Categories
Commentary

Daily Brief For April 4, 2022

The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

Editor’s Note: Hey team, thanks again for your reading of this daily newsletter. Due to travel commitments, I will not be writing reports consistently for the rest of this month.

Don’t expect any updates until Monday, April 11, 2022. Thereafter, coverage may be sporadic for the rest of the month.

What Happened

Overnight, equity index futures were higher after exploring lower, briefly. Commodities were mixed while bonds were lower and implied volatility measures were bid.

In terms of news, the European Union said it was interested in penalizing Russia, further, for its actions in Ukraine. This is as China battles new COVID-19 sub-strains. 

Ahead is data on factory and core capital equipment orders (10:00 AM ET). 

Graphic updated 5:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: In the face of geopolitical tension, supply pressures, and inflation, consumer sentiment is at or below pandemic levels, prompting the Federal Reserve (Fed) to destimulate.

Graphic: Via S&P Global Inc (NYSE: SPGI) research. “Confluence Of Risks Halts Positive Credit Momentum.

“It has entered 2008-09 territory and is not far from all-time lows in the ‘80s when inflation and interest rates hit double digits,” ARK Invest’s Catherine Wood explained in a Twitter discussion on yield-curve inversions and aggressive action by the Federal Reserve, as well as inflation.

“The economy succumbed to recession in each of those periods. Europe and China are also in difficult straits. The Fed seems to be playing with fire.”

In accordance, the Macro Compass’ Alfonso Peccatiello explains that his credit impulse metrics, which lead economic activity and risk asset performance, imply a slowdown in earnings.

Graphic: Via The Macro Compass.

Still, in spite of these metrics, on average, recessions happen 12 to 24 months after the first yield curve inversions, according to Jefferies Financial Group Inc (NYSE: JEF).

Post-inversion S&P 500 performance, actually, is often positive.

Graphic: Via Jefferies Financial Group. Taken from The Market Ear.

Bolstering the call for positive equity market performance are strong seasonality trends during Fed-rate-hike episodes, a contraction in equity risk premia, and “still accommodative” monetary policy, per explanations by rates strategist Rishi Mishra. 

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “Equities are a real asset as they make a claim on nominal GDP. In the post-financial crisis era, weak economic activity and lower inflation pushed down nominal GDP, raising the equity risk premium and reducing the bond term premium. So as long as economies grow, revenues and dividends should also grow. The dividend yield can be thought of as a real yield. Equity risk premia have started to decline in the post COVID cycle but remain higher than in the pre-financial crisis era.”

“[T]he 3ms2s vs 2s10s spread (or the 3m2s10s fly) is the widest it has been since the end of 1994. The widening of this fly is indicative of the fact that while the Fed shifted its guidance from dovish to extremely hawkish, the policy is still accommodative.”

Graphic: Via Bloomberg. Taken from Rishi Mishra.

Positioning: The equity market’s ferocious end-of-March rally, which placed the S&P 500 back above a key go/no-go level – the 200-period simple moving average – may have been in part the result of institutional investors purchasing equities ahead of quarterly reporting.

“Remember that stocks settle T+2, meaning that shares are actually owned by buyers two business days after they are purchased in the market,” says Interactive Brokers’ Group Inc (NASDAQ: IBKR) Steve Sosnick. 

“That means that institutions who wanted to show stock positions on their quarterly reports would have needed to purchase those shares no later than Tuesday the 29th. The sharp end-of-day runups that we saw on Monday and Tuesday had the hallmarks of aggressive institutional buying.”

According to Deutsche Bank AG (NYSE: DB) analyses, “[a]ggregate equity positioning has now risen off the lows but only to the 22nd percentile and is still well below neutral.”

That said, quarter-end rebalances and options expirations (OPEX) likely do little to upset the balance of trade. Based on a lot of the insights shared in this letter, barring some exogenous event, the market is in a position to drift or balance.

This, as a result, may solicit a “stronger impulse to chase the rally,” at which point JPMorgan Chase & Co (NYSE: JPM) strategists say they would “generally be more concerned.”

