Tag: LVN – Low Volume Node

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Commentary

Daily Brief For March 27, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

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Graphic updated 9:10 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

Sorry for the delay. Please read through the positioning section. Have a great Monday!

As always, if there are holes or unclear language. We will fix this in the next letters.

Fundamental

On 3/22, we mentioned news of Russia wanting to adopt the yuan for settlements.

And, with that, publications covering these East alliances use some tough language. One Bloomberg article notes China and Russia “roll[ing] back US power and alliances … [to] create a multipolar world … [and] diminish the reach of democratic values, so autocratic forms of government are secure and even supreme.”

Let’s rewind a bit to understand why all the toughness and fear.

Recall Chinese President Xi Jinping speaking with Saudi and GCC leaders. Here is our 1/4 summary takeaway:

Graphic: Retrieved from Physik Invest’s Daily Brief for January 4, 2023.

Essentially, those remarks confirm the East is hedging sanctions risk. Reliance on the West is falling, and this inevitably will present “non-linear shocks” (i.e., “inflation mess caused by geopolitics, resource nationalism, and BRICS”) monetary policymakers are not equipped to handle. So, are the markets at risk?

This most recent meeting between China and Russia increases the risks of unwinding the “debt-fueled economy in the US,” FT’s Rana Foroohar confirms, as we wrote in the Daily Brief for 1/4. Further, this is a threat to “hidden leverage and opaqueness.” That means the markets are at risk. Let’s explain more.

Read: Saudi National Bank Chair Resigns After Credit Suisse Remarks Helped Trigger A Slump In The Stock And Bonds That Prompted The Swiss Government To Step In And Arrange Its Takeover – Bloomberg

Graphic: Retrieved from Bloomberg.

With the encumbrance of commodities, among other initiatives, these nations’ weight in currency baskets may rise and keep “inflation from slowing.” If that happens, future rate expectations are off. Additionally, “the US dollar and Treasury securities will likely be dealing with issues they never had to deal with before: less demand, not more; more competition, not less,” we quoted Zoltan Pozsar (ex-Credit Suisse) saying on 1/5.

The markets most responsive to this are public, as we saw with 2022’s de-rate. In 2023 and beyond, added liquidation-type risks lie in the private markets. This will have knock-on effects.

Graphic: Retrieved from VoxEU.

The likes of The Ambrus Group’s Kris Sidial mentioned to your newsletter writer in a Benzinga interview that private market investors’ raising of cash to meet capital calls could prompt sales of their more liquid public market holdings. This is a major risk Sidial noted he was watching, in addition to some risks in the derivatives markets.

At the same time, Eric Basmajian believes the “banking crisis will cause a tightening of money and credit.” This will further solidify the “broader business cycle and corporate profit recession.”

Graphic: Retrieved from Bloomberg. Per John Authers, “the combination of deeply troubled banks and strong performance for the rest of the stock market cannot persist much longer.”

Positioning

Sidial’s well positioned to take advantage of the realization of these risks. In January, he explained that measures like the Cboe VIX Volatility Index (INDEX: VVIX) were low. This suggested, “we can get cheap exposure to convexity while a lot of people are worried.” In an update to Bloomberg, Sidial said The Ambrus Group’s tail-risk strategy (which Sidial has explained to us before) has performed well as the VIX index has risen, a sign of traders hedging concerns about “some contagion hitting and their portfolios being destroyed on that.”

Graphic: Retrieved from Bloomberg.

“We have seen an increase in tail hedging,” added Chris Murphy of Susquehanna International Group. “We have continued to see call buying in the VIX since the bank turmoil began.” The caveat, though, is that realized volatility or RVOL, not just implied volatility or IVOL (i.e., that which is implied by traders’ supply and demand of options), must shift and stay higher for those options to maintain their values, which may be difficult according to Kai Volatility’s Cem Karsan.

Though Karsan thinks markets will likely see RVOL come back in a big way, he thinks policymakers’ intervention will be stimulative short-term as it reverses a lot of the quantitative tightening or QT (i.e., flow of capital out of capital markets). Stimulation will be compounded by the continued unwinding of hedging strategies in previously depressed products like the Nasdaq 100 (INDEX: NDX). What do we mean by this?

Recall that traders’ closure and/or monetization of put protection results in options counterparties buying back their short stock and/or futures hedges. Therefore, before any downside is realized, the market may trade into a far “more combustible” position.

Consequently, look for low- and zero-cost call structures (e.g., ratio spreads) to play the upside while opportunistically using higher prices and elevated volatility skew to put on bear put spreads (i.e., buy put and sell another put at a lower strike price) for cheaper prices.

Consider following and supporting us on social media:

Technical

As of 9:10 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,026.75. 

Key levels to the upside include $4,038.75, $4,049.75, and $4,062.25.

Key levels to the downside include $4,004.25, $3,994.25, and $3,980.75.

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

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

Definitions

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

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

About

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 24, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

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Graphic updated 9:20 AM ET. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

Our Daily Brief for 3/23 discussed reactions to the Federal Reserve’s (Fed) interest rate decision being countered by Treasury secretary Janet Yellen’s deposit guarantee comments. Accordingly, doom and gloom are in full bloom prompting Yellen to walk back her toughness and tell lawmakers that regulators would protect the banking system if warranted. However, this did little to assuage markets, hence the neutral-to-risk-off sentiment this morning.

