Categories
Commentary

Daily Brief For January 25, 2022

Editor’s Note: Our newsletter service provider is not working, today. Our apologies if you were not able to receive the note via email, as usual.

What Happened

After exploring lower prices, Monday, major U.S. equity market indices rallied, sharply, closing higher on the day. Thereafter, trade was two-sided and volatility remained bid.

Ahead is data on the S&P Case-Shiller National Home Price Index and FHFA National Home Price Index (9:00 AM ET), as well as consumer confidence (10:00 AM ET). 

Graphic updated 6:30 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 the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: Monday’s liquidation was a combination of capitulation and “forced selling” in the face of months of divergent breadth by lesser weighted index constituents, geopolitical tensions, the prospects of reduced stimulus to combat high inflation, poor responses to earnings results, and disappointments in real demand and growth.

In data compiled by JPMorgan Chase & Co (NYSE: JPM), “retail investors offloaded a net $1.36 billion worth of stock by noon, most of it in the first hour” of trade, a 3.9 standard deviation share disposal. This is as “fund managers have yet to actively unwind their positions.”

Graphic: Via Bloomberg. “More than 18 billion shares changed hands Monday, the busiest session since early 2021.”

According to statements by JPMorgan Chase & Co’s Marko Kolanvoic, “worries around rates and corporate margins are overdone,” and “we expected the earnings season to reassure, and in a worst-case scenario could see a return of the ‘Fed put.’”

When examining extraordinary actions by the Federal Reserve (Fed), “the average ‘exercise price’ is a -23.8% peak to trough (equating currently to SPX 3,670.00),” Evercore ISI explains

“The Fed is likely to ‘exercise the Fed put’ should the average -23.8% strike price come into view.”

Positioning: “A negative gamma regime was to blame, in part, for the fast move lower and subsequent close higher,” according to options modeling and data service SpotGamma.

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

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

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

Heading into mid-day, there was a clear demand for protection (put buying), as evidenced by the VIX moving up nearly 11.00 in regular trade. 

After 12:00 or so, the tone changed, markedly, as participants sold puts and bought calls, a positive delta trade the dealers likely hedged by buying the underlying.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator.

The associated compression in implied volatility reduced the dealer’s exposure to positive delta (via puts they are short) and that resulted in a covering of hedges that compounded the move higher.

Taking into account options positioning, versus buying pressure (measured via short sales or liquidity provision on the market-making side), metrics are positively skewed, but much less so than before.

Graphic: Data SqueezeMetrics. Graph via Physik Invest.

“This is quite similar to the behavior that we saw at both the 12/26/18 and 3/23/20 trading lows that saw the S&P 500 get slammed on a Friday options expiration only to find a trading bottom the following Monday before noon,” adds Brian Rauscher of Fundstrat Global Advisors on the potential for a counter-trend rally. 

“So, it looks likely there is some opportunity for aggressive traders as well as for strategic investors to use the expected bounce to look for higher quality stocks that have been overly sold off.”

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

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

In the best case, the S&P 500 trades higher; activity above the $4,340.50 spike base puts in play the $4,411.75 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,449.00 untested point of control (VPOC) and $4,486.75 RTH High, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,340.50 spike base puts in play the $4,285.00 VPOC. Initiative trade beyond the $4,285.00 VPOC could reach as low as the $4,212.50 RTH Low and $4,177.25 HVNode, or lower.

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

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

What People Are Saying

Definitions

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

About

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

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

Disclaimer

Physik Invest does not carry the right to provide advice.

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

Categories
Commentary

Daily Brief For January 11, 2022

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

What Happened

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

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

What To Expect

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Graphic: Visualizing the compression in volatility.

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

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

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

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

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

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

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

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

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

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

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

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

What People Are Saying

Definitions

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

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

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

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

About

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

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

Disclaimer

Physik Invest does not carry the right to provide advice.

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

Categories
Commentary

Daily Brief For December 20, 2021

What Happened

Overnight, equity index futures auctioned sideways to lower with growth-heavy and rate-sensitive names bearing the brunt of the move.