A collapse (or convergence) in volatility metrics for different asset classes (like the Merrill Lynch Options Volatility Estimate [INDEX: MOVE] and Cboe Volatility Index [INDEX: VIX]) would bolster the “drift or balance” thesis.

Graphic: Via Physik Invest.

Technical: As of 5:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher; activity above the $4,527.00 untested point of control (VPOC) puts in play the $4,562.50 spike base. Initiative trade beyond the spike base could reach as high as the $4,583.00 VPOC and $4,611.75 low volume area (LVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,527.00 VPOC puts in play the $4,501.25 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,469.00 VPOC and $4,438.25 HVNode, or lower.

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

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

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.

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

What People Are Saying

Definitions

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

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

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

About

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

Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For March 28, 2022

The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Overnight, equity index futures diverged during participants’ attempt to discover higher prices.

Commodities were mixed while bonds extended their slump; central bank authorities, in an effort to rein in inflation amid rising prices, are focused on implementing tighter monetary policies.

For a moment, the (5-30) Treasury curve dropped below zero for the first time since 2006. This is after the Federal Reserve’s (Fed) Jerome Powell said last week the central bank was committed to upping borrowing costs and would hike by 50 basis points if needed.

Graphic updated 6:40 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: Keeping it short, today. 

Last week, we discussed monetary policy and the impact of quantitative tightening (QT) in the face of revisions in global growth expectations. You can check that out, here.

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “GS has significantly lowered our 2022 global growth forecast in recent weeks. The chart shows global 2022 real GDP growth, % change.”

On the belief that the “Fed hiking cycle and balance sheet drain are now priced” as the market enters a seasonally favorable period, strategists like JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic favor risk in high-beta.

“While the commodity supercycle will persist,” Kolanovic said, “the correction in bubble sectors is now likely finished, and geopolitical risk will likely start abating in a few weeks’ time (while a comprehensive resolution may take a few months).”

Graphic: Via Callum Thomas. “April is historically the best month (highest average monthly gain and 74% of all Aprils in history were positive).”

Complicating Kolanovic’s outlook is uncertainty with respect to the Fed’s decision to hike and pare asset holdings as financial conditions tighten.

Graphic: Via Stenos Signals. “On top of already tight financial conditions, the spill-overs from a weakening credit cycle remain mostly unseen. If usual correlations hold, then a contracting credit cycle will lead long bond yields LOWER and not higher during H2-2022.”

In the coming weeks, the thesis that a de-rate (or pricing in of uncertainties) has played out will be put to the test as the Fed reveals its template for QT. Final plans are likely to be unveiled in an announcement at the beginning of May.

Damped Spring Advisors’ Andy Constan explains well his perspectives on what comes next in the below video. Check it out.

Positioning: The CBOE Volatility Index (INDEX: VIX), a measure of participants’ demand for protection, so to speak, appears to have hit a lower bound around 20.00. This is as the VIX term structure steepened, dramatically, over the last weeks, particularly at the front end of the curve.

Graphic: Via Vix Central.

After a long period during which options market participants concentrated their activity on bets on lower prices (negative delta trades that payout in case of movement lower), markets jolted higher as that protection was monetized (and decay ensued).

Alongside this collapse in implied volatility was speculative demand in index heavy-weights like Tesla Inc (NASDAQ: TSLA). Participants bought stock while selling puts (bets on the downside) and buying calls (bets on the upside).

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator for TSLA as shown in our March 23, 2022 newsletter. The rising orange line denotes call buying. The rising blue line denotes put selling.

As this speculative demand cools, counterparties to these levered bets on the upside unwind their hedges and this has the effect of pressuring attempts higher.

According to SpotGamma, this is as, heading into this week’s expiration of quarterly options, there’s a “potential for more ‘pinning’ action as close-to-the-money bets concentrated in that expiry near the end of their lifecycle.” You can learn more about this, here.

Why? As time and volatility trend toward zero, the rate of change of options delta (gamma) of near-the-money options increases.

“This happens because the range of spot prices across which option deltas shift from near-zero to near-100% becomes very narrow as options approach maturity (and at maturity, options on one side of the settlement value have zero delta and the other side have 100% delta).”