Based on the Fed’s Overnight Reverse Repo (RRP) and Bank Term Funding Program (BTFP), as well as money-market flows, strategists believe the deposit flight has not stabilized. To explain, policymakers intervened on the heels of the banking crisis in a way that’s not to be confused with quantitative easing or QE (i.e., flow of capital into markets). The Fed’s balance sheet swelled (from the discount window, the new bank funding facilities, and spillover from the FDIC insurance backstop). The balance sheet has continued to swell while money market funds and the RRP facility see big inflows.

Strategists like Andreas Steno Larsen allege that the maturity of 3-month T-bills and deposit flights partly drives this swell.

Graphic: Retrieved from ZeroHedge.

Rather than being used to boost liquidity (i.e., “lend or to finance trading activities,” as discussed in previous letters, including 9/20), reserves are being sterilized. “The Fed’s actions to stem the banking crisis are beginning to accelerate the effects of [quantitative tightening or] QT, causing money velocity to drop and intensifying the tightening of financial conditions,” Bloomberg’s Simon White reports. “In the coming weeks and months, we are likely to see reserves leaving the high-velocity world of smaller banks, where they were being lent out more, to the effectively zero-velocity black-hole of” money-market funds and RRP.

Graphic: Retrieved from ZeroHedge.

JPMorgan Chase & Co (NYSE: JPM) validates this view. They think the Fed’s rate hikes and QT have coincided with funds going to money-market funds and larger banks. They add that the banking crisis has accelerated this movement.

Graphic: Retrieved from Bloomberg.

“Deposit movements could cause banks to be cautious on lending, with mid- and small-size banks playing a large role in US lending,” thus exacerbating recessionary pressures, they note. Bank of America Corporation (NYSE: BAC) strategists add that investors should sell equities after the last rate hike to sidestep “the biggest declines.”

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).

Positioning

Brief positioning update.

As proposed in previous letters, low- or zero-cost call options structures have worked and may continue to work.

Notwithstanding, look for opportunities to play the downside as markets trade higher into a “more combustible” position. Attractive bear put spread trades are showing in the previously depressed Nasdaq 100, where boosts have, in part, been the result of “volatility compression and options decay.” If you’re participating in the Nasdaq, at least you have breadth on your side.

Graphic: Retrieved from ZeroHedge.

Technical

As of 9:20 AM ET, Friday’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 the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,957.25. 

Key levels to the upside include $3,980.75, $3,994.25, and $4,005.00.

Key levels to the downside include $3,937.00, $3,921.25, and $3,891.00.

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

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

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

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

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

About

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 23, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

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Graphic updated TIME AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. Sentiment Risk-On if expected /MES open is above the prior day’s range. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

A shorter letter today, so there may be some holes we patch later. Take care!

Fundamental

The Federal Reserve (Fed) bumped its target rate up 25 basis points to 4.75-5.00% and opened the door to more hikes, barring market-induced financial tightening, as this letter put forward yesterday morning.

“The events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would, in turn, affect economic outcomes,” Fed chair Jerome Powell commented, adding that credit tightening significantly means monetary policy “may have less work to do.”

Further, before the recent collapses of a few financial institutions, including SVB Financial Group, the market was pricing a 50 basis point hike.

The below CME Group Inc’s (NASDAQ: CME) FedWatch Tool shows the market’s expectations on March 8. Note the 5.50-5.75% terminal (peak) rate.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool via The Daily Brief for March 8, 2023.

“Absent SVB, the Fed would have likely raised 50 basis points,” TS Lombard’s Steve Blitz said. “SVB did happen, however, and so this FOMC, ever anxious about facing a recession (rising unemployment), is more than happy to let ‘tighter credit conditions for households and businesses … weigh on economic activity, hiring, and inflation.’ As for financial instability, they believe they have the tools to keep a few poorly managed banks from imploding the whole sector.”

The updated summary of economic projections (SEP) or dot plot shows the FOMC expecting rates to end 2023 above 5.00%.

Graphic: Retrieved from Bloomberg.

This is far higher than what the markets are pricing. Powell’s go-to measure for spotting economic troubles suggests steep cuts are also coming sooner than later.

Graphic: Retrieved from Bloomberg. “Frankly,  there’s good research by staff in the Federal Reserve system that really says to look at the short — the first 18 months — of the yield curve. That’s really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it’s inverted, that means the Fed’s going to cut, which means the economy is weak.” — Fed Chair Powell on March 21, 2022.

Anyways, given that what was expected happened, markets responded positively. If interested in why that is the case following important events as of late, see the Daily Brief for 2/1 and 2/2. 

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via Bloomberg. “Viewed through the lens of implied volatility — or expectations of how much an underlying asset will swing in the future — zero-day options aren’t particularly cheap in reality. The gap over the S&P 500’s realized volatility, something in derivatives parlance known as volatility risk premium, is typically three times higher than longer-dated contracts, according to BofA.” The compression of “will naturally lead to a buyback” that supports the market, Kai Volatility’s Cem Karsan says.

It was Treasury secretary Janet Yellen who took the market lower. Yellen said she has “not considered or discussed anything having to do with blanket insurance of guarantees of deposits,” and markets did not like that.

Graphic: Retrieved from Bloomberg.

The likes of Pershing Square’s Bill Ackman responded he “would be surprised if deposit outflows don’t accelerate.” Adding, Federated Hermes’ Steve Chiavarone thought it was “astounding” Yellen and Powell would give contradictory messages.

“Powell essentially said that all deposits are safe; Yellen said, ‘Hold my beer.’ You would have thought that they would have coordinated,” responded Federated Hermes’ Steve Chiavarone.

To keep it brief, we’ll end with references to letters for 3/20 and 3/21, noting that the conditions for weak equity markets are present. The S&P 500 forward earnings are declining, the yield curve is inverted, unemployment is below average, manufacturing PMIs are below 50, and 40% of banks are tightening lending, Morgan Stanley (NYSE: MS) strategists explain.