This is as Goldman Sachs Group (NYSE: GS) economists reduced their U.S. economic growth expectations, Senator Joe Manchin rejected a $2 trillion tax-and-spending package, hawkish central bank pivots, and rising COVID-19 lockdown risks. 

Ahead is data on leading economic indicators (10:00 AM ET).

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

What To Expect

Divergent breadth in less heavily-weighted constituents, and what remains of “put-heavy” positioning, coupled with recent fundamental developments, is feeding into lower index prices.

Graphic: Sentimentrader writes: “Fewer than 65% of NDX stocks are currently trading above their 200-day moving averages. That is a stark change from a year ago when internal trends improved as the NDX marched steadily higher.”

Though the December 17 options expiration (OPEX) cleared positive delta and quite a bit of negative delta (e.g., the ARK Innovation ETF [NYSE: ARKK] had $1.5 billion in notional put delta expire) which, in theory, should open a window of strength and realized volatility, wherein positive fundamental forces and dealers’ covering of hedges would bolster any recovery, the January 21 expiry still carries $1.7 billion in notional put delta.

Continued weakness and higher volatility, among other things, likely solicits dealer hedging of exposure to increasing positive delta; weakness has dealers selling against short-dated, increasingly sensitive negative gamma positioning.

With breadth still to recover, a clear expansion of range places the S&P 500 below its 20- and 50-day simple moving averages, the levels which solicited responsive buying by short-term, visual traders who often lack the wherewithal (both emotional and financial) to defend retests.

Graphic: Monthly charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), Dow Jones Industrial Average (bottom right). All indices come into major support areas.

Context: “The Fed is seen responding to the inflation fears stalking businesses by leaning toward an older playbook of prioritizing the fight against price pressures — even if that risks weaker growth over the longer term,” per Bloomberg.

Notwithstanding, per Nasdaq, “growth in earnings is so far stronger than the multiple compression caused by rising rates,” and that is what has helped support this year’s rally.

Couple that with the management of massive S&P positions, and relentless, seasonally-aligned “passive buying support,” in the face of expectations there will be “the strongest quarterly nominal [economic] growth in more than three decades,” weakness (especially in growth-heavy and rate-sensitive names) remains.

Graphic: Positively skewed return distribution amidst “natural, passive buying,” and supportive positioning metrics. Data SqueezeMetrics. Graph via Physik Invest.

That’s due in part to some of the dynamics discussed in an earlier section, coupled with some negative fundamental developments like the rejection of an economic stimulus package, cuts to Goldman Sachs Group’s GDP forecasts, among other things.

I end with a note from JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic who expects a year-end rally to be driven by stocks targeted by short-sellers. 

“For short-selling campaigns to succeed, there have to be positioning, liquidity and often systematic amplifiers of the selloff,” Kolanovic wrote. 

“We believe these conditions are not met, and hence this market episode may end up in a short squeeze and cyclical rally into year-end and January.” 

That aligns with light positioning, improving seasonality metrics, and data that suggests equity markets tend to rally into the first hike.

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

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

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

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,548.75 low volume area (LVNode) puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,590.00 regular trade low (RTH Low) and $4,623.00 untested point of control (VPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,548.75 LVNode puts in play the $4,523.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,492.25 RTH Low and $4,471.00 VPOC, or lower.

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

Definitions

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

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

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

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

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

About

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

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, helping develop insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For December 2, 2021

What Happened

Overnight, equity index futures steadied at the prior day’s lows

There were signs of a shift in relative strength as the Russell 2000’s extended-day recovery outpaced that of the S&P 500 and (now) weaker Nasdaq 100. 

At the same time, yields on the ten-year rose while volatility came in. Still, the VIX futures term structure remained higher, a clear indication of stress, in the face of demand for protection.

Ahead is data on jobless claims (8:30 AM ET) with Fed-speak scattered throughout the day.

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

What To Expect

On nonparticipatory breadth and weak market liquidity metrics, the worst-case outcome occurred, evidenced by the S&P 500’s spike away from the value (i.e., the prices at which 70% of the day’s volume occurred).

