Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 7:00 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.
Positioning
A brief letter, today. Have a good weekend!
Last week, this letter discussed the precariousness of the market’s position. The data suggested pressure was to surface. This pressure surfaced and was exacerbated by traders’ new demands to hedge their downside, hence higher implied volatility (IVOL), among other things like poor Treasury auctions and higher yields pulling investors out of equities.
Graphic: Retrieved from Bloomberg via Piper Sandler Companies’ (NYSE: PIPR) Danny Kirsch.
Furthermore, pressures from demands to protect against the downside are mounting. To explain, think about what’s happening to the other side of those positions traders demanded. As markets trade lower, those positions work against the counterparty. To hedge, the counterparty likely sells underlying. This adds to pressure and instability.
When does it stop?
Well, all else equal, the Damped Spring’s Andy Constan thinks the instability sticks around at least until the S&P 500 (INDEX: SPX) reaches the $4,050.00 strike area, which we discussed the importance of in yesterday’s letter, and profits are taken, or the middle of next week after an update of the Consumer Price Index (CPI). Any short-term relief having to do with the decay of those options would be exacerbated next week by volatility compression if traders’ inflation fears are assuaged.
After next week, the market may be more at the mercy of macro-type repositioning, but we will discuss next week in detail. Also, note that previously attractive trades included selling rich call verticals to finance put verticals. These are no longer the most attractive trades.
Technical
As of 6:50 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, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,070.00.
Key levels to the upside include $4,083.75, $4,100.25, and $4,122.75.
Key levels to the downside include $4,052.25, $4,028.75, and $4,011.75.
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 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.
About
The author, Renato Leonard Capelj, works in finance and journalism.
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 options analyst at SpotGamma and an accredited journalist.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 7:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.
Positioning
The cross-cutting forces on inflation are set to net out says Bob Elliott, the CIO at Unlimited. The former Bridgewater Associates executive thinks short-term inflation pressures are skewed upward, and that new data suggests “the respite in inflation … is probably going to fade and higher numbers are going to print.”
In short, disinflation from oil prices and the amelioration of supply chains “cannot persist, and that’s what we’re seeing now. It looks like those upward pressures on inflation are moving faster than the pace that services prices and housing costs are moving down.”
Consequently, there is a potential for broad inflation measures to remain higher for longer, hence the thinking that the Federal Reserve (Fed) indeed stays tougher on inflation for longer (i.e., higher rates for longer). This would support traders’ recent desire to bet large on downside movement next week when the Consumer Price Index (CPI) is set to update.
Publicized by Kai Volatility’s Cem Karsan and Damped Spring’s Andy Constan, some trader(s) bought to open 24,000 put options at the $4,050.00 S&P 500 (FUTURE: /ES) strike expiring February 17, 2023. The trade coincided with market makers selling to open “roughly 7,200 [/ES] futures contracts worth roughly $1.5 billion.” This “caused the local low,” Constan, who also worked at Bridgewater (and your letter writer had the honor of interviewing before), explained.
This trade, and others like it, compounded the pressures of the dealers selling their existing stock and futures “to re-hedge their call options exposures that are declining in value.”
Graphic: Retrieved from SqueezeMetrics.
Accordingly, the Cboe Volatility Index (INDEX: VIX) is bid, as is the Cboe VIX Volatility Index (INDEX: VVIX), which your letter writer talked about in a SpotGamma note last night. Basically, traders are hedging more, and this is observed by previously low readings of convexity moving higher. Still, given that there is still some time to CPI, there’s potential for “current prices the SPX trades at [to] appear sticky for lack of better phrasing,” SpotGamma explained; pre-CPI, traders often sell short-term volatility as a bet on limited movement. It’s the post-CPI expirations in which implied volatility (IVOL) is wound and will serve as a catalyst for a fast move higher or lower.
Graphic: Retrieved from TradingView. Blue = VVIX. Orange = VIX.
So, in the short-term, there may be some pinning, followed by an expansion of range into the mid-February (2/17) monthly options expiration (OpEx). This event likely puts the market in a precarious position and at the whims of macro-type repositioning, which may be bearish based on the insights this letter has covered in the past.
