Categories
Commentary

Weekly Brief For September 19, 2021

Editor’s Note: Late today. So sorry! The main takeaway is that we’re in a window of volatility and participants should focus on leveraging rich skew and complex spreads to hedge or speculate on sideways to lower trade.

Market Commentary

  • SPX below balance, 50-day SMA.
  • Ahead is a 2-day FOMC meeting.
  • Concerns around the debt ceiling.
  • Rich skew makes hedging easier.
  • Post OPEX volatility likely in play.

What Happened: U.S. stock index futures auctioned lower, last week, into Friday’s quadruple witching derivatives expiry. 

Of interest this week is a meeting of the Federal Open Market Committee (FOMC).

Graphic updated 5:30 PM ET Sunday. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: During the prior week’s trade, on weak breadth, the worst-case outcome occurred, evidenced by a balance-area breakout and separation of value below the S&P 500’s 50-day simple moving average (i.e., a visual level likely paid attention to by short-term, technically-driven market participants who generally are unable to defend retests).

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

We now monitor for rejection (i.e., return inside of balance) which portends a move to the opposite end of the balance.

Further, the aforementioned trade is happening in the context of a waning economic recovery, heightened valuations in the face of strong EPS expectations, the prospects of stimulus reduction, non-seasonally aligned flows, impactful options and equity market dynamics, divergent sentiment, as well as fears of a mid-cycle transition.

In a Goldman Sachs Group Inc (NYSE: GS) note posted by The Market Ear, analysts “believe it is a critical period for many investors and companies that manage performance to calendar year-end. Such pressures boost volumes and volatility as investors observe earnings reports, analyst days and managements’ guidance for the following year.”

At the same time, inflows into equities are exploding to the upside as JPMorgan Chase & Co (NYSE: JPM) technicians “do not see a pattern on the [S&P 500] chart or any cross-market dynamics that would suggest the market is set for a lasting bearish reversal. The late-Aug systematic sell signals lose statistical significance into next week and the seasonal trends improve into early-Oct.”

Graphic: Bank of America Corporation (NYSE: BAC) charts equity flows, via The Market Ear.

That said, we hone in on risks.

If concerns like the debt ceiling are not resolved, some economists argue, according to Bloomberg, “that an announcement on tapering is likely to be delayed to December, and that Treasury yields could fall further as a result.”

We note that – as Goldman Sachs writes – “The upcoming debt limit deadline is beginning to look as risky as the 2011 debt limit showdown that led to Standard & Poor’s downgrade of the US sovereign rating and eventually to budget sequestration, or the 2013 deadline that overlapped with a government shutdown.”

On the other hand, according to SqueezeMetrics, “the current combination of weak put flows and large customer vanna exposure” is fragile; “people are [still] overexposed to changes in VIX, and will be hurt more than usual if VIX starts moving up. Historically, this means SPX down, VIX up.”

Following SqueezeMetrics’ remarks, SpotGamma adds that “over 50% of stocks [had] their largest gamma position” roll-off Friday. This suggests an increased potential for volatility heading into the September 21-22 FOMC event.

In this post-quad-witching window of non-strength, we may, as a result, use the rich skew to hedge (see below Weekly Trade Idea section).

Moreover, for today, given an increased potential for heightened volatility and initiative trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,437.75 micro-composite point of control (MCPOC) puts in play the $4,481.75 high volume area (HVNode). Initiative trade beyond the $4,481.75 HVNode could reach as high as the $4,510.00 low volume area (LVNode) and $4,526.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,437.75 MCPOC puts in play the $4,393.75 HVNode. Initiative trade beyond the $4,393.75 HVNode could reach as low as the $4,365.25 LVNode and $4,341.00 untested point of control (VPOC), or lower.

We note that the $4,481.75 and $4,393.75 HVNodes intersect key anchored volume-weighted average price levels. These are 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.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures updated 5:30 PM ET Sunday.

Key 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.

Weekly Trade Idea

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

Options offer an efficient way to gain directional exposure. 

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

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

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

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

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

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

Trade Idea: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 29 SEP 21 4400/4300 PUT @.65 CREDIT LMT

I’m neutral to bearish on the S&P 500 and I think the index may slide toward $4,300. I will structure a spread below the current index price, expiring in about 2 weeks. I will buy the 4400 put option once (+1) and sell the 4300 put option twice (-2) for a $0.65 credit. Should the index not move to my target, I keep the $65 credit. Should it move to $4,300, I could make $10,065.00 at expiry. Should the index move past $4,200.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower. 