The knee-jerk selling, which coincided with news that a COVID-19 variant was spotted in the U.S., broke the S&P 500 out of a short-term consolidation (i.e., balance) area. 

The developing balance was a result of participants looking for new information to base a directional move. With new information, participants chose downside price exploration.

Adding, the knee-jerk selling and associated price action left behind poor structure (i.e., participants will look to validate [or invalidate] the move, spending time below [or above] the ~$4,574.25 spike base). Caution is warranted on overnight validation of the spike. 

Graphic: Supportive delta (i.e., committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of initiative trade (i.e., directional trade that suggests current prices offer unfavorable entry and exit; the market is seeking balance).

Context: A resurgence in COVID-19, a change in tone with respect to monetary policy, and last-minute tax-selling, in the face of seasonally-bullish buybacks and new month inflows.

The implications of these themes on price are contradictory. 

As stated, yesterday, the Federal Reserve’s Jerome Powell unexpectedly changed his tone around inflation, becoming more open to a faster taper in bond-buying and rate hikes. 

This is as policymakers look to tame price readings without inhibiting economic growth; fears of the aforementioned change in tone were clearly spotted by the bond market’s pricing of risk, so to speak, diverging from that of the equity market, weeks before current volatility.

Graphic: “The ICE BofA MOVE Index, which measures implied volatility for Treasuries, is close to the steepest level since April 2020,” via Bloomberg.

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive to own.

As the market is a forward-looking mechanism, the implications of this are staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

Graphic: Via The Market Ear, “Bank of America estimates that corporate earnings used to explain half of equity market returns up to the financial crisis, but since then they only explain 21%. Meanwhile, changes to the Fed’s balance sheet explain 52% of market returns since 2010, it estimates. Buy what the FED buys. Sell what the FED stops buying.”

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Eventually, the fear on the part of bond market participants fed into equity market positioning; breadth weakened for weeks into November’s large monthly options expiration, after which the absence of sticky and supportive hedging flows finally freed the market for directional resolve. 

Couple that with participants being “underexposed to downside put protection,” according to SpotGamma, there was an expectation that there could be a rough re-pricing of tail risk as participants, en masse, sought after highly “convex” downside options which had the counterparties to those trades exacerbating underlying price movement.

Per the VIX term structure graphic below, there is tons of movement in the front-end, a sign that participants are concentrating activity in shorter-dated tenors where the sensitivity of options to direction is higher.

Graphic: VIX term structure. 

So long as this dynamic remains, participants can expect instability.

In assuaging fears, however, Moody’s Corporation (NYSE: MCO) put out research that found “information about the variant and the policy actions taken to date do not yet support a material shift” in forecasts.

This is as S&P Global Inc (NYSE: SPGI), despite lowering growth forecasts a touch, expects GDP to reach a 37-year high in 2021. With odds that it will likely take the next few weeks to find out more with respect to the severity of new COVID-19 variants, attention moves to “cyclicals, commodities, and reopening themes,” according to JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic. 

Graphic: Via Bloomberg, “there is ‘plenty of liquidity available to drive stock prices higher as dip-buyers enter the market,’” strategists at Yardeni Research, wrote.

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

Spike Rules In Play: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,551.75 low volume area (LVNode) puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,629.00 untested point of control (VPOC) and $4,674.25 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,551.75 low volume area (LNVode) puts in play the $4,497.75 regular-trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,471.00 and $4,425.00 VPOC, or lower.

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

Charts To Watch

Graphic: (NYSE: SPY). (S~$448, $438 and R~$454, $460). S is for support. R is for resistance.

Definitions

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

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

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

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For October 12, 2021

Market Commentary

Equity index futures recover after Monday’s liquidation and brief overnight follow-through. Commodities were mixed and bonds were sideways to higher.

  • Market positioning for an EOY rally?
  • Ahead: Job openings, inflation data.
  • New feature to view real-time levels.

What Happened: U.S. stock index futures recover from earlier bearishness, absent impactful fundamental narratives.

Ahead is data on the job openings (10:00 AM ET) and the median expected 3-year inflation rate (11:00 AM ET). 