With, at least at the index level, bets on lower volatility dominating (put and call selling), as the gamma of these near-the-money options increases, counterparties add liquidity, buying (selling) into weakness (strength) as positive delta exposure falls (rises).

Graphic: Analysis of book depth for the E-mini S&P 500 futures contract, via CME Group Inc’s (NASDAQ: CME) Liquidity Tool. For more on the implications of participants’ options positioning and dealer hedging, read here.

Moreover, the odds point to sideways trade, rather than a fast move higher or lower. 

However, after this expiry, it’s likely that the market succumbs to underlying forces. At present, despite the S&P 500 and its peers trading higher, underlying breadth is collapsing.

Graphic: Via Jefferies Financial Group Inc (NYSE: JEF). Taken from The Market Ear. “While the SPX is up over 8% since the lows, the equal-weight version of the index is down nearly 3% relative, its steepest relative decline so far this year. Typically, this would make us uneasy too, but the market narrowed considerably from June to Dec last year, so this might be attributable to a tech bounce from lows.”

Technical: As of 6:40 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 balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher; activity above the $4,535.25 low volume area (LVNode) puts in play the $4,548.75 LVNode. Initiative trade beyond the $4,548.75 LVNode could reach as high as the $4,565.00 untested point of control (VPOC) and $4,585.00 regular trade high (RTH High), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,535.25 LVNode puts in play the $4,515.25 LVNode. Initiative trade beyond the $4,515.25 LVNode could reach as low as the $4,489.75 LVNode and $4,469.00 VPOC, or lower.

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

What People Are Saying

Definitions

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

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

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

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). 

About

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

Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For March 1, 2022

Editor’s Note: The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Overnight, equity indices auctioned lower, further into the thick of Monday’s wide trading range. 

The implied volatility (VIX) term structure is downward sloping as front-month contracts price higher than those in the back as a result of participants’ heightened fear in the short-term.

The take by some on current events and their impact on markets is mixed. 

Some suggest the ‘worst might be behind us’ while others suggest markets may tend toward instability until participants’ fears are assuaged at the next Federal Reserve meeting, and the decline in so-called negative gamma exposures post-options expiry later this month.

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

Graphic updated 6:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: Pursuant to remarks this commentary disclosed yesterday from Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar, other strategists, like JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic believe geopolitical conflicts (and harsh responses) are likely to dim the prospects for aggressive Federal Reserve monetary tightening initiatives. 

“The worst might be behind us for risk assets,” Kolanovic said. The strategist sees heightened short-term opportunity in growth stocks such as tech and medium-term value in value stocks and commodity-linked assets.

“Indirect risks are more substantial, given effects of higher commodity prices on inflation, growth, and consumers; however, one silver lining is that the crisis forced a dovish reassessment of the Fed by the market.” 

Graphic: Per Bloomberg, after the escalation of conflict abroad, the market priced in diminished odds of a 50-basis-point rate hike in March.

This is in opposition to valuation worries by Morgan Stanley’s (NYSE: MS) Mike Wilson.

“The median stock forward P/E for the S&P is still 19x (94th percentile of historical levels back 40 years). We think this lends support to the idea that multiples across the index have room to compress due to our Ice thesis even after discounting the geopolitical developments of the last couple of weeks as well as a hawkish Fed.” 

To note, historically speaking, though “big stock gains tend to happen late in a mid-term year, … be aware that March tends to see strength,” LPL Financial’s Ryan Detrick says.

Graphic: Via LPL Financial.

Positioning: As stated, yesterday, there is strong passive buying support (via buybacks and retail inflows), and this is in the face of a negative-gamma, lower liquidity, high-volatility regime.

Graphic: Via Goldman Sachs. Taken from The Market Ear. “US equities on the GS Prime book saw the largest $ net buying in the past month (1-Year Z score +2.0), driven by long buys and to a lesser extent short covers (2.4 to 1), … [and] single Names saw the largest net buying in a month (1-Year Z score +2.0), driven entirely by long buys as short flows were relatively flat.”