Graphic: Retrieved from Physik Invest. Data from SqueezeMetrics. Gamma exposure is set to fall in mid-February, and this may result in less support from the options market.
Trades that look and are working well include those that use short-call vertical credits to finance long-put vertical debits out months from now. For instance, for every two units of short call verticals (SOLD -1 VERTICAL SPX 100 19 MAY 23 [AM] 4150/4200 CALL), your letter writer is looking to own one unit of the long put vertical (BUY +1 VERTICAL SPX 100 16 JUN 23 [AM] 3450/3350 PUT). Remember that your letter writer may not necessarily think the market will trade that far, rather it may be a bet on IVOL repricing.
A case study on last week’s ultra-successful call ratio spreads is coming soon. Take care and watch your risk!
Technical
As of 7:20 AM ET, Thursday’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, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,168.75.
Key levels to the upside include $4,189.00, $4,202.75, and $4,214.25.
Key levels to the downside include $4,153.25, $4,136.25, and $4,122.75.
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 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.
About
The author, Renato Leonard Capelj, works in finance and journalism.
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 options analyst at SpotGamma and an accredited journalist.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 6:50 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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. Backed by popular demand, mortgage rates are rising; 30 Yr. Fixed ~6.45%.
Positioning
The S&P 500 (INDEX: SPX) closed higher yesterday despite the Federal Reserve’s (Fed) Jerome Powell warning rates would stay higher for longer.
According to an analysis by Interactive Brokers Group Inc’s (NASDAQ: IBKR), “it was clear that there were algos programmed to buy if [Powell] mentioned ‘disinflation.’ When [Powell] said the secret word, off we went.”
Graphic: Retrieved from Bloomberg. According to Bloomberg Economics’ Anna Wong, “The jobs surprise confirmed his message from the post-FOMC presser message that disinflation has barely begun and there’s still a long way to go. It seems clear he hasn’t shifted his views based on that gangbuster report alone.”
Implied volatility (IVOL) compression, as evidenced by shifts lower in the IVOL term structure and measures like the Cboe Volatility Index (INDEX: VIX) declining, was a booster, as was the trade of ultra-short-dated call options.
Graphic: Retrieved from SpotGamma on 2/7/2023. “[T]raders hit the bid after Powells “punt”. Stocks then violently flipped at 4165 (SPY 415) with heavy selling after a bad 1pm ET treasury action, only to go aggressively bid off of 4100 into end of day.”
SpotGamma’s HIRO indicator showed positive delta call buying and put selling. This indicator validates the belief that IVOL compression catalyzed a rally and that follow-on strength came from traders’ demand for call options. In instances of put selling and call buying, counterparties hedge by buying underlying stocks and futures.
One way to think about what’s going on is to recall that for options to keep their value, something unexpected has to happen. When nothing unexpected happens, from a trader’s perspective, what’s the value-add of continuing to own put options, for instance? So, you sell and pressure IVOL. Consequently, dealers, who are short puts declining in value, buy back some of their short stock and/or futures hedges, and this is supportive for the market.
Graphic: Retrieved from SpotGamma’s HIRO for the S&P 500 (INDEX: SPX) on 2/7/2023.
The bullish impact of this options activity, taken alone, is not long-lasting.
In the Daily Brief for February 3, 2023, we discussed the impact of this activity, all else equal; as time passes and/or volatility falls, the counterparties’ reaction to long call options, for example, declining in value is to sell some of the stock and futures they own as hedges. This can resist traders’ attempts to explore higher prices.
To close, it continues to make sense to position in structures that take advantage of still low longer-dated S&P 500 (INDEX: SPX) IVOL. For instance, traders can consider selling rich call verticals to finance put verticals expiring months from now.
In our recent commentaries, we reasoned why such structures are priced the way they are. Should market pressures surface, that’s a simple way to protect profits.
Technical
As of 6:50 AM ET, Wednesday’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 $4,153.25.
Key levels to the upside include $4,168.75, $4,189.00, and $4,202.75.
Key levels to the downside include $4,136.25, $4,122.75, and $4,113.00.
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
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, works in finance and journalism.
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 options analyst at SpotGamma and an accredited journalist.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.
Fundamental
In late December 2022, this letter unpacked the likelihood that concerns over inflation were overblown. Strength in markets would re-appear despite earnings deterioration.