Technical

As of 8:55 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET) in the S&P 500 will likely open in the middle part of a positively skewed overnight inventory inside the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,994.25. 

Key levels to the upside include $4,004.25, $4,017.00, and $4,026.75.

Key levels to the downside include $3,977.00, $3,959.25, and $3,946.75.

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

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

Definitions

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

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

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

About

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 22, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 8:20 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range./MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

Recall our past letters pondering the use of the yuan for settlements in the East. Well, there’s been progress on that end.

Also recall “the recycling of petrodollars by oil-rich nations” fueling “several emerging market debt crises” and prompting “the creation of a more speculative, debt-fueled economy in the US.” Is this a reversing trend? We shall unpack in a future letter, soon.

Fundamental

The Federal Reserve (Fed) is likely to bump its current target rate up 25 basis points to 4.75-5.00%. Failing to bump interest rates would likely send the wrong message about financial stability. To give up on the inflation fight (a pause or interest rate cut) would tell investors “look out below,” Bloomberg summarizes.

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

The path after is less certain, though most think there is likely to be at least one additional hike in the coming months. The catch is that if market-induced financial tightening persists through the second quarter, it would substitute for rate hikes. 

Assuming the Fed publishes its summary of economic projections (SEP) or dot plot, they will likely show the governors “getting less aggressive,” adds Bloomberg’s John Authers.

If we recall, Kai Volatility’s Cem Karsan talked about the Fed not wanting liquidations; they want a slow sale, not a fire sale. So, with there being a lag, the Fed may want to slow and assess, carefully telegraphing this being not a pivot. A pivot would probably inspire confidence among investors to own assets “mak[ing] things hotter,” Karsan explains, noting that the Fed really needs to walk up the long end of the yield curve. Recall that the long end fell considerably on the back of the turmoil and intervention, as well as recent data (e.g., housing starts showing more supply, likely a mortgage application booster that would further “make things hotter”).

Read: US 30-Year Mortgage Rate Falls To A Five-Week Low Of 6.48%; Purchase Applications Gauge At Highest Since Early February

Graphic: Retrieved from Bloomberg.Graphic: Retrieved from Bloomberg.

Additionally, there’s been lots of talk about volatility in bond markets.

Graphic: Retrieved from Bloomberg.

In large part the result of low liquidity, Treasury volatility could prompt the Fed to adjust their quantitative tightening or QT (i.e., the flow of capital out of capital markets) program, instead. Just as quantitative easing or QE (i.e., the flow of capital into capital markets) did little to spark off inflation, it’s unlikely that temping QT would disrupt efforts to rein inflation. 

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) Liquidity Tool. Per a Bloomberg article, “the spread between offered prices and what sellers will accept has widened for all maturities, … a sign of thinning market depth” and illiquidity.

Adjusting QT, which is contributing to the excessive volatility, “would be preferable to not raising rates … [since] an abrupt pause in rate hikes would likely resurrect the notion that there’s, indeed, a Fed ‘put’ designed to bail out Wall Street at the first sign of stress,” a potential catalyst for market upside, says Robert Burgess.

Graphic: Retrieved from Bloomberg.

Positioning

In Tuesday’s letter, we talked about the potential for fears of downside easing and fears of missing out (i.e., FOMO) on upside rising. Specifically, the letter said the following: 

“A response may be FOMO-type demand for call options exposures, coupled with CTAs further ‘raising their equity exposure’ on trend signals and lower volatility, boosting markets into a ‘more combustible’ state as explained on 2/17. This fear of missing out is visible in options volatility skew; traders are hedging those tail outcomes.”

In support of the most recent strength, per JPMorgan Chase & Co’s (NYSE: JPM) trade desk commentary, there is a buy skew. Goldman Sachs Group Inc (NYSE: GS) strategists agree, noting that flows are almost entirely “cover-driven.”

Recall that traders sought protection amidst all the calamities recently. Accordingly, measures of implied volatility or IVOL including the Cboe Volatility Index or VIX rose (e.g. traders demand exposure to downside put protection by way of S&P 500 options which bids options prices and manifests higher IVOL and counterparty pressure from their equity future/stock sales to hedge this demand). These same measures of IVOL are now falling as traders’ closure of protection results in counterparty pressures being lifted (helping explain, in part, the above “cover-driven” remark by GS).

Does this rally have breadth behind it? Look no further than market internals. 

Graphic: Retrieved from Bloomberg via Liz Young. “The Nasdaq’s Cumulative Advance-Decline line has parted ways with index direction in recent days. In other words, the index has rallied despite weak breadth (more stocks falling than rising), the two lines are likely to find their way back together somehow…”

A pause before the Fed announcement, and then breadth catches up to price?

Or, has the typical post-Fed IVOL boost been spent?

Regardless, we maintain that low-cost call options structures as proposed in previous letters worked (and may continue to work). Notwithstanding, look for opportunities to play the downside should markets trade higher into a “more combustible” position. 

More on trade ideas in the next letters. Take care.

Technical

As of 8:15 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a negatively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,038.75. 

Key levels to the upside include $4,059.25, $4,071.75, and $4,082.75.

Key levels to the downside include $4,017.00, $3,994.25, and $3,977.00.

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

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

Definitions

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

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

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

About

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 21, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 7:00 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

Not all doom and gloom. Make sure to read to the end!

Fundamental

In the Daily Brief for 3/20, we summarized the financial industry and policymaker responses that would turn asset fire sales into managed, orderly asset sales. 

