury rate and S&P 500 dividend yield.

What Does It Mean: Equity traders began pricing in the risk of a rapid move up in rates, due to concerns over bond values, as a result of rising debt levels and inflation.

Additionally, the yield on a 10-year Treasury, a risk-free asset, which was — per Axios — “artificially depressed by the flight-to-quality trade during the coronavirus pandemic, as well as by large-scale purchases by the Federal Reserve,” converged with S&P 500’s dividend yield.

Typically, the S&P 500’s dividend yield is less than the risk-free rate because investors expect to earn less in dividends than they would holding the same amount in bonds, absent rising stock prices.

Values are derived using the discounted cash flow calculation; as interest and discount rates go up, the present value of future earnings goes down, which will drag stock prices, especially in growth categories, as seen.

Still, despite the pricing in of rising debt levels and inflation, a divergence in bond and equity market volatility persists. In such a case, market participants ought to widen their outlook; there is some potential for risk asset capitulation in the present down cycle.

Graphic 1: Divergence in volatility across the bond and equity market. 

Moving on, it’s important to take note of the market’s unpinning, after February’s monthly options expiration (i.e., OPEX), as well as the long-term trend.

More On 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.

Aside from OPEX, last week’s volatility did not disrupt the S&P 500’s long-term uptrend (Graphic 2), and a skewness toward put options — evidenced by Graphic 3 and market gamma — suggests the potential for a near-term turn-around.

Graphic 2: Long-term uptrend in the cash-settled S&P 500 Index (INDEX: SPX) is intact.
Graphic 3: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending February 26, 2021. Noting activity in short- and long-dated tenors, near the $380, a strike that corresponds with $3,800.00 in the cash-settled S&P 500 Index (INDEX: SPX).

What To Expect: Directional resolve, given the S&P 500’s rotation near a prominent high-volume area, or HVNode (Graphic 4), and an overnight rally-high at $3,959.25.

More On Overnight Rally Highs: Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process.

More On 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 4: 4-hour chart of the Micro E-mini S&P 500 Futures.

What To Do: In coming sessions, participants will want to pay attention to the VWAP anchored from the $3,959.25 peak and $3,657.00 low, as well as the $3,840.00 HVNode.

Volume-Weighted Average Prices (VWAPs): Metrics 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.

In the best case, the S&P 500 opens and remains above the $3,840.00 volume area.

Additionally, auctioning above the $3,875.75 VWAP would suggest buyers, on average, are in control and winning, since the February 15 rally high.

Auctioning beneath $3,785.00 would (1) leave the $3,840.00 HVNode as an area of supply — offering initiative sellers favorable entry and responsive buyers favorable exit — and (2) portend repair of poor structures (e.g, the $3,785.00-$3,777.00 gap) left in the wake of a prior advance.

In such a case, participants should look to the next area of high-volume (i.e., $3,794.75 and $3,727.75) for favorable entry and exit.

Graphic 5: Profile overlays on a 65-minute candlestick chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s trade is $3,840.00.

Any activity at this level suggests market participants are looking for more information to base their next move. Anything above (below) this level increases the potential for higher (lower).

Levels Of Interest: $3,840.00 HVNode.

Photo by Sohel Patel from Pexels.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Should I Stay Or Should I Go’

Notice: Physik Invest’s daily market commentaries will be suspended for the next five regular trading sessions or February 22-26.

Please accept our apologies for the inconvenience and thank you for the support!

Key Takeaways:

  • Debt, inflation threatening low-rate regime.
  • Markets most complacent in two decades.
  • Sentiment turns hot from hotter amid slide.
  • Global equity fund net inflows decelerated.
  • Markets fret about economic performance.
  • Retail sales and industrial production gain.

What Happened: U.S. stock index futures auctioned lower last week.

What Does It Mean: Market participants witnessed a rapid de-risking event, as a result of individual stock volatility, and a subsequent v-pattern recovery, that was later taken back as Friday’s large February monthly options expiration (OPEX) neared.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.

At the same time, bond and equity market volatility diverged, materially. 

In other words, a rapid move up in rates — as investors become increasingly concerned over the value of their bonds due to rising debt levels and inflation — has yet to be priced in as an equity market risk.

Graphic 1: The Market Ear unpacks divergence in volatility across different markets.

Adding, the risk of inflation comes alongside a potential for slowing in economic growth, which may have knock-on effects, such as savers protecting their capital by investing in non-productive assets, thus helping form speculative asset bubbles.

Risk Of Monetary Support: The increased moneyness of financial markets; investors look to exchange-traded products (e.g., S&P 500) as savings vehicles, thereby forcing participants, like the Federal Reserve, to backstop market liquidity, and promote market and economic stability in times of turmoil.
A great paper on the impact of central bank intervention, passive index investing, and asymmetric liquidity provisioning.

Still, as Bloomberg suggests, reasons to not panic include an overreaction by market participants, premature Fed tightening, and a risk asset rout (i.e., rising rates may eventually increase demand for safety assets).

“Typically it’s a good environment for risk assets. Neither the pace nor the extent of the move so far has been unusual relative to other historical moves coming out of a recession,” said Pimco’s Erin Browne. “It would take a significant move in real yields in order to disrupt risk markets broadly.”

Graphic 2: Benchmark 10-year real rate in solidly negative territory.

Moving on, given OPEX, participants have a clue as to why the market failed to resolve directionally over the past week: 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.

Aside from OPEX, we must talk more about the v-pattern recovery and a prior week’s spike exit from balance, as well as low broad market volatility.

In light of the v-pattern, balance, and spike, the S&P 500’s long-term uptrend remains intact. In support of this uptrend, systematic and hedge fund participants are increasing their long-exposure, given the economic recovery, and a drop in volatility.

Beyond that, speculative activity in the options market and measures of market liquidity fail in offering much information.

Graphic 3: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending February 19, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, near the $390, a strike that corresponds with $3,900.00 in the cash-settled S&P 500 Index (INDEX: SPX).

What To Expect: U.S. stock indexes are positioned for directional resolve.

This comes alongside the acceptance of higher prices (inside a prominent high-volume area, or HVNode) and an overnight rally-high at $3,959.25.

More On Overnight Rally Highs: Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process.

More On 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.

What To Do: In the coming sessions, participants will want to pay attention to the VWAP anchored from the $3,959.25 peak and $3,909.25 HVNode.

Volume-Weighted Average Prices (VWAPs): Metrics 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.

In the best case, the S&P 500 opens and remains above the $3,909.25 volume area.

Additionally, auctioning above the $3,915.00 VWAP would suggest buyers, on average, are in control and winning, since the February 15 rally high.

Auctioning beneath $3,909.25 turns the HVNode, nearby, into an area of supply, offering initiative sellers favorable entry and responsive buyers favorable exit. 

The situation would drastically deteriorate with trade beneath the $3,880.00 HVNode, the last reference before participants find acceptance in an area of low-volume.

In such scenario, future discovery ought to be volatile and quick as participants repair some of the poor structures left in the wake of a prior advance, and look to the next area of high-volume (i.e., $3,830.75) for favorable entry and exit.

Graphic 4: Profile overlays on a 65-minute and 4-hour chart of the Micro E-mini S&P 500 Futures. See all decision levels of /ES and /NQ here, also.

Conclusions: The go/no-go level for next week’s trade is $3,909.25. 

Any activity at this level suggests market participants are looking for more information to base their next move. Anything above (below) this level increases the potential for higher (lower).

Levels Of Interest: $3,909.25 HVNode.

Photo by Charles Parker from Pexels.