Graphic updated 6:30 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 the following section. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

This comes after a volatile Monday.

At the outset, initiative sellers painted themselves into a corner at the convergence of the $4,363.25 high volume area (HVNode) pivot and an anchored volume-weighted average price.

Note: Liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs, a metric highly regarded by chief investment officers, among others, for quality of trade.

After participants failed to muster the wherewithal to take prices lower, the S&P 500 then endured a rapid short-covering rally intraday – as evidenced by emotional, multiple distribution profile structures – before the momentum from covering shorts faded.

Thereafter, the S&P 500 liquidated, leaving behind a minimal excess high just south of the $4,408.75 low volume area (LVNode) and $4,415.00 untested point of control (VPOC).

Despite the spike and weak close, there was a minimal separation in value (i.e., the area where 70% of the day’s volume occurred); in other words, though participants valued lower prices, the knee-jerk, end-of-day move was not validated by increased trade at lower price levels.

Overnight exploration provided that validation before a massive change in tone after about 2:00 AM ET. Thereafter, indices recovered the prior day’s close.

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit).

Further, the aforementioned trade is happening in the context of a seasonal cycle of rebalancing and earnings, improvement among some positioning metrics, among other things. 

These themes support (1) October volatility and (2) an increased potential for sideways to higher trade.

In support is JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic, a big stock market bull; “We believe that this was the last significant wave, and an effective end to the pandemic,” he said.

Kolanovic prefers economically sensitive shares over technology and growth stocks. 

In opposition is Morgan Stanley’s (NYSE: MS) Mike Wilson who is on the side of pressured earnings, as a result of higher labor and material costs.

“Higher rates and a stronger USD have led to multiple compression, a process that remains unfinished, in our view,” he said in a note featured by The Market Ear. “Whether the final chapter of the mid-cycle transition ends with a 10% or 20% correction in the S&P 500 will be determined by how much earnings growth decelerates or has to outright decline (i.e., the Ice). We are gaining confidence in a sharper deceleration but the timing is more uncertain.”

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,346.75 HVNode invalidates Monday’s spike lower and puts in play the $4,363.25 HVNode. Initiative trade beyond the $4,363.25 HVNode could reach as high as the $4,381.25 LVNode and $4,415.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,346.75 HVNode puts in play the $4,330.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,299.00 VPOC and $4,278.00 HVNode, or lower.

Click here to load today’s real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

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

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

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

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

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

News And Analysis

JPMorgan’s Kolanovic says stocks can handle $130 oil.

Chinese developers are faced with cuts to credit ratings.

Federal Reserve will wimp out on hikes despite inflation.

Evergrande skips 3rd round of bond coupon payments.

More clarity on inflation doesn’t mean the news is good.

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 23, 2021

Market Commentary

Equity index futures trade higher with yields. VIX and most commodities sideways to lower.

  • Buy-the-dip mantra slowly fading.
  • Fed is eyeing a taper, raise rates.
  • SPX to 4.7-5K at end of the year.
  • Positioning: Still at a key juncture.

What Happened: U.S. stock index futures auctioned higher alongside news the Federal Reserve held advanced talks on paring back its asset purchase program and raising rates. 

In other news, JPMorgan Chase & Co (NYSE: JPM) strategists suggest the buy-the-dip mantra is at risk.

Ahead is data on jobless claims (8:30 AM ET), Markit manufacturing and services PMI (9:45 AM ET), leading economic indicators (10:00 AM ET), as well as real household net worth and nonfinancial debt (12:00 PM ET).

Graphic updated 6:30 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 the following section. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on strong intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by mostly sideways trade and higher value areas.

This is significant because sideways-to-higher trade and an intent to separate value (i.e., break from balance, higher) reflects a willingness to check and resolve some unfinished business (e.g, $4,425.00 untested point of control or VPOC).

We’re carrying forward the overhead supply; the 20- and 50-day simple moving averages, as well as the anchored volume-weighted average prices (VWAP), north of the $4,425.00 VPOC, are some key dynamic levels that must be taken to change the tone. 