Participants have pulled forward their bets and are trading in some of the most short-dated contracts, and this is evidenced still via a downward sloping VIX term structure.

Graphic: VIX term structure. Shifts higher portend negative delta hedging flows with respect to increases in volatility (vanna). Shifts lower portend positive vanna flows.

Jefferies Financial Group (NYSE: JEF) ran an analysis and found that VIX inversions often precede positive resolve.

“[W]e ran SPX performance from VIX inversions going back to 2004. While the performance seems a bit middling, outside of the GFC, it balloons, with 6M SPX performance over 6% and 12M over 12%. In addition, the inversion we saw on Wednesday was over 3 handles, which has led to even better performance. Outside of the GFC, 12M SPX performance has averaged over 17% and been positive in every single instance.”

Graphic: Via Jefferies. Taken from The Market Ear.

Further, prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The evolution of monetary policy may make valuations much less justifiable. 

Therefore, participants are looking to events such as the March Federal Open Market Committee (FOMC) meeting mid-March (March 15-16) for clarity on policy. 

After this event provides clarity and potentially assuages participants of their fears, there is a large options expiration the same week. 

Participants having less fear likely coincides with the lesser need to hedge, while the large options expiration is to “reset” options counterparty gamma exposures.

At present, the demand for downside (put) protection leaves counterparties short puts (i.e., a positive-delta, negative-gamma trade in which losses are amplified on increases in volatility or trade lower). 

Options expirations work to clear this exposure and therefore are to reduce the amount of negative gamma. In having less negative gamma to hedge, there will be counterparty-based support (i.e., a buy-back of the short stock and futures hedges to the short put exposures).

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

In the best case, the S&P 500 trades higher; activity above the $4,346.75 high volume area (HVNode) puts in play the $4,398.50 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,415.00 untested point of control (VPOC) and $4,438.75 key response area, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,346.75 HVNode puts in play the $4,309.00 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,285.50 HVNode and $4,249.25 low volume area (LVNode), or lower.

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

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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

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

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

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.

Vanna: The rate at which the delta of an option changes with respect to 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.

About

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

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

Disclaimer

Physik Invest does not carry the right to provide advice.

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For February 14, 2022

Editor’s Note: The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Overnight, equity index futures auctioned sideways to lower, extending the sell-off that began with the release of Consumer Price Index (CPI) data.

The Federal Reserve will convene, today, at 11:30 AM ET for an unscheduled meeting of the Board of Governors to discuss “the advance and discount rates to be charged by the Federal Reserve banks.”

Scheduled is an interview with St. Louis Fed President James Bullard (8:30 AM ET).

Graphic updated 6:50 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: Markets are catching up to divergences in breadth, trading down in the face of narratives around the Federal Reserve’s (Fed) response to heightened inflation, a challenging economic growth outlook, and geopolitical tensions.

Graphic: NYSE A-D Line versus the Dow Jones Industrial Average. Taken from Tom McClellan.

Pursuant to these narratives, Goldman Sachs Group Inc (NYSE: GS) lowered its targets for the S&P 500 from $5,100.00 to $4,900.00. 

“The macro backdrop this year is considerably more challenging than in 2021. However, we continue to expect that equity prices will rise alongside earnings and reach a new all-time high in 2022,” strategists said on earnings growth in light of the impact of higher rates on valuations.

“During the last 50 years, a ‘goldilocks’ environment of accelerating GDP  growth and stable real yields has typically been associated with a 12-month S&P 500 return of +16%. However, when growth is decelerating and real yields are rising, 12-month S&P 500 returns have averaged +8%.”

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear

At the same time, participants are withdrawing their cash and assets held in money market funds in size.

Graphic: Via Bank of America Corporation (NYSE: BAC).

Based on flows into equities, participants appear to be opportunistically buying the dip.

Graphic: Via EPFR. Retrieved from The Market Ear.

Looking back, when the yield curve – e.g., spread between 10- and 2-year – is between 75 and 25 basis points, stocks actually perform well. 