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

News And Analysis

An essay on why you keep losing money as a trader.

August retail sales reflect strong consumer demand.

UBS: Resist temptation to time market despite highs.

U.S. debt ceiling fight could cause markets to tumble.

Nasdaq on whether Rule 605 works better in dollars.

Rally driven less by reflation prospects; TINA to stock.

Higher U.S. CGT proposal spurs a PE and M&A rush.

If a CEO talks like Kant, think twice before investing.

New vehicle prices surge amid global chip shortages.

Active managers’ performance disappointing in 2021.

DeFi is disrupting but not derailing traditional finance.

OpenSea admitted recent incident as insider trading.

SEC looks to greater oversight of the crypto markets.

Central bank digital currency; cash for the digital age.

White House to put forward three CFTC nominations.

Some key lessons from NYC’s first SALT conference. 

Let’s Hang Out

Salt Lake City, UT September 28-30

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For August 17, 2021

Market Commentary

Equity index futures traded lower overnight.

  • COVID-19, SEC, and political tension.
  • Ahead: Retail sales, NAHB, and more.
  • Indexes positioned for sideways trade.

What Happened: U.S. stock index futures auctioned lower overnight alongside news of COVID-19 lockdowns, an SEC warning on Chinese company risks, and tensions in Afghanistan.

Ahead is data on retail sales (8:30 AM ET), industrial production (9:15 AM ET), capacity utilization (9:15 AM ET), business inventories (10:00 AM ET), and the NAHB home builders’ index (10:00 AM ET). Jerome Powell speaks at (1:00 PM ET) while Neel Kashkari is scheduled to speak at (3:45 PM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index (DPI) and Gamma (GEX). A higher DPI approximation is bullish. At the same time, the lower the GEX approximation, the more volatility. SHIFT data used for options activity approximation. Note that options flow is sorted by the call premium spent; if green and more positive then more was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index from 0-100.

What To Expect: As of 6:30 AM ET, Tuesday’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, on weak intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by trade above the $4,447.75 high volume area (HVNode). This is significant because this initiative trade resulted in a new overnight all-time high (ONH) at $4,476.50. Typically, there is a low historical probability associated with overnight rally-highs ending the upside discovery process.

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

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

Further, the aforementioned trade is happening in the context of great earnings, pandemic-induced clampdowns on mobility, monetary and fiscal policy evolution, SEC comments against Chinese risks, as well as tension in Afghanistan.

Graphic: Morgan Stanley boosts earnings forecast due to exceptional results. 

With equities more so priced to perfection, the implications of the aforementioned themes on price would be thought of as contradictory; to elaborate, coming into potentially big fundamental catalysts like the Economic Policy Symposium in Jackson Hole, Wyoming, August 26-28, 2021, participants are positioned in such a manner that ought to dampen volatility.

In light of the upcoming August options expiration (OPEX), we point to SpotGamma findings that suggest after OPEX, “the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Graphic: SpotGamma data suggests an increase in volatility after the removal of large options positions. 

Moreover, for today, given expectations of middling volatility and responsive trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,456.75 low volume area (LVNode) puts in play the $4,463.75 LVNode. Initiative trade beyond the $4,463.75 LVNode could reach as high as the $4,476.50 overnight high (ONH) and $4,482.25 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below the $4,456.75 LVNode likely puts in play the $4,447.25 HVNode. Initiative trade beyond the $4,447.25 HVNode could reach as low as the $4,437.00 untested point of control (VPOC) and $4,422.75 balance area high (BAH).

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 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.

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

News And Analysis

Soros joined by D1, Soroban in the exit of Chinese stakes. 

The White House attempts to balance climate, oil policies.

SPAC boom creates fresh target for short-sellers, activists.

Inflation cherry-pickers have trouble drowning out the noise.

The U.S. declared its first Western reservoir water shortage.

Michael Burry of ‘Big Short’ bet against Ark Invest’s ARKK.

President Joe Biden defended U.S. exits from Afghanistan. 

Why Wood changed her ARKK ETF’s China exposure to 0.