Graphic: Retrieved from Sergei Perfiliev.

The net result of the intervention would be a reduction in credit creation, a tightening of financial conditions, as well as a slowing of the economy and inflation while, potentially, setting “a dangerous precedent that simply encourage[s] future irresponsible behavior” (e.g., risky lending/borrowing), the House Freedom Caucus put eloquently. Basically, the fear is in policymakers underwriting the losses of prevailing carry-type strategies and setting the stage for an even bigger unwind or so-called “Minsky moment,” the “sudden crash of markets and economies that are hooked on debt,” Bloomberg reports. 

The likes of Elon Musk express fear, too!

A systemic credit event is among strategists’ biggest fear, indeed. A Bank of America Corporation (NYSE: BAC) survey shows a credit event happening on the heels of a US shadow banking, corporate debt, and developed-market real-estate collapse. Recall this letter writer’s conversation with Simplify Asset Management’s Michael Green who said he sees “cracks in bubbles like commercial real estate” already appearing, too.

Bloomberg adds that JPMorgan Chase & Co (NYSE: JPM) strategists think the inverted yield curve signals recession and the stocks are likely nearing their high point.

Graphic: Retrieved from Callum Thomas’ Weekly S&P 500 ChartStorm.

JPM adds that market lows won’t occur until interest rate cuts ensue.

Graphic: Retrieved from BNP Paribas ADR (OTC: BNPQY).

Recall 3/20’s letter citing BAC research that finds selling markets on the last Fed rate hike is a good strategy. The “Minsky moment” comment/fear has others at JPM adding that investors should sell into relief bounces.

Graphic: Retrieved from Bank of American Corporation (NYSE: BAC) via The Market Ear.

Most participants foresee rates continuing to rise by at least 25 basis points, per the CME Group Inc’s (NASDAQ: CME) FedWatch Tool. Following Wednesday’s (expected) hike, the path forward appears uncertain. Yesterday, the terminal/peak rate was at 4.75-5.00%. Today, the peak has shifted higher to 5.00-5.25%.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

Financials look ready to fall off a cliff, to add. If they do, the whole market likely goes.

Graphic: Retrieved from Callum Thomas’ Weekly S&P 500 ChartStorm.

Positioning

We keep referring back to our Daily Briefs published last week (e.g., 3/13 and 3/14). In those letters, we talked about the growing concern about markets enduring some exogenous shocks. 

We opted to take the less extreme side since policymakers’ response was likely to stem (or push into the future) turmoil. Additionally, with participants easing up on their long-equity exposure, equity markets were likely to stay contained, relative to bond markets where the lack of liquidity is an issue, some believe. Anyways, following important events including inflation updates (i.e., CPI) and derivatives expiries, short bursts of strength (particularly in some of the previously depressed products such as the Nasdaq 100 or NDX, as explained 3/17) were likely to ensue heading into the end of this month and next month. Additionally, certain rates trades via options we set forth on 3/14 were ripe for monetization, too.

Rotating into a money market or T-bill fund or box spreads, while allocating some remaining cash to leverage potential by way of some call options structures, appeared attractive. While the T-bill or box spread exposures did not budge much, call options structures as proposed on 3/14 worked (and are likely to continue to work) rather well. The monetization of the rate structures discussed on 3/14 was timely, also.

The potential for coming events including the Federal Reserve’s (Fed) interest rate decision on Wednesday 3/22 to assuage participants’ fears of slowing may, accordingly, prompt fears of missing out on the upside, Bloomberg reports. A response may be FOMO-type demand for call options exposures, coupled with CTAs further “raising their equity exposure” on trend signals and lower volatility, boosting markets into a “more combustible” state as explained on 2/17. This fear of missing out is visible in options volatility skew; traders are hedging those tail outcomes.

Technical

As of 7:00 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,004.75. 

Key levels to the upside include $4,026.75, $4,037.00, and $4,045.25.

Key levels to the downside include $3,994.25, $3,977.00, and $3,959.25.

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

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

Definitions

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

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

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

Options Expiration (OPEX): Reduction in dealer Gamma exposure. There may be an increase in volatility after the removal of large options positions and associated hedging.

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

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 20, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 8:10 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

As well summarized by Eric Basmajian, inflation, and growth are on a downward trajectory. Most leading indicators “suggest recessionary pressure will be ongoing.” The banking crisis and response, which will ultimately “cause a tightening of lending to the private economy,” likely exacerbates the ongoing recessionary pressures.

Breaking: UBS To Buy Credit Suisse In $3.3 Billion Deal

Most strategists including the Damped Spring’s Andy Constan agree. In a recent video, Constan detailed the implications of policymakers’ intervention. In short, an asset fire sale was turned into a managed sale, and a reduction in credit creation will tighten financial conditions, slowing the economy and inflation.

“Small banks that are facing deposit outflows will see earnings and margins collapse as their cost of funds surges from 1% or 2% on deposits to 4% or 5% at the Fed funding facility,” Basmajian summarizes, noting that the increase in the Federal Reserve (Fed) balance sheet came from the discount window, new bank funding facilities, and spillover from the FDIC insurance backstop, all of which are not to be confused with quantitative easing or QE (i.e., monetary stimulus and a flow of capital into capital markets). 

Graphic: Retrieved from Bank of American Corporation (NYSE: BAC) via The Market Ear.

“As deposits leave regional and smaller banks for more yield and safety, they will flow into bigger banks that do less lending or into money market funds that don’t drive credit creation.” Consequently, there will be “a significant tightening of lending standards, and a credit crunch on the private economy as regional and smaller banks face massive funding pressure.”