According to The Market Ear, “[S]imilar periods of time have typically coincided with the middle of prior cycles when economic expansion was broad-based. Worth highlighting the mid-90s, mid-00s, and late-10s.”

“Both short and long-term SPX performance following similar instances were well above typical return profiles. Average 6M performance is over 9% and average 12M performance is over 17%. Almost more notably, SPX performance was positive 90%+ of the time.”

Graphic: Via Jefferies Financial Group Inc (NYSE: JEF). Retrieved from The Market Ear.

To end this section, we point to the so-called unscheduled Fed meeting, today, and the potential for surprise rate increases, despite some policymakers, like Kansas City Fed President Esther George, attempting to cool expectations.

The historical reaction, months out, is not what participants expect would happen by default.

Graphic: Via SentimenTrader.

Positioning: As stated, Friday, Thursday’s post-CPI trade disrupted the balance of trade.

Lower prices and demand for protection, in the face of lower levels of “on-screen liquidity,” solicited dealer selling to hedge increased exposure to the positive delta from demanded short-dated, highly convex options.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator; “customers bought put options (a negative delta trade) leaving dealers short (a positive delta trade).” 

Lower prices and higher volatility compound macro flows, exacerbating weakness.

To note, much of the demand for protection is concentrated in shorter-dated options that are more sensitive to changes in implied volatility and direction. The demand is well visualized by the VIX term structure which shifted markedly at the front-end, Friday.

Graphic: VIX term structure shifts higher (dramatically at the front-end).

Going forward, there is a large monthly options expiration (OPEX) this week. OPEX is a sort-of reset; options roll-off, as do the counterparties’ hedges.

According to data compiled and analyzed by Pat Hennessy a while back, “OPEX week returns peaked in 2016 and have trended lower since.”

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

Post-OPEX, though, according to SpotGamma, “In an environment characterized by negative gamma (wherein an options delta falls with stock price rises and rises when stock prices fall), options expiries ought to make gamma less negative.”

“Therefore, a reset that may make gamma exposures less negative, there will be a removal of [counterparties’] linear short (-delta) hedges which may further bolster attempts higher.”

So, the dip lower and demand for protection could serve to prime the market for upside (when volatility starts to compress again and counterparties unwind hedges to put-heavy exposures). 

Commitment to higher prices would likely coincide with increased interest in options at higher strike prices. We have yet to see this occur.

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

Balance-Break + Gap Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) occurred.

Acceptance (i.e., more than 1-hour of trade) outside of the balance area has been established.

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 (i.e., nothing has changed since Friday).

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

In the best case, the S&P 500 trades higher; activity above the $4,365.00 point of control (POC) puts in play the $4,393.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,438.00 key response area and $4,499.00 POC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,365.00 POC puts in play the $4,332.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,266.25 Weak Low and $4,212.50 regular trade low (RTH Low), or lower.

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

What People Are Saying

Definitions

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

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

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

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.

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

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.

Options Expiration (OPEX): Traditionally, 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) and the reduction dealer gamma exposure.

Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

About

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

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

Disclaimer

Physik Invest does not carry the right to provide advice.

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For January 24, 2022

The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Overnight, equity index futures auctioned sideways to lower while measures of implied volatility expanded, which suggests increased fear and demand for protection.

This is in the context of an environment wherein the equity market, in particular, is positioned for heightened volatility, albeit potential strength, after Friday’s large monthly options expiration.

Ahead is data on Markit Manufacturing and Services PMI (9:45 AM ET).

Graphic updated 6:15 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: “The ratio of stocks hitting 52-week lows is at the highest since March 2020,” according to The Market Ear

In fact, in the face of a traditionally bullish period, seasonally, this is the worst January on record for the Nasdaq.

Graphic: Per Bloomberg, “Down almost 12% in January, the Nasdaq 100 is on course for its worst month since the 2008 global financial crisis. On any four-day basis, the current streak of 1% drops was the first since 2018.”

This weakness is in the context of months of divergent breadth by lesser weighted index constituents, geopolitical tensions, the prospects of reduced stimulus to combat high inflation, poor responses to earnings results, and disappointments in real demand and growth.