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 22, 2021

Market Commentary

Equity index futures trade higher as volatility implodes. Yields, commodities are higher, too. 

  • President Biden played down inflation.
  • Ahead: Claims, home sales, earnings.
  • Equity indices up on fantastic breadth.

What Happened: U.S. stock index futures auctioned higher alongside comments against inflation by President Joe Biden, yesterday. Virus fears ebbed as infections accelerated. 

Bitcoin extended its advance after Elon Musk, Catherine Wood, and Jack Dorsey talked cryptocurrency at a virtual event.

Ahead is data on weekly jobless claims, existing home sales, and corporate earnings. 

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

What To Expect: As of 6:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open on a small gap, just outside of prior-range and -value, 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 day’s regular trade, the best case outcome occurred, evidenced by trade above the $4,334.25 spike base. As that happened, participants found increased acceptance at higher prices, moving the micro-composite Point of Control (MCPOC) up to $4,341.75, a pivot point (i.e., above = bullish, below = bearish) for today’s trade. This is noteworthy since it suggests the fairest price to do business, on a larger timeframe, is higher. 

At the same time, in support of the price rise was fantastic breadth and dynamics with respect to the derivatives market; amidst a crash in volatility, associated hedging activities bolster the rally. 

Coming into the balance-area sellers initiated from the weak prior, however, certain mechanics may quell the upside volatility, potentially leading to a stall or slower advance. 

Graphic: SpotGamma data suggests the S&P 500 is back in so-called “long-gamma” territory. 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 $4,341.75 MCPOC puts participants just short of entry into a prior balance area, near the $4,357.75 low volume area (LVNode). Initiative trade beyond the $4,357.75 LVNode could reach as high as the $4,371.00 POC and $4,384.50 minimal excess regular trade high (RTH), the typical scenario on re-entry into balance. 

In the worst case, the S&P 500 trades lower; activity below the $4,341.75 MCPOC puts in play the $4,325.75 LVNode. Initiative trade beyond the $4,325.75 LVNode could reach as low as the $4,315.25 and $4,299.75 high volume areas (HVNodes). 

It is important to note also that the prior two HVNodes correspond with key Volume Weighted Average Price (VWAP) levels, 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.

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).

POCs: POCs 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.

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.

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

News And Analysis

Strong job and real estate markets support credit. (Moody’s)

Federal Reserve ramps up debate on taper timing. (WSJ)

China offers oil reserves in a move to cool oil rally. (BBG)

Biden dismisses inflation worries, warns on hiring. (BBG)

U.S.-China goods trade booms amid virus, tariffs. (BBG)

Powell has broad support among top Biden aides. (BBG)

PG&E plans to bury power lines in fire-risk areas. (WSJ)

EMEA economies recovering faster than thought. (S&P)

Structured finance sees issuances rising to $1.4T. (S&P)

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

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

Categories
Commentary

Daily Brief For July 15, 2021

Market Commentary

Equity index futures sideways to lower overnight.

  • A $3.5T spending bill is gaining traction.
  • Claims, earnings, Fed speak, and more.
  • Indices diverge; breadth metrics weaken.

What Happened: U.S. stock index futures resolved lower after underlying breadth metrics failed to support further price discovery. 

Such lackluster trade comes ahead of a few key developments, most important of which include testimony by Federal Reserve chair Jerome Powell, employment data, earnings, industrial and manufacturing numbers, as well as the July 16 monthly options expiration.

Graphic updated 7:50 AM ET. See here for more on the Dark Pool Index and Gamma. Check out SHIFT search for data on the options activity.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open on a small gap below prior-range and -value. This suggests an increased 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 day’s regular trade, the worst-case outcome occurred, evidenced by a failure to expand range above the Volume Weighted Average Price (VWAP) anchored from the CPI release (blue in color on the below profile graphic). Instead, on very slow tempo, indexes traded lower in the face of extremely poor breadth.

Graphic: Equity index leaders rose in price as internal divergences – like the ratio of advancers to decliners – grew. Noting a bigger divergence in internals tracking Nasdaq issues. 

As stated yesterday, the push-pull and divergence comes ahead of the options expiration (OPEX) cycle which starts on the third Friday of each month (July 16). Associated hedging forces make it so there’s more liquidity and less movement. 