Graphic: Retrieved from Morgan Stanley (NYSE: MS) via The Market Ear. “MS models show that a permanent +10pt tightening in lending standards for C&I loans leads to a 35bps rise in the unemployment rate over the next two years. Historically, recessions have arrived more than half a year after jobless claims begin a sustained rise.”

Traders are conflicted about the Fed’s coming interest rate decision. Many were expecting a couple more hikes of at least 25 basis points in size. However, following the recent bank turmoil in the US and abroad, it appears that traders think it will be one additional 25 basis point hike before rate cuts ensue in mid-2023.

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

Historically, selling markets on the last Fed rate hike is a good strategy, Bank of America found.

Graphic: Retrieved from Bank of American Corporation (NYSE: BAC) via The Market Ear.

Positioning

Top-line measures of implied volatility or IVOL including the Cboe Volatility Index or VIX are higher heading into Monday’s trade.

Macro uncertainties have some frightened, hence “equity volatility present[ing] itself in a much stronger way,” said The Ambrus Group’s Kris Sidial. For this equity volatility (i.e., implied volatility or IVOL) to continue performing well, realized volatility or RVOL (i.e., the movement that actually happens and is not implied by traders’ supply and demand of options) must shift and stay higher as well (note: in many ways RVOL and IVOL reinforce the other during extreme greed or fear events.

Though big options expiries (OpEx) “may help unpin the market” and manifest market downside and follow-through in RVOL needed to keep IVOL performing, the window for this to happen may be closing.

The monetization of profitable options structures, as well as volatility compression and options decay, may result in counterparties buying back their short stock and/or futures hedges (to the short put positions they have on), thus boosting the market (particularly the depressed and rate-sensitive Nasdaq 100).

If the market rallies, that has the potential to “make things hotter” in the economy, explained Kai Volatility’s Cem Karsan, which emboldens policymakers to make and keep policy tighter. So, barring follow-through to the downside, any equity market upside that arises is likely limited, as a disclaimer, some think.

Apologies for rushing this section, today. More on positioning in the coming letters.

Technical

As of 8:10 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a negatively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,946.75. 

Key levels to the upside include $3,970.75, $3,994.25, and $4,026.75.

Key levels to the downside include $3,912.25, $3,891.00, and $3,868.25.

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

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

Definitions

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

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

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

About

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 17, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 8:50 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Fundamental

Higher asset prices boosted household wealth and demand; consumers’ increased ability to spend more wealth pushed up inflation. If policymakers use their tools to lower household wealth and demand, this should cut down on inflation.

Kai Volatility’s Cem Karsan says the latter was a policy objective and recent financial institution failures are a sign of follow-through; excesses and speculation are being removed, as policymakers desired.

Policymakers don’t want liquidations, however. They want lower asset prices. Recent events put policymakers in an odd position after raising rates non-stop. In the Federal Reserve’s (Fed) case, and we paraphrase Karsan, policy/rates moved very quickly with little pause. With there being a lag, the Fed may want to pause and assess. However, they have to telegraph this carefully so that the market does not read it as a pivot. If the market rallies, that “makes things hotter,” Karsan says.

There’s already been an overreaction in the bond market, he adds, which is not ideal. The Fed does not want the long end of the yield curve to fall, as it has on the back of the turmoil and intervention, as well as data including housing starts which show more supply coming onto the market, likely a mortgage application booster in the near term.

Graphic: Retrieved from USTreasuryYieldCurve.com.

Even at the front end, there’s been lots of movement. This has “forc[ed] widespread risk liquidation,” Bloomberg says. Take a look at the Three-Month SOFR (FUTURE: /SR3), a tool used to hedge USD short-term interest rates.

Graphic: Retrieved from Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s thinkorswim platform.

The consensus, which Karsan agrees with, is that the Fed moves forward with a 25 basis point hike while telegraphing it wants the long end of the curve to rise or higher for longer as it is colloquially referred to.

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

It is possible for the US policymakers to adopt a meeting-by-meeting stance, as their counterparts have in Europe, letting uncertainties regarding the likes of Credit Suisse Group AG (which just received a ~$54 billion or so liquidity backstop and is mulling a combination with other lenders), SVB Financial Group (NASDAQ: SVB) and First Republic Bank (NYSE: FRC) pan out.

Graphic: Retrieved from Bloomberg. “[T]he credit extended through the two backstops show a banking system that is still fragile and dealing with deposit migration in the wake of the failure of Silicon Valley Bank of California and Signature Bank of New York last week.” Per John Authers: the phenomenal borrowing from the Fed’s discount window suggests that if these are just liquidity problems, they are widespread and serious. Further, the point of the exercise is to slow down the economy, which will in time tend to put pressure on banks’ solvency.”

Pausing, or intending to pause explicitly, could raise inflation expectations or “boost the odds of a recession by spooking consumers and companies into believing that the economy is worse off than they thought,” Bloomberg explains, noting: “All told, the emergency loans reversed around half of the balance-sheet shrinkage that the Fed has achieved since it began so-called quantitative tightening — allowing its portfolio of assets to run down — in June last year.”

Graphic: Compiled by Physik Invest. Per Jefferies Financial Group Inc’s (NYSE: JEF) Christopher Wood: “2022 was the year when US equities suffered multiple contraction from monetary tightening. This year will be the year when earnings downgrades hit the stock market if the US recession forecast proves to be accurate. This is now the key issue in world financial markets. Then 2024 will be the year when markets will have to deal with the emerging credit problems in the private space.”