Graphic: @MacroAlf plots credit impulse as a percent of GDP and SPX year-over-year earnings.

The tone amongst retail participants is changing, too, with outflows starting for the first time since a major rush in account openings. When asked whether the selling is over, JPMorgan Chase & Co’s (NYSE: JPM) prime brokerage data suggests no.

This is in opposition to the typical trend into the start of the Federal Reserve (Fed) hiking cycles.

“U.S. equities have stumbled significantly on their way toward the first hike of this cycle, which is not the norm,” Jefferies Financial Group (NYSE: JEF) explained. “Performance tends to be poor immediately after the first hike, and can be worse if stocks are weakly into the first hike.”

Notwithstanding, Jefferies adds, “the SPX was higher in the 12 months that followed the start of each of the last 7 hike cycles.”

Graphic: S&P 500 performance before and after rate hikes.

With some of that context in mind, what is there to look forward to? The corporate buyback blackout window ended after the close of business, Friday, and equity inflows remain robust.

What is there to be wary of? 

Well, given that “risk is being repriced to fit the world where real rates are a lot higher, and the Fed put [is] much lower thanks to the Fed’s need to fight inflation,” this week’s Federal Open Market Committee (FOMC) meeting shall provide market participants more context as to the “timing and pace of QT” which may assuage fears unless the Fed is all out to “drop QE next week itself.”

The odds of that happening are low.

Graphic: Per Bloomberg, “As Savita Subramanian of Bank of America Corporation (NYSE: BAC) shows in the following chart, expected earnings are far less helpful in explaining market outcomes since 2010 than they were before. Meanwhile, changes in the Fed’s balance sheet, the amount of money it’s making available to markets, have become hugely important.”

As Bloomberg’s John Authers puts it well: “Despite many scares, money has stayed plentiful for the last decade, rates have fallen, and anyone who did much to protect themselves against the risk of a decline would have done badly by it.”

Graphic: As Goldman Sachs Group Inc (NYSE: GS) “shows in this chart, companies are becoming ever more profitable in a way that seems to be sustained.”

Positioning: The major broad market indices – the S&P 500, Nasdaq 100, and Russell 2000 – are in an environment characterized by negative gamma and heightened volumes. 

Graphic: Per Tom McClellan, “Persistently high volume late in QQQ is a sign of overly bearish sentiment worthy of a bottom. Key caveat: just because one notices a sentiment indication which should matter does not mean it has to matter right away.”

The negative gamma – in reference to the options counterparties reaction “when a position’s delta falls (rises) with stock or index price rises (falls)” – is what compounds the selling. 

With measures of implied volatility expanding, as is the case when there is heightened demand for downside put protection (a positive-delta trade for the dealers), protection is bid and the dealer’s exposure to positive delta rises, which solicits more selling in the underlying (addition of short-delta hedges).

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on the underlying’s order book. For instance, in selling a put, customers add liquidity and stabilize the market. How? The market maker long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

Moreover, in negative-gamma, dealers are selling weakness and buying strength, taking liquidity. 

That’s destabilizing but it appears that “Friday in the markets did not have abnormal liquidity across S&P500 stocks.”

Graphic: Per @HalfersPower on Twitter, liquidity rankings for S&P 500 components. 

High readings in indicators like the put/call volume ratio, which denotes heightened trade of puts, relative to calls, as well as how calm equity market volatility is relative to rate volatility, could be the result of adequate hedging into the monthly options expiration (OPEX) and this week’s FOMC meeting.

“A very nasty flush out on a key polarized psychological level (S&P 500 $4,500.00) on the highest negative gamma day on an OPEX,” said Kris Sidial of The Ambrus Group on the increased potential for relief as a result of aggressive dip-buying. 

“Aggressive shorts piling in on an already dismantled tech selloff, leading into FOMC meeting after an 8% decline in the market, and Apple Inc (NASDAQ: AAPL) reporting earnings.”