After OPEX, according to SpotGamma, “the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Knowing the above, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,357.75 low volume area (LVNode) pivot puts in play the $4,371.00 untested Point of Control (POC). Thereafter, if higher, participants can look for responses at the $4,384.50 regular trade high (RTH High) and $4,398.50 Fibonacci price extension.

In the worst case, the S&P 500 trades lower; activity below $4,357.75 puts in play the $4,343.25 HVNode. Trade beyond $4,343.25 could reach as low as the HVNodes at $4,314.75 and $4,297.00.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

POCs: POCs 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.

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

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

News And Analysis

Politics | Biden agenda gains Senate ground with big hurdles remaining. (BBG)

Economy | Restaurants signing most new retail leases as rents plummet. (CNBC)

Markets | Executive orders on competition and policy tightening impact. (Moody’s)

Economy | Jerome Powell dismisses claims of complacency on inflation. (FT)

Politics | China has accused Biden administration of hurting global trade. (Axios)

Markets | Reddit traders are upending the world of credit investing, also. (BBG)

Markets | No market breadth, no problem as Faangs lift S&P 500 higher. (BBG)

Economy | CEOs speak on elevated levels of inflation which may persist. (Axios)

Economy | China warns economic uncertainty despite moderate recovery. (FT)

What People Are Saying

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 July 14, 2021

Market Commentary

U.S. equity index futures sideways overnight.

  • Dems agree to $3.5T tax, spending plan.
  • Fed Chair Powell semi-annual testimony.
  • Earnings begin with a bang and continue.
  • Equity indexes mixed; sideways to lower.

What Happened: U.S. stock index futures resolved lower after underlying breadth metrics failed to support the post-CPI recovery.

Thereafter, indices traded sideways overnight alongside news Senate Democrats on the Budget Committee agreed to a $3.5 trillion spending bill. The bill would carry President Biden’s economic agenda without Republican support. 

Ahead, participants are expecting testimony by Federal Reserve Chair Jerome Powell, earnings releases from heavily weighted index constituents, as well as the latest Fed Beige Book.

Graphic updated 6:44 AM ET.

What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open just 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 an intraday liquidation break and the subsequent acceptance below a Volume Weighted Average Price (VWAP) anchored from the CPI release (blue in color on the below profile graphic).

Liquidation Breaks: The profile shape suggests participants were “too” long and had poor location. Such dynamic offers responsive buyers (initiative sellers) favorable entry (exit).

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.

Prior to the liquidation, breadth metrics were firmly negative. Despite what appeared to be a strong recovery post-CPI, internal divergences via breadth metrics became more pronounced, while profile dynamics revealed weak commitment at higher prices and an abundance of poor structures (e.g., low-volume areas). 

Graphic: Equity index leaders rose in price as internal divergences – like the ratio of advancers to decliners – grew. Noting a bigger divergence in internals tracking Nasdaq issues. 

This push-pull and divergence comes ahead of the options expiration (OPEX) cycle which starts on the third Friday of each month (July 16). Associated hedging forces make it so there’s more liquidity and less movement. In other words, the market tends to pin.

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.

Thereafter, according to SpotGamma, “[t]he week after expiration the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Graphic: Volatility before and after OPEX, via SpotGamma.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,365.75 low volume area (LVNode) pivot puts in play the $4,375.00 untested Point of Control (POC), first. Then, the $4,383.75 regular trade high (RTH High) and $4,398.50 Fibonacci extension come into play.

In the worst case, the S&P 500 trades lower; activity below the $4,365.75 LVNode pivot puts in play the $4,353.25 LVNode. Trade beyond that figure puts in play the high volume areas (HVNodes) at $4,343.25 and $4,314.75.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

POCs: POCs 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.

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

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
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: SHIFT search suggests participants were most interested in call strikes at and below the price in the cash-settled S&P 500 (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), yesterday. Noting, yesterday and over the past few weeks, there’s been increased activity in long-dated put options. 