Positioning

Heading into this most recent market decline, investors foresaw increased volatility and were positioned for it as indicated by the pricing of tail risk and performance of implied volatility or IVOL (as investors continued to demand protection during this window of non-strength), said Laya Royer of Citadel Securities.

Recall that Kris Sidial warned us of this. Options, colloquially referred to as volatility, would serve as the only hedge in an environment wherein commodities, stocks, and bonds don’t combine or balance each other as well as they did in 2022.

Graphic: Retrieved from Bloomberg.

Now, there are options expirations (OpEx) nearing (March 16 and 31); monetization of profitable options structures, as well as volatility compression and options decay, have counterparties buying back their short stock and/or futures hedges (to the short put positions they have on), boosting the market (particularly the depressed and rate-sensitive Nasdaq 100) through this OpEx/triple witching window.

Graphic: Retrieved from Cboe Global Markets (BATS: CBOE).

Following this period, the “rollover” of existing positions may result in “price swings” that last, Bloomberg puts forth. “This quarterly expiry may help unpin the market.”

Structures proposed in the Daily Brief for March 14 may work in reducing portfolio downside while allowing you to participate directionally at less cost.

Technical

As of 8:50 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,970.75. 

Key levels to the upside include $4,004.75, $4,037.00, and $4,059.25.

Key levels to the downside include $3,946.75, $3,921.25, and $3,891.00.

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

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

Definitions

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

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

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

About

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 16, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 7:15 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

As previously indicated, through the end-of-this week, newsletters may be shorter due to the letter writer’s commitments. Take care!

Fundamental

Based on the 30-Day Fed Funds (FUTURE: /ZQ), traders expect the Federal Reserve (Fed) to continue its tightening campaign with a 25 basis point rate hike at the next Federal Open Market Committee (FOMC) meeting. Following this, traders expect one more 25 basis point hike that brings the terminal or peak rate to 5.00-5.25%.

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

Earlier this week, traders were pricing out hikes on financial institutions’ liquidity issues (e.g., SVB Financial Group) and data, including producer prices and retail sales, “moving in the right direction,” said Vital Knowledge’s Adam Crisafulli.

Graphic: Retrieved from Bloomberg via Gavekal Research/Macrobond. Recall that the Fed believes in needs a certain level of reserves for the proper functioning of the financial system (~$2 trillion). In 2019, banks dumped a lot of their reserves into repo to earn some extra return. When QT was about to end, there was less money in their reserves which preceded a spike in rates and a blow-up among those who needed the money the most, as explained here. Read the Daily Brief for September 20, 2022, for more.

Now, with fear of contagion ebbing on authorities’ commitment to preventing an “all-out systemic crisis,” explains Bloomberg’s John Authers, traders are again expecting a 5.00-5.25% terminal or peak rate.

Read: Credit Suisse Group AG (NYSE: CS) protection reaches prohibitively expensive levels as banks rush into CDS after big shareholders hesitate to boost their stake. Switzerland was forced to step in with a $54 billion lifeline to stabilize the crisis.

Graphic: Retrieved from Bloomberg via Holger Zschaepitz.

Adding, as Unlimited’s Bob Elliott puts it, “in the [Global Financial Crisis], credit risk spread rapidly. Today, there is very little [credit default swap] impact” or carryover.

Read: Daily Brief for October 4, 2022, for calculating CDS market-implied probability of default.

Graphic: Retrieved from Alexander Campbell.

Positioning

Following measures of US Treasury yield volatility implied by options (i.e., bets or hedges on or against market movement) adjusting higher, equity market volatility strengthened as observed by measures of convexity (e.g., Cboe VIX Volatility Index or VVIX). The Daily Brief for March 14 talked about this in detail.

Graphic: VVIX chart retrieved from TradingView.

For this protection to keep its value and continue to perform well, realized volatility or RVOL must shift higher substantially and stay elevated. That’s not really happening to some big extent, at least in the equity market. Consequently, put structures such as bear put spreads in the S&P 500 (INDEX: SPX), for example, are not performing.

Graphic: Retrieved from Alpha_Ex_LLC. “Easy to argue that rate vol is leading and in this context, one could suggest VIX has room to rise from here.” However, it would “take a lot for the MOVE to sustain itself at this level.”

This information, coupled with falling implied volatility or IVOL, the passage of nearing derivatives expiries, and the strength of products like the Nasdaq 100 (INDEX: NDX) relative to others like the Russell 2000 (INDEX: RUT), has your letter writer leaning optimistic. Though it may be too early to position for strength, one may consider it the way it was explained in the Daily Brief on March 14.

Graphic: Retrieved from Tom McClellan. “The direct message is that the SP500 options traders who drive the VIX Index are feeling more fearful than the VIX futures traders believe is merited.”

Technical

As of 7:15 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a balanced overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,904.25. 

Key levels to the upside include $3,921.25, $3,946.75, and $3,970.75.

Key levels to the downside include $3,891.00, $3,868.25, and $3,847.25.

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

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

Definitions

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

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

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

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

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 15, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Subscribe
Graphic updated 6:15 AM ET. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

As indicated yesterday, through the end-of-this week, newsletters may be shorter due to the letter writer’s commitments. Therefore, please read the Daily Brief for March 14, if you haven’t already, for a big discussion on bond and equity market volatility, as well as the odds of the market falling apart or rising, and positioning contexts that support that movement. If there are any incomplete statements below, we shall complete them in the coming letters. We’re laying it all out for awareness. Take care!

Fundamental

Headline inflation via CPI (Consumer Price Index) fell most on energy and core goods while shelter, food, and services inflation continues to be sticky. Core prices continue to be high, risking “inflationary psychology [] becoming ingrained,” Bloomberg’s John Authers explains.