Balance (Two-Timeframe Or Bracket) Is The Status Quo: Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Further, the aforementioned trade is happening in the context of a fraying in the buy-the-dip psychology, as well as a belief that companies will continue to do good into year-end. The implications of these themes on price are contradictory

On one hand, as discussed yesterday, JPMorgan Chase & Co’s Marko Kolanovic stated that despite “technical selling flows (CTAs and option hedgers) in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks,” the equity market would continue higher with the S&P 500 ending 2021 at 4,700, with the potential to break 5,000 next year.

On the other hand, strategists led by JPMorgan Chase & Co’s Nikolaos Panigirtzoglou wrote that the psychology of buying the dip is fraying; “Observing flows for signs that this change in behavior would prove more persistent is important over the coming days” as the S&P 500 continues to trade below its 50-day simple moving average alongside concerns over waning stimulus, inflation, the debt ceiling, and China’s debt crisis.

Adding, Goldman Sachs Group Inc’s (NYSE: GS) Peter Oppenheimer, alongside HSBC Holdings Plc (NYSE: HSBC) strategists, believes dip-buying is a go as “we’re still in the relatively early stages of this economic cycle.” 

In terms of positioning, SpotGamma data suggests the S&P 500 is still at an intersection (i.e., short gamma) that portends increased volatility, should the index continue lower.

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,393.75 high volume area (HVNode) puts in play the $4,425.00 VPOC and balance area low (BAL). Initiative trade beyond the VPOC could reach as high as the $4,481.75 HVNode and $4,510.00 low volume area (LVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,393.75 HVNode puts in play the $4,365.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,294.00 regular trade low (RTH Low) and $4,233.00 VPOC, or lower.

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

Definitions

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. 

Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. 

The former exacerbates volatility. The latter calms volatility.

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

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

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.

News And Analysis

U.S. default this fall would cost 6M jobs, wipe $15T.

Central banks aim to limit digital currency disruption.

New York faces more than water-related climate risk.

Fed signals the possibility of 6 to 7 rate hikes, taper. 

Building the future depends on building more homes.

Fed officials believe ‘transitory’ inflation lasts longer.

Platform backed by Fidelity, Goldman digitizes IPOs.

Slower car production hit the pricing of commodities.

Founder of volatility-hedging program eyeing a drop.

The Emerging Ecosystem: Digitalization of markets.

JPMorgan team says flows show buy-the-dip fading.

China pumped $17B, tells Evergrande to not default.

ARK Invest’s Wood to sell Tesla if it reached $3,000.

Goldman’s Oppenheimer said a 10% dip is buyable.

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 22, 2021

Market Commentary

Equity index futures trade sideways to higher with yields and the dollar. Volatility ebbs.

  • Despite risks, market in solid position.
  • Ahead: Existing homes sales, FOMC.
  • Value overlaps; a breakout is coming.

What Happened: U.S. stock index futures auctioned sideways as participants looked to position themselves for new information with respect to the Federal Reserve’s intent to make policy adjustments.

In other news, Wall Street analysts suggest China’s Evergrande debacle is not a Lehman moment. 

Ahead is data on existing home sales (8:30 AM ET), an FOMC statement (2 PM ET), as well as Fed Chair Jerome Powell’s news conference (2:30 PM ET).

Graphic updated 6:30 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 the following section. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on lackluster intraday breadth and market liquidity metrics, the worst-case outcome occurred, evidenced by symmetrical, overlapping value areas.

This is significant because sideways trade (i.e., balance) marks acceptance, or a willingness to transact at lower prices, after an earlier liquidation. 

We’re carrying forward the overhead supply; the 20- and 50-day simple moving averages, as well as the anchored volume-weighted average prices (VWAP), north of the $4,425.00 untested point of control (VPOC), are some key dynamic levels that must be taken to change the tone. 

Balance (Two-Timeframe Or Bracket) Is The Status Quo: Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Further, according to JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic, the aforementioned trade is happening in the context of “technical selling flows (CTAs and option hedgers) in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks.” 

Despite these conditions, Kolanovic anticipates a continued move higher in the equity market as the COVID-19 delta wave fades and companies beat third-quarter earnings expectations.