News And Analysis

Politics | Senate Democrats Agree to $3.5T tax, spending plan. (BBG)

Markets | ‘A free put on the market’: CIO on volatility dislocation. (BZ)

Energy | OPEC reaches agreement with UAE over oil production. (WSJ)

Economy | Weekly mortgage refinances spike 20% on rate drop. (CNBC)

Mobility | EU set to call time on combustion engine in decades. (REU)

Economy | Broker says NYC’s real estate market is heating up. (CNBC)

Markets | Delta posts first profit since 2019 on aid, better revenue. (CNBC)

Economy | China’s GDP and the five things to keep an eye on. (FT)

Economy | Inflation climbs higher than expected; CPI up 5.4%. (CNBC)

Markets | Goldman, JPM pivot to M&A amid fading trade boom. (FT)

Mobility | Norwegian Cruise Line sues on vaccine passport ban. (CNBC)

Politics | China deals another blow to its cryptocurrency miners. (BBG)

Markets | Wood sells China tech stocks, warns of valuation reset. (BBG)

Economy | JPMorgan Chase CEO uber bullish on U.S. consumers. (Axios)

What People Are Saying

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 24, 2021

Market Commentary

Equity index futures exit balance, auction higher overnight.

  • Nike, FedEx, Carnival will report.
  • Europe targets travel on variants.
  • Ahead: A heavy events calendar.
  • Indices trade sideways to higher.

What Happened: U.S. stock index futures auctioned higher ahead of a busy day.

Of interest? Data on weekly initial jobless claims, first-quarter U.S. GDP, durable good orders, manufacturing, Fed speak, the Bank of England’s monetary policy decision, and updates on a bipartisan infrastructure plan. Participants are also on the lookout for the Federal Reserve’s latest bank stress test results, after market close.

Adding, some areas of Europe are calling for tougher travel rules to fight COVID-19 variants. 

Graphic updated 7:25 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 higher potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by sideways trade above the $4,229.00 VPOC. This is significant because it signaled acceptance (i.e, defense of higher prices). 

Point of Control (POCs): POCs 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.

The most recent price rise, followed by sideways-to-higher trade, has a lot to do with how participants are positioned in the options market. According to some metrics, the market is trading in a so-called “long-gamma” environment.

What does this mean? Most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection. 

As a result of this activity, options dealers are long upside and short downside protection. This exposure must be hedged; dealers will sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value. 

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints — like the one the market is currently in — followed by rapid de-risking events as the market transitions into “short-gamma.” 

Further, last week, coming into the large June monthly options expiration (OPEX), participants saw good odds, in conjunction with fundamental developments (e.g., Federal Reserve policy outlook), the market would resolve directionally. Well, not much has happened. With overwriting now back in favor – alongside a crush in implied volatility, among other things – expect more of the same: pinning.

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.

In other areas, we see breadth metrics taking a hit; the ratio between advancing and declining issues is coming off its highs, a signal that underlying strength is easing. 

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 $4,251.25 high volume area (HVNode) puts in play the $4,258.00 overnight high (ONH). Initiative trade beyond the ONH puts in play the Fibonacci-derived price targets near $4,294.00. 

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.

Overnight 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 $4,237.25 HVNode puts in play the $4,229.00 VPOC. On a break of the $4,228.25 HVNode, participants ought to look for a response near the HVNode at $4,213.00.

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).
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), yesterday. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside. Noting, similar to the day prior, there was interest in farther-dated put strikes at and above current prices. This may denote opportunistic hedging or speculation on the downside.

News And Analysis

Politics | Chinese COVID-19 gene data was removed from NIH database. (WSJ)

Economy | The BOE lifts inflation forecast but keeps rates, QE unchanged. (G)

Markets | China boosts short-term cash injection to ease liquidity worries. (BBG)

Economy | Fed’s Bostic sees 2022 rate liftoff, taper call in a few months. (BBG)

COVID | Pfizer and Moderna’s vaccine likely linked to heart inflammation. (REU)

COVID | Brazil sets a single-day record for COVID-19 coronavirus cases. (REU)

Politics | President Biden’s push for infrastructure deal nears the goal line. (BBG)

Markets | Credit Suisse’s chairman sends a chill through investment bank. (BBG)

Markets | Fannie, Freddie plunged as SCOTUS deals a blow to investors. (BBG)

What People Are Saying

Innovation And Emerging Trends

Space | In overtaking U.S., China plans crewed missions to Mars by 2033. (FT)

FinTech | On lower fees, Vanguard steps up its push into financial advice. (FT)

Energy | Unpacking the past and present transitions in energy systems. (REU)

FinTech | The battle forming in the European financial technology scene. (F)

Markets | Gensler highlighting disclosures and payments for order flow. (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 June 20, 2021

Too Lazy; Didn’t Read: As the market enters into a seasonally weak period, participants have noticed a divergence appear across the broader market. A breakdown in individual sectors – financials and transportation, for instance – and breadth, policy tightening concerns, outflows, elevated skew, put/call ratios, and degrossing on risk-taking (e.g., speculative activity in so-called meme stocks), in conjunction with the passage of Quadruple Witching, may portend increased volatility.