Graphic: Retrieved from Morgan Stanley (NYSE: MS) via The Market Ear.
“If the market sniffs out an inflation-driven pause or a pivot from the Fed, even before a drawdown in risk assets is seen, we may get a disinflation rally,” this letter quoted Andreas Steno Larsen explaining. Accordingly, when the Fed upped its benchmark rate by 25 basis points last week and chairman Jerome Powell appeared “not ‘overly combative,” traders turned ultra-optimistic and levered up.
Notwithstanding, the Damped Spring’s Andy Constan believes that pressures are set to remain strong. Traders are pricing higher rates for longer after some new data last week, and the flow of capital, out of capital markets (via quantitative tightening or QT), will be a strong headwind.
Fabian Wintersberger added that if central banks, indeed, are “more restrictive for longer to dampen the pressure of rising consumer prices, … [this] supports the thesis that stocks and bonds will have to fall … [leading] to a demand shift, back from financial markets into the real economy, … [and] the current consumer price disinflation is probably just an injury break before we see the real slowdown between inflation and central banks next year.” Consequently, the double-top inflation playbook appears intact, and volatility in financial markets is likely to persist.
Positioning
Late last week, this letter talked about data that pointed to weaker returns over a 5- to 10-day window. This was, in part, the result of short-dated options activity. After implied volatility (IVOL) compression helped catalyze a rally, SpotGamma, noted that traders’ open interest at slightly higher S&P 500 (INDEX: SPX) prices, and associated counterparty hedging, would likely result “in range suppression or pressure” as time passes and volatility falls. Why? Well, if a long call option’s probability of having value at expiration falls, the counterparty’s risk falls as well and, so, they can sell some of their hedges. This is market pressure.
Anyways, SpotGamma added, yesterday, that “pressure surfaced just when the … data said it was most likely to surface. This appears coincidental, however … [as] the SPX drops began during the first round of [some] VIX [trades]. Some traders entered into 300,000 VIX March 24 and 26 strike calls. The selling accelerated into Monday when nearly 122,000 VIX June 30/40 call spreads fired off. Dealers who may be short VIX calls are likely hedged with VIX futures (or other long volatility hedges). This hedging is market pressure.”
Graphic: Retrieved from SpotGamma’s PM Note on 2/6/2023.
If you’re playing for expansive moves, an attractive way to protect portfolios includes selling rich call verticals to finance put verticals with months left before expiration.
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 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 $4,122.75.
Key levels to the upside include $4,136.75, $4,147.00, and $4,165.75.
Key levels to the downside include $4,100.25, $4,079.00, and $4,052.25.
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.
About
The author, Renato Leonard Capelj, works in finance and journalism.
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 options analyst at SpotGamma and an accredited journalist.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 7:55 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.
Fundamental
To kick off this week, we’ll do a short recap of last week and, then, go into more depth over the coming days. Thanks for tuning in (and subscribing if you’re new). Have a great rest of your day!
As a recap, markets were strong last week with follow-on strength, in part, coming from the options complex; implied volatility (IVOL) shifting lower and the trade of short-dated options were likely two big market boosters. Trades that worked really well included structures long call options closer to current market prices and short call options farther from current market prices.
Investors were optimistic about the fact that “[i]nflation was coming down, the US was slowing down faster than Europe, and rates would soon be nudging down as the Federal Reserve [or Fed] aimed to ease the economy into a reasonably ‘soft’ landing,” Bloomberg’s John Authers said. However, “on Friday morning, the facts changed.”
Data is pointing to job creation, and this is likely to put upward pressure on inflation. Accordingly, traders are pricing higher rates, again; “the unemployment data, on its face, implied that rates short and long would have to rise because money remains too cheap,” Authers added. This news bolstered the selling heading into Monday.
Graphic: Retrieved from Bloomberg.
As The Macro Compass’ Alfonso Peccatiello summarized, “a bear market rally starts by squeezing out shorts [and] it extends through some narrative that seems to validate price action (2001: worst is behind; 2023: soft landing). In the end though, to morph into a new bull market it needs fundamentals and/or the Fed, [but it appears] you have neither in 2023.”