“We remain constructive on risk assets and last week upgraded our S&P 500 price target, given expectations of a reacceleration in activity as the delta wave fades and better than expected earnings,” Kolanovic added. “Risks are well-flagged and priced in, with stock multiples back at post-pandemic lows for many reopening/recovery exposures; we look for Cyclicals to resume leadership as delta inflects. We expect the S&P 500 to reach 4,700 by the end of 2021 and to surpass 5,000 next year.”

In terms of positioning, SpotGamma data suggests the S&P 500 is at an important junction ahead of the Federal Open Market Committee statement and news conference, later today; a directional move higher (lower) could set the index up for lower (higher) volatility.

Graphic: Based on an analysis of positioning in the options market, SpotGamma plots key levels to be aware of; presently, the S&P 500 is in short-gamma territory. Gamma is the sensitivity of an option to changes in the underlying price. Those that take the other side and warehouse these risks hedge their exposure by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,365.25 LVNode pivot puts in play the $4,393.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,425.00 untested point of control (VPOC) and $4,481.75 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,365.25 LVNode pivot puts in play the $4,346.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,294.00 regular trade low (RTH Low) and $4,233.00 VPOC, or lower.

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

Definitions

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

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

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.

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

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

News And Analysis

A modest shift in retail spending amid variant uncertainty.

The gobal economic recovery is hitting some speed limits.

Areas of emerging markets present investor opportunities.

The Fed debate on tapering just became a lot more tricky.

House passes debt limit suspension, setting up standoffs.

Democrats pursue the debt move with emergency option.

Evergrande is not another Lehman. Here is the bad news.

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Weekly Brief For July 3, 2021

Market Commentary

Key Takeaways: U.S. equity index futures diverge in their attempt to discover fair prices for two-sided trade.

  • Economy is set for sustained boom.
  • Ahead is a light economic calendar.
  • SPX, NDX, DJI higher. RUT coiling.

Summary: Last week, U.S. stock index futures auctioned sideways to higher into Friday’s employment report. The release showed an addition of 850,000 jobs in June, the strongest employment gain since last summer. 

The S&P 500 and Nasdaq 100 led the week-long rally, while the Dow Jones Industrial Average followed closely behind. Though the Russell 2000 did end lower, it has been building energy for a break.

Considerations: It was the beginning of April JPMorgan Chase & Co’s (NYSE: JPM) Jamie Dimon wrote strong consumer savings, an increased pace in COVID-19 coronavirus vaccinations, and unprecedented efforts to spur economic activity could mean that a boom lasts as long as 2023.

Dimon’s comments remain valid. Months after, officials are hard at work in helping the U.S. reach herd immunity with vaccines that produce antibodies for the most well-known variants of COVID-19. Additionally, the economy is making progress toward meeting the Federal Reserve’s objectives for employment and inflation; just a couple of weeks ago the institution brought forward the time frame on when it will raise interest rates. 

In a statement, BlackRock strategists noted: “We believe the Fed’s new outlook will not translate into significantly higher policy rates any time soon. This, combined with the powerful restart, underpins our pro-risk stance.”

Alongside that news, the equity market sold violently, into Quadruple Witching, or the large expiry of futures and options. Thereafter, indexes staged a massive reversal, and the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility, traded to its lowest level since February 2020.

According to SpotGamma models, up to 50% of the gamma in and across the S&P 500 complex was taken off the table that expiry.

This, as SpotGamma has said in the past, “creates volatility because, as large options positions expire[], are closed and/or rolled, dealers have large hedges they need to adjust.”

Put more simply, the initial action, into the expiry, may have been attributable to the sale of long stock that hedged expiring short exposure above the market (i.e., call side).

After that exposure was cleared, the prospects for a rally improved, boosted by the buying back of short put hedges as volatility imploded.

Last week, though, things became a tad frothy with the number of put options sold-to-open seeing heightened levels.

Graphic: SpotGamma’s analysis suggests equity put options were sold-to-open (red arrow). 

Put sales, which can be part of sophisticated volatility-based trading strategies, often suggest increased confidence as market participants look to options for income, and not insurance.