Market Commentary

Key Takeaways: Index futures diverge. Risk-off sentiment returns.

  • Fears over inflation and taper sparking movements.
  • Ahead: GDP, Home sales, PMI, Claims, Fed speak.
  • Indices sideways to lower; growth, tech stay strong.
Weekly price action graphic updated Sunday, June 20, 2021, at 12:00 PM ET.

What Happened: Last week, U.S. stock index futures diverged.

The Nasdaq 100 traded relatively strong, in comparison to the weaker S&P 500, Russell 2000, and Dow Jones Industrial Average. This action comes as the Federal Reserve signaled a faster-than-expected pace of policy tightening (learn more about the impact of policy tightening, here).

At the same time, in conjunction with the divergence in major indexes, participants saw sectoral breakdowns, a concern that may portend increased volatility after ‘Quadruple Witching’ Friday, or the rebalancing of benchmarks, as well as the expiration of stock index futures, stock index options, stock options, and single stock futures.

In light of the event, participants found it very difficult to discover prices. That’s according to Matt Tuttle, the CEO at Tuttle Capital Managment LLC. 

“When you get one of these events, you get noises around share movements,” Tuttle said by phone. “It messes up the information that we’re seeing.”

Adding, this Quadruple Witching Friday may throw a wrench into the recent bullishness.

Much of the advance, since the election, came in light of a historically bullish period for markets, amid increased mobility and reflation, supportive structural flows, as well as the pricing in of positive earnings expectations.

Now that the reaction to earnings was lackluster, in addition to the passage of a large derivative expiration and move into a seasonally weak period, the odds of volatility are substantially higher. 

Why? Most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection. 

As a result of this activity, options dealers are long upside and short downside protection. 

This exposure must be hedged; dealers will sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value. 

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints — like the one the market is currently in — followed by rapid de-risking events as the market transitions into “short-gamma.” 

“‘Equities stable on hawkish Fed guidance’ is the wrong read here,” Nomura’s Charlie McElligott notes. “Equities are stable for the same reason they’ve been chopping for weeks: markets continue choking on an oversupply of gamma from vol sellers!”

The implications of this volatility supply can be summed up with the below graphic.

Given that OPEX will lead to a drop in gamma exposures, the market will, in the simplest way, be subject to more movement in its attempt to price in changing financial conditions.

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.

“The extremely low SPX realized volatility is consistent with the possibility that 18-Jun has left ‘the street’ long index gamma, in which case realized volatility could pick up once positions are cleaner,” Rocky Fishman of Goldman Sachs said.

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 $4,153.25 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 $4,153.25 puts in play the HVNodes at $4,177.25 and $4,199.25. Initiative trade beyond $4,199.25 could reach as high as the $4,227.75 HVNode, $4,235.00 Point Of Control (POC), and $4,258.00 overnight high (ONH). 

POCs: POCs 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 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 $4,153.25 puts in play the $4,122.25 HVNode. Thereafter, if lower, participants should look for responses at the $4,069.25 HVNode and $4,050.75 low volume area (LVNode).

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).
Graphic: SHIFT search suggests participants, based on dollars committed, were most interested in call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside.