Positioning
Notwithstanding the equity market’s potential to stay strong into the mid-February timeframe as some strategists think (which we summarized in last week’s letters), with longer-dated SPX IVOL cheap, still “attractive trades include selling rich call verticals to finance put verticals.”
Technical
As of 7:45 AM ET, Monday’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, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,122.75.
Key levels to the upside include $4,136.75, $4,147.00, and $4,165.75.
Key levels to the downside include $4,100.25, $4,079.00, and $4,052.25.
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.
About
The author, Renato Leonard Capelj, works in finance and journalism.
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 options analyst at SpotGamma and an accredited journalist.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.
Positioning
The Federal Reserve’s (Fed) decision to increase its benchmark interest rate by 25 basis points kicked off a bout of strength, boosted by the compression of wound implied volatility (IVOL). This volatility compression we observed with a shift lower in the IV term structure in the S&P 500 (INDEX: SPX). Follow-on strength surfaced on Thursday and, based on an analysis of top-line IVOL measures such as the Cboe Volatility Index (INDEX: VIX) trending higher with the SPX, it was, in part, from traders’ demands for call options, hence high call option volumes.
Graphic: Retrieved from Bloomberg via Danny Kirsch on 2/2/2023.
Recall our detailed letter published prior to February 2, 2023 (e.g., February 1, 2023, January 26, 2023, and beyond). The context was set for the SPX and VIX to trend higher; traders bidding up call options due to their fear of missing out, in the context of less liquidity to absorb those demands, would be beneficial to owners of structures like call option butterflies and ratio spreads. Additionally, owning such structures would help dampen the impact of potential SPX downside on portfolios.
For instance, on January 25, 2023, this letter said trades structured in the indexes such as the Nasdaq 100 (INDEX: NDX), where there was a steeper skew that would enable us to collect more credit in the options we are short, thereby lowering the cost of the spread we own, looked attractive, given the likelihood that the index would stay strong after the earnings reports of some big movers like Tesla Inc (NASDAQ: TSLA).
In yesterday’s letter update, we said that such trades were working spectacularly. In fact, your letter writer’s trading partner, who “initiated some +1 x -2 (17 FEB 23 13500/14000) [NDX] call ratio spreads for free (i.e., $0.00 debit or better to enter),” saw his spreads price in excess of a $40.00 credit to close, yesterday. That structure went from a $0 debit to open to a $4,000.00 credit to close. Again, nice job Justin. I’m expecting that case study, soon!
The NDX was probably the best place to be, yesterday, looking at the magnitude of movement in some of the heavyweights in the SPX, yesterday.
Noteworthy is that many of the strongest performers (e.g., Google, Amazon, Apple) weakened considerably in the after-market when their earnings, and the speeches associated, pointed to some challenges ahead.
Breadth was, generally, not that strong, to add. This validates your letter writer’s belief the market is in a precarious position. Notwithstanding the market’s potential to stay strong into the mid-February timeframe as some strategists believe, the data seems to suggest that “whenever there are two million or more call contracts that exchange hands on the Cboe, future 5- and 10-day returns tend toward being negative (about -1.37% and -2.12% respectively),” SpotGamma said.
SpotGamma added: “This is, in part, because the bullish hedging impact of short-dated call options activity is not long-lasting. Also, IV compressing from a relatively low starting point also does little to bolster long-lasting rallies.”
As further validation for the precariousness the market is in, “[t]he most prominent feature of the 0DTE landscape is actually customer-bought calls way out at $4,200.00 (which would ramp up buying from dealer long-gamma if SPX were to rise to ~$4,170.00.” Per SpotGamma, should “traders’ interest build at or slightly above current SPX prices, then dealers’ hedging may actually result in range suppression or pressure” as time passes and volatility falls. That’s because if a long call option’s probability of finishing in the money at expiration falls, the dealer’s risk falls as well and, so, the dealer can sell some of their hedges. This is market pressure.
As this letter stated, yesterday, knowing that longer-dated SPX IVOL “is cheap, now attractive trades include selling rich call verticals to finance put verticals.”