Graphic: Retrieved from Bloomberg.

“There’s nothing in this report to suggest that inflation is defeated already,” explained Authers. “Not to raise the fed funds rate next week, with median inflation above 7%, would be a sign of panic,” and an acknowledgment of uncertainties with regard to the banking system, as talked about in the Daily Brief on March 14.

To note, however, contagion appears contained, despite Moody’s Corporation (NYSE: MCO) cutting its outlook for the banking system to negative from stable, and placing lenders including First Republic Bank (NYSE: FRC) on a downgrade review.

JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic did cut his equity allocation warning that not all carry trades, something this letter has talked about numerous times before (i.e., borrow at a low rate and invest in something that provides higher return), can be bailed out. Kolanovic appears worried about commercial real estate, which Simplify Asset Management’s Michael Green just told your letter writer is in a bubble that “we’re seeing crack,” finally.

Graphic: Retrieved from Bloomberg. The Federal Reserve’s new Bank Term Funding Program or BTFP is “QE in another name – assets will grow on the Fed balance sheet which will increase reserves.” Recall that QE is the flow of capital into capital markets while QT is the opposite. Q is for quantitative while E is for easing and T is for tightening.

Anyways, following yesterday’s CPI, traders price higher odds of a 25 basis point hike which puts the terminal or peak fed funds rate at 4.75-5.00%. Following this spring, factoring potential inflation plateau and financial system uncertainties, traders foresee the Fed easing. By year-end, traders expect rates to fall down to 3.75-4.00%. Recall that at the beginning of last week, there were no expectations of easing in 2023. Also, traders thought the Fed would raise as high as 5.50-5.75%.

Mortgage rates, determined by changes in the price of mortgage-backed securities or MBSs, fell too.

Graphic: Retrieved from ZeroHedge. Adding: “US layoffs [are] far higher than suggested by initial jobless claims, JOLTS.”

ARK Invest’s Cathie Wood, who your letter writer had the honor of interviewing in person for Benzinga articles, thinks we’re on the cusp of the “roaring twenties” as inflation “is likely to surprise on the low side of expectations” with the banking crisis also leading to “bad deflation.”

“Today, five major innovation platforms are evolving at the same time – multiomics sequencing, robotics, energy storage, artificial intelligence, and blockchain technology, all of which are converging,” she elaborates.

“Once the Fed stops looking backward at CPI inflation and starts addressing the deflationary banking crisis that a 19-fold increase in short rates and an inverted yield have caused, we would not be surprised to see a return to the Roaring Twenties.”

Graphic: Retrieved from Bloomberg.

On the backward-looking measures quote in the above paragraph, former Fed trader Joseph Wang notes that the Fed and central banks, in general, are aware segments of the market may break, but that won’t discourage them from tightening further.

“As the BOE saved the gilt market through purchases and kept tightening, so the Fed can save banks and keep tightening.”

Positioning

Tuesday’s letter said that following important events like CPI, the compression of wound implied volatility or IVOL, coupled with the nearing large options expirations (OpEx), sets the market up for potential short bursts of strength into the end of the month and next month.

That’s along the lines of what is happening. The S&P 500 rose mechanically after the release of CPI yesterday. Later, though the index succumbed, internally speaking the market remained strong through end-of-day, hence some short bursts boosted by some short-dated options activities, also.

As explained, yesterday, the recent re-grossing theme appears intact. Any further compression of wound IVOL and the passage of options expirations (OpEx) could support equities as month-end approaches. Though it may be too early to position for strength, one may consider it the way it was explained in the Daily Brief on March 14.

Technical

As of 6:15 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a negatively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,904.25. 

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

Key levels to the downside include $3,884.75, $3,868.25, and $3,847.25.

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

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

Definitions

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

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

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

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

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

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

Connect

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

Calendar

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

Disclaimer

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

Categories
Commentary

Daily Brief For March 14, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

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Graphic updated 6:30 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.

Administrative

A long(er) letter, today. Through the end-of-this week, newsletters may be shorter due to the letter writer’s commitments. Take care!

Fundamental

Yesterday’s letter focused on the SVB Financial Group (NASDAQ: SIVB) failure, albeit with an optimistic tone. In short, the bank could not make good on fast accelerating withdrawals. Read more here.

According to one TechCrunch article, the likes of Founders Fund “reportedly advised their portfolio companies … to withdraw their money, … [and], if everybody is telling each other that SVB is in trouble, that will be a challenge,” as it was.

Graphic: Retrieved from @Citrini7. In the worst-case scenario, it was likely that uninsured depositors at SIVB would have received $0.80 on each dollar barring a bailout.

Authorities later put forth emergency measures guaranteeing all deposits. The effort shored up confidence in the banking system and markets strengthened, though some regional names such as First Republic Bank (NYSE: FRC) continued trading weak. In FRC’s case, the Federal Reserve’s (Fed) new bailout facility does not help. As former Fed trader Joseph Wang explains, “you need Treasuries and Agency MBS to tap the facility, and [FRC] barely owns any.”

Graphic: Retrieved via Joseph Wang.

Anyways, as yesterday’s letter briefly mentioned, expectations on the path of Fed Funds shifted. Traders put the terminal/peak rate at 5.00-5.25%, down from 5.50-5.75%, while pricing cuts after spring. Previously, no cuts were expected in 2023.

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

Some Treasury yields fell spectacularly, too, …

Graphic: Retrieved from Bloomberg.

… on par with those declines experienced amidst major crises, at least in the case of the 2-year.

Graphic: Retrieved from Bloomberg.