News And Analysis

Economy | Big shift in the so-called “dot-plot” that tracks rate projections. (Moody’s)

Economy | Housing boom moderates on lower building permit authorizations. (S&P)

Economy | Capital gains – a century-old tax break gets a rush of attention. (WSJ)

Economy | Supply crunch risks are extending into 2022, stocking inflation. (WSJ)

Economy | New Chinese regulation requires recovery, resolution plans. (Moody’s)

Markets | Troubled companies take pages from AMC playbook, selling stock. (WSJ)

Markets | Brace for huge oil volatility one U.S. trading group suggests. (REU)

Economy | U.S. bank loan-to-deposit ratios fall and pressure margins. (S&P)

Economy | U.S. economic recovery doesn’t have to follow herd immunity. (Moody’s)

Economy | The U.S. distress ratio continued its downward trend last month. (S&P)

Economy | Global structured finance – charting the recovery from COVID-19. (S&P)

Economy | The MBA is predicting another decline in new home sales. (MND)

Markets | Bond market in midst of repricing, but not the kind we’re used to. (MND)

What People Are Saying

Innovation And Emerging Trends

FinTech | Owning the paycheck is the key to financial technology success. (TC)

FinTech | Mark Cuban says ‘banks should be scared’ of crypto-based DeFi. (CNBC)

FinTech | Outlook: How the API economy is reinventing financial services. (CBI)

FinTech | Analysis: Big differences between a digital dollar and a CBDC. (BBG)

FinTech | Cryptocurrency lode of $100B stirs worries over hidden danger. (BBG)

FinTech | Axis-Z is working hard to bring virtual reality (VR) tech to trading. (BZ)

FinTech | OVTLYR’s platform helps investors take advantage of volatility. (BZ)

FinTech | Liti Capital allows investors tokenized access to litigation finance. (BZ)

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 June 18, 2021

Editor’s Note: Happy Friday! In the coming days, there will be some additions to the newsletter helping you better identify the levels in play. Also, I will try to improve engagement with some visual effects.

Stay tuned,

Renato

Market Commentary

Index futures balance after violent downside discovery.

  • Inflation fears spark morning dips.
  • EU opened up travel with the US.
  • Indicies traded sideways to lower.

What Happened: U.S. stock index futures auctioned sideways to lower after violent downside discovery just days prior.

Ahead, there are no significant economic releases.

Graphic updated 7:48 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 best case outcome occurred, evidenced by sideways trade at and around the VWAP (blue in color on the below graphic) anchored from the time of Wednesday’s Federal Reserve event. This suggests the average buyer, since the event, is regaining strength. 

So, what is needed in the coming days? Ideally, the S&P 500 trades (and stays) above the blue VWAP line.

Volume Weighed Average Price (VWAP): The average price at which a stock is traded over a certain horizon.

Moreover, since the Federal Reserve’s signal of the faster-than-expected pace of policy tightening provided participants more clarity, major indices broke out of balance, but in different directions. 

The S&P 500, Russell 2000, and Dow Jones Industrial Average are trading relatively weak in comparison to the tech- and growth-focused Nasdaq 100 which quickly recovered FOMC losses to discover higher prices. This divergence, in conjunction with sectoral breakdowns, is concerning and may foreshadow increased volatility after the monthly options expiration (OPEX), into quarter-end. 

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.

According to SpotGamma’s models, up to 50% of the gamma in and across the S&P 500 complex is expiring. Here’s an explanation and visual to understand why that matters.

After those gamma exposures drop (and related hedging forces disappear), the market will be subject to more movement. That is when things will get interesting. 

Based on the price action across the biggest FANGMANT stocks, participants would think another run higher is likely. However, looking at the breakdowns in individual sectors – financials and transportation, for instance – a dip in certain breadth metrics, elevated skew, put/call ratios, and volatility spreads, the picture becomes less clear. 

Without going into things too deep, the odds favor volatility and sideways trade for today’s session.

Like yesterday, in the best case, the S&P 500 trades sideways or higher; activity above the $4,207.25 VWAP (blue in color on the below chart) puts in play the $4,227.25 HVNode. Initiative trade beyond that HVNode could reach as high as the $4,235.00 Virgin Point Of Control (VPOC), $4,249.00 low volume area (LVNode), and $4,258.00 overnight high (ONH).

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

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 blue VWAP suggests a risk-off sentiment remains. In such a case, there is the potential to test lower, into the $4,182.50 overnight low (ONL) and $4,177.25 HVNode. Breaking $4,177.25 suggests a higher potential to trade to the HVNodes at $4,153.25, $4,122.25, and $4,069.25.

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).
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), yesterday. On the other hand, in the cash-settled Nasdaq 100 Index (INDEX: NDX), participants were most interested in call strikes at and above current prices.