Per Joseph Wang, the “increasing probability of a second bout of inflation, an issue in the 1970s that the Fed is keen to avoid … [by] retighten[ing] financial conditions … through its balance sheet,” the flow of capital out of capital markets presents more pressure on the financial economy (not necessarily the real economy). Cheap put protection may help hedge the realization of further macro-type market pressure.
As of 8:15 AM ET, Friday’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 range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,165.75.
Key levels to the upside include $4,189.00, $4,202.75, and $4,214.25.
Key levels to the downside include $4,153.25, $4,136.75, and $4,122.50.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels hold weight 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.
About
In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 7:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.
Positioning
The Federal Reserve (Fed) upped its benchmark interest rate by 25 basis points. This puts the target rate range between 4.5% and 4.75%.
The Fed’s Jerome Powell signaled that toughness on inflation will last; though the “disinflation process has started,” and markets are pricing about 50 basis points of cuts by year-end, Powell said rates will continue to increase at least a couple more times. He said rates may reach as high as 5.25% to cut “inflation to 2% over time.”
Markets rallied sharply when Powell began talking. Some suggest his not “overly combative” responses were a reason. Looking back to the Daily Brief for February 1, 2023, we said that in spite of “toughness from the Fed,” markets would likely trend sideways to higher as traders would “not be able to justify the pricing of the ultra-short-dated options they demanded heading into Wednesday.”
Consequently, the supply and expiry of short-dated options coincided with dealers, who were short-stock against the puts they supplied, buying back their hedges. Kai Volatility’s Cem Karsan put this well in a media appearance pre-Fed.
He said that “vol structurally affects how markets move” and that put options, which traders own and dealers are short (and hedging with short stock, as well), would likely go down in value as the “event vol” falls; “those vanna and charm effects will naturally lead to a buyback.”
Graphic: Retrieved from SqueezeMetrics. Click to learn the implications of volatility, direction, and moneyness.
For context, vanna is the change in an options delta with respect to changes in IVOL. Charm is the change in an options delta with respect to changes in time. These are second-order derivatives of an option’s value, once to time or IVOL, and once to delta.
The positive market response, however, should not overly excite. Rather, the market is in a precarious position, and the compression of volatility, given its low starting point, probably does little to encourage a long-lasting rally.
Graphic: Small spread between realized (RVOL) and implied (IVOL) volatility. Retrieved from Bloomberg via CME Group Inc (NASDAQ: CME) analysis.
Trades this letter put forth (e.g., call butterflies and ratio spreads) that would benefit from a sharp move higher while limiting the downside, in products like the Nasdaq 100 (INDEX: NDX), are working spectacularly. In fact, while your letter writer was traveling, his trading partner initiated some +1 x -2 (17 FEB 23 13500/14000) call ratio spreads for free (i.e., $0.00 debit or better to enter), and those spreads are now pricing over $6.00 credit to close. That’s $600.00. Nice job, Justin!
Anyways, though markets could continue trending higher, the risks for a move lower, particularly after mid-February, are increasing some say. Additionally, though we keep our technical analysis usually limited to volume and market profiles, there are a few anchored volume-weighted average price levels sticking out just above current prices.
For context, VWAPs are metrics highly regarded by chief investment officers, among other participants, for the quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
Knowing that longer-dated S&P 500 (INDEX: SPX) implied volatility (IVOL) is cheap, now attractive trades include selling rich call verticals to finance put verticals.
As an aside, there are a number of reasons for calls pricing the way they do. Some of them include the opportunity cost of forgone interest (i.e., buy a call and invest the outlay difference in an interest-bearing account), as well as a fear of missing out in the context of a lower liquidity environment and less supply to absorb demand for hedging (hence higher lows in the VIX).
Graphic: Retrieved from Morgan Stanley (NYSE: MS).
Technical
As of 7:30 AM ET, Thursday’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 range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,153.25.
Key levels to the upside include $4,165.75, $4,189.25, and $4,202.75.
Key levels to the downside include $4,136.75, $4,122.50, and $4,100.25.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels hold weight 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.
About
In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.
Positioning
Markets think the Federal Reserve (Fed) raises its benchmark rate by 25 basis points. Notwithstanding the less aggressive hike, strategists believe the Fed will stay tougher on inflation for far longer and, accordingly, crush traders’ optimism.