Measures of US Treasury yield volatility implied by options (i.e., bets or hedges on or against market movement) adjusted higher, accordingly. This is often a harbinger of equity market volatility.

Graphic: Merrill Lynch Option Volatility Estimate retrieved from TradingView

Call options on the three-month Secured Overnight Financing Rate (FUTURE: SOFR) future (i.e., bets on interest rates falling in the future) paid handsomely.

For instance, bull call spreads that expire in December 2023 (e.g., BUY +1 VERTICAL /SR3Z23:XCME 1/2500 DEC 23 /SR3Z23:XCME 96/97 CALL @.0375) increased in value by about 650.00% to $0.33 (i.e., $750.00 per contract).

Graphic: Retrieved via TradingView. Three-month SOFR Future (December 2023). When SOFR is at a lower (higher) number, the market is pricing an increase (decrease) in interest rates. Participants put the December 2023 SOFR rate at 100-96.145 = 3.855%.

In the equity space, some readers may have caught some commentary on spot-vol beta in the VIX complex strengthening like we have not seen in a while, a nod to the harbinger of equity market volatility remark a few paragraphs higher.

Recommended Readings:

  • Read: The Ambrus Group’s Kris Sidial on two major risks investors should watch out for in 2023. In short, volatility’s sensitivity to underlying prices (spot-vol beta) was low, and Sidial cast blame, in part, on commodity trading advisors and strong volatility supply.
  • Read: Simplify Asset Management’s Michael Green on using option and bond overlays to hedge big uncertainties facing markets. Following 2022, investors swapped poor-performing long-dated volatility exposures for ones with bounded risk and less time to expiry, hence the increase in 0 DTE trading.
Graphic: Retrieved from Piper Sandler’s (NYSE: PIPR) Danny Kirsch.

This spot-vol beta remark suggests that (at least some of) the volatility in rates, as well as certain small pockets of the equity and crypto market, manifested demand for crash protection in the S&P 500, “which feeds back into VIX,” one explanation put well.

Graphic: Retrieved from Piper Sandler’s (NYSE: PIPR) Danny Kirsch. “[Last] week finally got a bit of explosiveness in VIX as fixed strike volatility got bid. This is VIX generic front month future and move in SPX. Last time it really “paid” to have VIX upside was Jan of 2022 (point in upper left corner).”

Notwithstanding, for these options to keep their value and continue to perform well, realized volatility (RVOL) must pick up substantially, which is not likely.

Unlimited’s Bob Elliott comments: “the bond market is pricing a broad-based credit crunch, … [and though] it’s not crazy for the Fed to slow down here given the current uncertainty,” odds are financial problems are contained and the Fed moves forward with its mission to get (and keep) inflation down.

Graphic: Retrieved from Fabian Wintersberger. Just as the “monetary expansion supported the rise in equity and bond prices in January.”

Consequently, “the pricing of Dec23s and 5yr BEIs makes no sense,” Elliott adds. This means the example SOFR trade above is/was ripe for some monetization, and equity volatility must be dealt with carefully (i.e., price movements must be higher than they are now which would be difficult given that authorities/Fed do not want liquidations).

In support of siding with the less extreme take, we paraphrase Kai Volatility’s Cem Karsan who says that for years prior to the 2007-2008 turmoil, macro tourists were calling for a crash.

For markets to crumble, there would have to be an exogenous event far greater in implications than what just transpired with SIVB over the weekend. With odds that such turmoil doesn’t happen soon, coupled with participants easing up on their long-equity exposure (i.e., selling stock and not needing to hedge, hence the statement that owning equity volatility must be dealt with carefully), RVOL is likely to stay contained. That’s not to say that this volatility observed in the rates market can’t persist. It’s also not to say that markets can’t continue to trade lower (in fact, with interest rates rising and processes like quantitative tightening challenging bank liquidity, there is less incentive for investors to reside in lower-yielding equities). It just means that, barring some exogenous event, the market remains intact.

Graphic: Retrieved from Jack Farley. “Silicon Valley Bank owns >$80 Billion of Mortgage-Backed Securities (MBS), a market that is ‘more prone to bouts of volatility’ because ‘small investors & leveraged funds have become the main buyers’ as the Fed & banks step away from market, according to Dec 2022 BIS report.”

Positioning

Following important events like the release of the Consumer Price Index (CPI) today, the compression of implied volatility or IVOL, coupled with the nearing of big options expirations (OpEx), sets the market up for potential short bursts of strength heading into the end of the month and next month.

Graphic: Retrieved from Bloomberg. Inflation has been well within forecasts.

A quick comparison of the Russell 2000 (INDEX: RUT) and Nasdaq 100 (INDEX: NDX) suggests this options-induced strength may help keep the recent re-grossing theme intact. The compression of wound IVOL and passage of OpEx, coupled with the still-live re-grossing theme, may put a floor under equities.

Graphic: Retrieved from TradingView. Orange = RUT. Candles = NDX. Note the weakness in RUT. Note the strength of the Nasdaq relative to the Russell.

To play, one could place a portion of their cash in money market funds or T-bill ETFs or box spreads, for instance, while allocating another portion to leverage potential by way of some call options structures that use one or more short options to help bring down the cost of a long option that is closer to current market prices (e.g., a bull call spread or short ratio call spread). To note, based on options prices as of this writing, it may be too early to enter call structures (i.e., too expensive given the context).

 Technical

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

The S&P 500 pivot for today is $3,904.25. 

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

Key levels to the downside include $3,884.75, $3,868.25, and $3,847.25.

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

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

Definitions

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

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

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

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

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

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

Connect

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

Calendar

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

Disclaimer

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