Sidial’s opinion that the market is due for a counter-trend rally, in the face of an environment in which “there does not seem to be a direct hazard,” is aligned with the expectation that removal of put-heavy exposure, post-OPEX, and a reduction in embedded event premiums tied to the approaching FOMC, opens up a window of strength, wherein dealers have less positive delta exposure to sell against.

Technical: As of 6:15 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the lower part of a balanced skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades higher; activity above the $4,381.50 regular trade low (RTH Low) puts in play the $4,449.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,486.75 RTH High and $4,526.25 high volume area (HVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,381.50 RTH Low puts in play the $4,349.00 VPOC. Initiative trade beyond the $4,349.00 VPOC could reach as low as the $4,299.00 and $4,233.00 VPOC, or lower.

Considerations: The daily, weekly, and monthly charts are in alignment. 

The loss of trend across higher timeframes suggests a clear change in tone. This does not discount the potential for fast, but short-lived counter-trend rallies.

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

Definitions

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

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

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Traditionally, 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) and the reduction dealer gamma exposure.

About

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

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

Disclaimer

Physik Invest does not carry the right to provide advice.

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For January 11, 2022

The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Overnight, equity index, commodity, and bond futures were sideways to higher. This is ahead of important Fed-speak; Federal Reserve Chair Jerome Powell speaks at 10:00 AM ET.

Graphic updated 6:40 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: JPMorgan Chase & Co (NYSE: JPM) strategists led by Marko Kolanovic noted, yesterday, that the selloff is overdone, arguing higher rates would not derail the bull market. 

Graphic: Interest rates relative to Russell 1000 Value/Growth. Via The Market Ear, “Higher bond yields and growth-to-value rotation within equities.”

“The pullback in risk assets in reaction to the Fed minutes is arguably overdone,” Kolanovic said. “Policy tightening is likely to be gradual and at a pace, that risk assets should be able to handle, and is occurring in an environment of strong cyclical recovery.”

An analysis of equity market performance in the face of past rate spikes, suggests Kolanovic’s comments aren’t out of line. 

“We found that while SPX tends to see returns slow in the short term, the NDX and RTY actually tend to outperform on a 1M basis,” Jefferies Group says on S&P 500 (SPX), Nasdaq 100 (NDX), and Russell 2000 (RTY) performance post major rate spikes.

“Looking further out, the NDX (naturally) is the only of the three that flags. The SPX trends back toward its historical return profile and the RTY actually tends to beat the SPX in the intermediate to longer-term”.

Graphic: Taken The Market Ear. Original source Jefferies Group.

Beyond asset price support from a recovering economy, strong growth in business profits, rents, and other income, Moody’s Corporation (NYSE: MCO) believes another reason “financial markets are brushing off QT is that there will still be a lot of excess liquidity—a little less than $1 trillion— when the central bank’s balance sheet does begin to decline.”

This excess liquidity is to shrink, naturally, as the economy grows quicker than the M2 money supply; the Marshallian K – the difference between year-over-year growth in M2 money supply and GDP – which had turned negative late last year (and prompted concerns around liquidity and its impact on the equity market) is now positive.

Graphic: Marshallian K had turned negative late last year. According to Bloomberg, “While stocks kept rising during frequent negative Marshallian K readings in the 1990s, the pattern since the 2008 global financial crisis — a period when the central bank was in what Ramsey calls a “perpetual crisis mode” — begs for caution.”

Notwithstanding, according to Callum Thomas, “[t]he election cycle + decennial cycle (i.e. that ‘years ending in 2’ line) suggest some challenging months ahead… (as opposed to the usual unconditional seasonal pattern).”

Graphic: Taken from Callum Thomas. Source: @mrblonde_macro.

Positioning: Heading into Monday’s session, the broader market was set to experience increased two-way volatility.

That happened. The S&P 500 and Nasdaq 100 explored lower but ended higher yesterday.

What’s next? There’s been a noticeable shift in relative strength. The Nasdaq 100 has firmed, relative to its counterparts, and overnight activity built on yesterday’s end-of-day advance.

At the same time, the VIX term structure, a good gauge of fear, remained upward sloping and volatility (via the Cboe Volatility Index) compressed suggesting a reduction in the demand for protection. 