“I suspect the Fed messaging tomorrow will push back against the pivot narrative and thereby current bond market pricing,” DoubleLine Capital CIO Jeffrey Gundlach said. Former investment banker and trader, as well as the president of the Minneapolis Fed, Neel Kashkari warned the Fed is set on finishing the job and cutting inflation, even if it costs millions of Americans their jobs. “I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic,” he said.
Further, relief in markets (e.g., stocks, housing) is a boon for asset owners and may enable companies to raise cash, bid up equipment prices, and demand new hires.
Graphic: Retrieved from Mortgage News Daily. “A trend of [increasing] purchase applications implies home buyer demand is [increasing].” The prevailing narrative is that the Fed wants less inflation and less demand. This narrative’s been disrupted, in part. Recall our Monday letter talking about investors’ desire to put their cash to work and the demand for treasuries (i.e., bond bid and yield pressured) which forced investors into previously depressed assets.
With inflation still a problem, regardless of whether there are better solutions as we put forth in the January 31 letter, the Fed is looking to keep rates above 5% for the rest of 2023, though markets are pricing a pivot far earlier and at a lower rate.
Despite the expectation of toughness from the Fed, markets have not broken down. Rather, if we zoom out, they are trending sideways to higher and may continue to do so. That’s according to Kai Volatility’s Cem Karsan who says that implied volatility (IVOL) is heightened across options with very little time to expiry (1- to 3-days).
“Event vol, which is the pricing of one-, two-, and three-day options, is significantly higher than everything else behind it right now,” he said, noting that customers’ or traders’ demands for downside put protection is the culprit. That said, despite the committee’s recent hawkishness, “the market responded relatively well at those levels, and you’re seeing vol come back down.”
Graphic: Retrieved from TradingView. First included in SpotGamma’s PM Note for 1/31/2023. During Tuesday’s strength, measures of IVOL, such as the Cboe Volatility Index (INDEX: VIX) fell, though the VIX did not move lower in as sharp of a fashion that the S&P 500 (INDEX: SPX) traded higher. In fact, the VIX trended up into the close, after a mid-day bottom, suggesting some left-over hedging demands ahead of some important macroeconomic drivers this week.
“I think that’s kind of likely what you’re going to see, regardless of what the Fed does,” Karsan added. That’s because, barring some unexpected development, traders will not be able to justify the pricing of ultra-short-dated options post-Fed; the supply and expiry of short-dated options will coincide with the dealers or market makers who are short-stock against the puts they supplied buying back their hedges.
“Vol structurally affects how markets move. Puts are the way people hedge in the market and dealers are short the puts. If you have an event vol that comes down, those vanna and charm effects will naturally lead to a buyback,” post-Fed.
For context, vanna is the change in an options delta with respect to changes in IVOL. Charm is the change in an options delta with respect to changes in time. These are second-order derivatives of an option’s value, once to time or IVOL, and once to delta.
You might have heard the old #trading adage "never short a dull market", Cem Karsan @jam_croissant explains how some second order Greeks, vanna & charm, play a role in proving out that phrase. #Vol411pic.twitter.com/AMnd7kQQdA
As your letter writer explained in a SpotGamma analysis yesterday, we saw an interest to hedge heading into this week’s Fed announcement. This coincided with a slight rebound in measures like the Cboe VIX Volatility (INDEX: VVIX) (which, in general, reads low and suggests convexity is a good place to be), and put a damper on the rally, hence its climax on Friday.
Moreover, if “macroeconomic events do not disappoint, IVOL compression may provide markets a boost,” SpotGamma explained. “Notwithstanding, the marginal compression of heightened IVOL, because of its lower starting point, probably does less to encourage a longer-lasting rally,” hence the thought that, if there was to be relief post-Fed, it would likely last up until the mid-February monthly options expiration (OpEx). OpEx’s removal of traders’ options protection (as well as dealers’ supportive buyback to those options that were demanded), may leave the market at risk of bearish macro-type flows.
Compounding the risk is traders’ expected reaction in case of weakness. The desire to hedge during a drop would coincide with a re-pricing in IVOL dangerous to anyone who is short volatility, hence this letter’s recent focus on owning the S&P 500 (INDEX: SPX) via call butterflies and call ratio spreads, the sorts of trades that would benefit from an SPX and VIX up environment (the result of traders bidding up call options due to their fear of missing out, in the context of less liquidity to absorb those demands).