News And Analysis

Economy | Fed’s Bullar says inflation running hotter than expected. (REU)

Economy | EU opens up for Americans wanting to vacation abroad. (BBG)

Economy | Faster world recovery boosting prices, inflation will halt. (Fitch)

Economy | Fear during the COVID-19 comeback largely transitory. (Axios)

Economy | Inflation data holding key to Fannie Mae’s new forecast. (MND)

Politics | Pacific cable project sinks after warning against China bid. (REU)

Politics | Supreme Court rejects GOP challenge to Affordable Care. (BBG)

What People Are Saying

Innovation And Emerging Trends

FinTech | Mark Cuban wants stablecoin regulation amid token crash. (BBG)

Markets | Google to open first retail store steps away from Apple. (BBG)

About

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

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

Disclaimer

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

Categories
Commentary

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 April 14, 2021

Market Commentary

Index futures in attempting to balance and validate higher prices.

  • The Fed worried about disinflation.
  • Economic Club hosts Fed’s Powell.
  • Growth and inflation already priced.

What Happened: U.S. stock index futures balanced overnight as participants positioned themselves for a strong earnings season.

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

Adding, during the prior day’s regular trade in the S&P 500, the best case outcome occurred, evidenced by initiative trade above $4,127.00, which is significant because it marked an overnight-high (ONH).

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

It seems that nearly every day this commentary goes out, U.S. index futures are trading sideways or higher. Is that a reason to become bearish? Absolutely not. 

Much of the advance comes in light of a historically bullish period for markets. As a result of supportive structural flows and the pricing in of positive earnings expectations, the S&P 500 is up over 11% since the start of March.

Graphic: April, historically speaking, is usually a good month for equity investors. 

Taking a step back, based on speculative derivatives activity, participants are opportunistically hedging their downside. This is evidenced by ask-side activity in long-dated puts, which provide holders with the right to sell an asset, at a certain price, at some point in the future.

Graphic: The Balance explains how call and put options work. 

At the same time, volatility is falling off of a cliff causing the sensitivity of options to changes in underlying price to increase. As a result, because option dealers are typically long calls and short puts, the “long-gamma” dynamic — crushed volatility and momentum — becomes more pronounced; amid associated hedging, liquidity increases and movement declines. This dynamic will likely resolve itself come April’s monthly options expiration.

Option Expiration (OPEX) Significance: 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.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above $4,139.75 excess high targets $4,143.00, a price extension. Initiative trade beyond the $4,143.00 level could reach as high as $4,197.25. In the worst case, the S&P 500 trades lower; activity below the $4,120.00 pull-back low targets the $4,112.75 high-volume area (HVNode) and $4,104.00 spike base. 

More On Volume Areas: A structurally sound market will build on past areas of high-volume (HVNode). Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area (LVNode) 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.

More On 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).
Graphic: 4-hour 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 April 13. Activity in the options market was primarily concentrated in short- and long-dated tenors, in strikes near $412, which corresponds with $4,120 in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: SHIFT search shows that trade in the SPDR S&P 500 ETF Trust (NYSE: SPY) was scattered across call and put strikes near current prices.

News And Analysis

Travel | Airlines can’t get the world flying again despite the U.S. boom. (BBG)

Recovery | Amsterdam’s recovery from a deadly outbreak in 1665. (BBG)

Energy | Overhang in oil inventories worked off, outlook improving. (IEA)

Crypto | Yellen, crypto fearmongers get pushback from CIA director. (Forbes)

Markets | Nomura, Credit Suisse tighten financing in hedge fund units. (BBG)

Recovery | Pfizer, and BioNTech on track to beat Q2 EU vaccine goal. (BBG)

Earnings | JPMorgan’s net profit soars 5-fold to $14.3B, the stock slipped. (MW)

Economy | National delinquency rate posted a fifth consecutive decline. (MND)

Economy | Fed needs to do more to keep short-term rates above zero. (REU)

Crypto | IRS says crypto reporting standards would help close the tax gap. (TB)

Markets | SPACs may cast a wider net as competition for targets increases. (CB)

World | Japan to release contaminated Fukushima water after treatment. (REU)

What People Are Saying

Innovation And Emerging Trends

FinTech | Banks, wealth managers, fintech to create ‘Goldilocks’ product. (TA)

NFT | New York Stock Exchange debuts ‘First Trade’ non-fungible tokens. (FN)

 

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.