Graphic: Visualizing the compression in volatility.

All that means is that the opposite of what was expected heading into yesterday happened.

Recall, in demanding downside protection (buying a put), customers indirectly take liquidity as the counterparties hedge their short put exposure by selling underlying. 

Higher implied volatility marks up options delta (exposure to direction) and this leads to more selling, as hedging pressures exacerbate weakness.

Alongside yesterday’s end-of-day rally, lower implied volatility marked down options delta (exposure to direction). This lead to buying by the counterparty.

We can maintain the notion that despite markets tending toward instability so long as volatility is heightened and products (especially some constituents) remain in negative gamma, the dip lower and demand for protection may serve to prime the market for upside (when volatility starts to compress again and counterparties unwind hedges thus supporting any attempt higher).

“Failure to expand the range, lower, on the index level, at least, likely invokes supportive dealer hedging flows with respect to time (‘charm’) and volatility (‘vanna’),” SpotGamma.

Technical: As of 6:40 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades higher; activity above the $4,674.25 high volume area (HVNode) puts in play the $4,691.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as high as the $4,717.25 low volume area (LVNode) and $4,732.50 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,674.25 HVNode puts in play the $4,647.25 HVNode. Initiative trade beyond the latter could reach as low as the $4,629.25 HVNode and $4,593.00 untested point of control (VPOC), or lower.

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

What People Are Saying

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.

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.

About

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

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

Disclaimer

Physik Invest does not carry the right to provide advice.

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Market Commentary For The Week Ahead: ‘All In At The Top’

Key Takeaways:

  • Analysts extended 2021 S&P 500 targets.
  • Fear and greed are tugging at each other. 
  • Jefferies ups 2021 GDP forecast to 5.25%.
  • Net equity buying the largest in months.
  • Inflation is rising where you don’t want it.
  • Positioning suggests elevation of volatility.
  • The big picture breakouts remain intact.

What Happened: Coming into the extended holiday weekend, on tapering volumes, U.S. index futures balanced within prior range. 

This activity occurred in the context of a larger balance-area forming just beyond the $3,600.00 multi-month break-out point. Given the lack of range expansion, in addition to the aforementioned responsive, back-and-forth trade, participants are signaling a lack of conviction.

Though there is a lot of noise in the markets — an uneven recovery, stimulus, elections, trade, and the like — one key point remains: the multi-month upside breakout targeting S&P 500 prices as high as $4,000.00 remains intact. Add to this the recovery of Monday’s liquidation fueled by weak-handed, short-term buyers, and the fact that the all-time $3,724.25 rally-high was established in an overnight session, it is highly likely that the upside discovery process has yet to end.

Note: Historically, there is a low probability that overnight all-time highs end the upside discovery process. 

Pictured: Profile overlays on a 30-minute candlestick chart of the Micro E-mini S&P 500 Futures

What To Expect: Friday’s session found responsive selling surface near the $3,691.00 profile level. Given that participants had difficulty in sustaining higher prices, alongside shortened holiday trade, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 remains above its $3,667.75 HVNode, and continues to balance. As stated earlier, given the tapering volume and holiday, the odds of directional resolve are quite low. 

Two go, no-go levels exist; trade that finds increased involvement above $3,691.00 and below $3,667.75 would suggest a change in conviction. Anything in-between favors responsive trade.

Conclusion: Bank of America Corp’s (NYSE: BAC) Michael Hartnett summarized it best: “[T]he year of the virus, the lockdown, a crash, a recession, an epic policy panic, the greatest stock market rally of all-time, a V-shape economic recovery, and ending with a vaccine for COVID-19.”

Though risks remain, markets are pricing in the odds of a continued rebound. Unless some exogenous event were to transpire, technically speaking, all broad-market indices are in an uptrend. A move below $3,600.00 in the S&P 500 would denote a change in tone, increasing the likelihood of a failed breakout that would target prices as low as $3,200.00.

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

Levels Of Interest: The $3,691.00 boundary and $3,667.75 HVNode.

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

Photo by Raka Miftah from Pexels.