To summarize everything, we have the Fed rate decision coming up. After, markets will be volatile but more likely to trend higher into mid-February, bolstered by traders’ fears of missing out in the context of a lower liquidity environment, as well as stimulus (e.g., falling Treasury General Account played into an easing of financial conditions by making it easier for banks to lend and finance trading activities). After mid-February, the window for markets to weaken and accelerate to the downside may open, based on the information we have today.
As an aside, the last time the Nasdaq 100 (INDEX: NDX) was up more than 10% in January was in 2001, The Market Ear informed subscribers yesterday.
Graphic: Retrieved from BNP Paribas ADR (OTC: BNPQY) via The Market Ear.
Should you wish to hedge, longer-dated SPX IVOL is cheap, relative to recent history.
Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via The Market Ear.
Finally, if you’re interested in following further along the fundamental conversation in Tuesday’s letter, check out Dr. Pippa Malmgren’s post on “ancient empires springing back to life.”
Technical
As of 8:00 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 range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,087.00.
Key levels to the upside include $4,100.25, $4,122.50, and $4,136.75.
Key levels to the downside include $4,071.50, $4,055.00, and $4,028.75.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels hold weight 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.
About
In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:00 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.
Fundamental
Late release. Apologies!
To stay ahead of big trends likely to impact our portfolios in non-linear ways, we must not narrow our playing field. This is from a December 30, 2022 conversation between Dr. Pippa Malmgren and Michael Green of Simplify Asset Management on the “big adjustment” investors are likely to face, as well as the risks to models/frameworks and the “religious belief” in them built up over time.
To explain, the typical response to inflation, which is higher interest rates, is outdated.
“We have a supply shock” brought on by the pandemic and exacerbated by geopolitics, Malmgren said. “We don’t have enough production of physical things” such as food, as well as “oil, gas, and molecules.”
Monetary policymakers are ill-equipped to handle the inflation situation and the global conflicts we’re engaged in; the current response, to quote Credit Suisse’s (NYSE: CS) Zoltan Pozsar, of “curbing demand structurally to adjust to shortages” has put the economy on an L-shaped path (i.e., vertical drop in activity via recession, and flatline for a period of time as rates remain higher for longer to prevent a sharp rise in inflation, though the latter part is to be debated, hence the talk inflation will come roaring back once policymakers scare and pivot prematurely).
Malmgren suggests policymakers should (and eventually may) look to bring markets in balance by asking how “to get more” supply. The answer is that businesses need to be created, and this is capital-intensive; “raising interest rates precludes that from happening,” Malmgren added. Rates are a blunt tool and we “do not want to treat everything the same.”
Rather, there may be fiscally funded industrial policy, as Pozsar suggested months back, as well as “different interest rates for different things in the economy” through the use of a central bank digital currency (CBDC), Malmgren said. With a CBDC, we can have “personalized interest rates for each individual company and each individual in society … determined by … your behaviors, and views about whether your sector is going to be a winner or not.”
The “belief systems in models [are] so deeply religious, and we’ve built everything on that.” Consequently, policies that worked in the past (i.e., bailouts, at-zero interest rates, and providing endless amounts of cheap capital) will, inevitably, create sticky inflation and “spark off geopolitics,” Malmgren explained.
To fast forward, the moral of the story is that policymakers are using outdated ways to handle new problems. Therefore, the inflation story will continue, and its resolution will look nothing like it has in the past.
Yes, though there may be a dip in inflation in the interim resulting in a pivot and relief in markets, the prospects of inflation resurfacing, potentially with vengeance, are up, and this has negative implications on traditional portfolio constructions.
Technical
As of 8:00 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a negatively skewed overnight inventory, outside of the prior range, suggesting a potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,011.75.
Key levels to the upside include $4,028.75, $4,050.25, and $4,061.75.
Key levels to the downside include $3,988.25, $3,981.00, and $3,965.25.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels hold weight 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.
MCPOCs: Areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
About
In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:45 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.
Fundamental
Since the start of 2023, markets have trended higher. This has coincided with traders’ expectations that inflation has peaked and the pace of tightening should slow or peak soon, China re-opening, and the aversion of an energy crisis abroad, given a warmer-than-expected winter.
Investors continue to sit on a lot of cash, at this time.
Graphic: Retrieved from Bank Of America Corporation (NYSE: BAC) via Bloomberg.
Some, in their desire to put their cash to work, have demanded Treasuries.
Graphic: Retrieved from Bloomberg. “Each of the Treasury auctions this month were awarded at a yield lower than expected based on pre-sale trading, known as ‘stopping through’ — meaning that demand was strong. Primary dealers (who are obligated to bid) in Thursday’s $35 billion offering of seven-year notes picked up just 6.1% of the securities, the smallest in any Treasury note or bond auction in data going back to 2003.”
Strong demand during Treasury auctions (i.e., bond bid and yield pressured), as some suggest, is forcing investors into previously depressed equities which Goldman Sachs Group Inc (NYSE: GS) showed investors selling heavily leading up to 2023.
Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via The Market Ear.
In fact, Treasury auctions have coincided with big demand for short-dated exposure to call options and short-covering.
Graphic: Retrieved from SpotGamma’s Weekend Note. “Last week’s bullishness appeared to be bolstered by very strong treasury auctions, which ignited the trade of short-dated (i.e., 0 DTE) call options. You can see this relationship in the image below wherein large 0DTE options flow (bottom) were triggered by the 1 PM ET treasury auction (red vertical line).”
Additionally, the markets have enjoyed a liquidity boost, also a driver of equity market relief. The Treasury General Account (TGA), or the government’s checking account, if we will, was driven down and played into an easing of financial conditions which has benefitted stocks.
Per past letters, we note that a falling TGA is likely to be accompanied by a rise in bank reserves (liabilities to the Fed), increasing the room banks have to lend and finance trading activities which add to market liquidity. This added market liquidity, some suggest, is due to the debt ceiling. Consequently, once a debt ceiling deal is signed, run for the hills!
Graphic: Retrieved from Fabian Wintersberger. “One driving factor is the US is facing its debt ceiling (again). Hence, the US treasury needs to run off its Treasury General Account, which injects liquidity into markets from which stock markets benefit.”
“[T]he single most important driver of equities over the last year has been excess liquidity, and it’s about to turn more restrictive. The amount of liquidity in the system is about to change again – the Treasury is increasing bill issuance sizes, which will drain liquidity from the system. The Treasury could build cash by more than $200 billion over the span of a month – which on top of QT will effectively drain nearly $300 billion from bank reserves – which implies the S&P 500 should be 6% lower over the net month.”
Anyways, strategists think markets are underestimating the Fed which is likely to keep rates higher for longer. There are not enough restrictions to reduce inflation. This would ultimately boost capital costs, leading to earnings misses and lower EPS.
Graphic: Retrieved from Morgan Stanley (NYSE: MS) via The Market Ear. “[M]isses, both on revenue and margin, were not punished as much as they have been historically.”
If this market strength is, in part, the result of a so-called front-running of the Fed’s pivot from tightening, either the failure to realize a pivot or an eventual pivot may be followed by the markets selling (i.e., buy the rumor and sell the news scenario).
Graphic: Retrieved from Fabian Wintersberger. “Neither the ECB nor the Fed is restrictive enough to bring inflation back to 2 %. A look at the Volcker era shows that it is necessary to increase real interest rates above the inflation rate for a prolonged period to achieve that.”
A chart to tack on here at the end of the section is FINRA margin debt versus the S&P 500 (INDEX: SPX). In short, this measure is not supportive of the move up in stocks. More on this sometime later. Take care!
Graphic: Retrieved from Tier1Alpha via Callum Thomas.
Technical
As of 8:45 AM ET, Monday’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, outside of the prior range, suggesting a potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,050.25.
Key levels to the upside include $4,061.75, $4,071.50, and $4,087.00.
Key levels to the downside include $4,028.75, $4,011.75, and $3,998.25.
Disclaimer: Click here to load the key levels via the TradingView platform. New links are produced daily. Quoted levels hold weight barring exogenous event.
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.
About
In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