Historically, the returns after such developments are mixed; more often the appearance of strong initiative buying surfaces (e.g., August and January 2020) before a liquidation helps correct excess inventory, and bring sense back into the market. 

Kris Sidial – co-chief investment officer at The Ambrus Group, a volatility arbitrage fund – and I recently held a conversation regarding meme stock volatility, market structure, and regulation. He noted that ongoing risk-on dynamics can be traced back to factors like Federal Reserve stabilization efforts, and low rates, which incentivize risk-taking.

“The growth of structured products, passive investing, the regulatory standpoint that’s been implemented with Dodd-Frank and dealers needing to hedge off their risk more frequently, than not,” are all part of a regime change that’s affected the stability of markets, Sidial notes. “These dislocations happen quite frequently in small windows, and it offers the potential for large outlier events,” like the equity bust and boom during 2020. “Strength and fragility are two completely different components. The market could be strong, but fragile.”

That dynamic is playing out as Cem Karsan, founder at Kai Volatility, notes volatility is dramatically oversupplied. As a result, as implied volatility drops, options gamma – an option delta’s sensitivity to market price changes – rises. Associated hedging forces make it so there’s more liquidity and less movement. In other words, the market tends to pin.

Still, in line with Sidial’s comments, Karsan believes expected distributions are fat-tailed, given “fragility.” In other words, it’s hard for the market to unpin. Should it unpin, however, there’s “not enough liquidity” to absorb leverage on the tails.

Given this, Karsan finds it interesting to sell at-the-money option structures to fund out-of-the-money structures. Alternatively, knowing what forces – e.g., charm or the rate at which the delta of an option changes with respect to time – decay poses on so-called “dealer positioning,” going into the July option expirations (OPEX), one could look into long calendar put spreads on the S&P 500.

In such a case, traders are short puts in July and long puts on forward. This way, you’re collecting decay as a result of realized pinning. Here’s Karsan’s full take, from the source.

Graphic: The risk profile of a long put calendar spread, via Fidelity.

After mid-July, though, the window for fundamental dynamics (e.g., a shift in preferences from saving and investing to spending, monetary tightening, seasonality, or a COVID-19 resurgence) to take over is opened. 

In a note on COVID resurgence, to not venture too far off into the abyss, I cite strategists led by JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic who last year correctly suggested equities would continue rallying on the basis of low rates, improved fundamentals, buybacks, as well as systematic and hedge fund strategies. 

“The delta variant should not have significant repercussions for the pandemic situation in developed markets (e.g. Europe and North America, which have [made] strong progress in vaccinations) due to the level of population immunity.”

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to Friday’s $4,323.00 untested Point of Control (POC).

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

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above the $4,323.00 POC puts in play the $4,347.00 excess high. Initiative trade beyond the excess high could reach as high as the $4,357.50 Fibonacci-derived price target.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

In the worst case, the index trades lower; activity below the $4,323.00 POC puts in play the untested POC at $4,299.00, as well as the POC and micro-composite HVNode at $4,285.00. Thereafter, if lower, participants may look for responses at the $4,263.25 LVNode, $4,247.75 LVNode, as well as the $4239.25 HVNode and $4,229.00 POC.

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

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

For a full list of important levels, see the 65-minute profile and candlestick chart, below.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. This activity denotes (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside. Also, there was a meaningful bid in September puts on the S&P 500 and Nasdaq 100. This dynamic suggests participants, despite their commitment to higher prices, are hedging against near-term risks, like the Jackson Hole Economic Symposium.

News And Analysis

Markets | The premium Elon Musk adds to Tesla, other ventures. (Kyla)

Markets | Forward-looking indicators point to improving credit trends. (S&P)

Travel | TSA screenings surpassed 2019 levels in a pandemic first. (CNBC)

Energy | WH is worried about high oil prices, sees enough supply. (REU)

Energy | An overview of data from IEA’s Energy prices database. (IEA)

Energy | OPEC ends Friday’s meeting without a deal for agreement. (CNBC)

Agriculture | Dry weather damage spells trouble for U.S. spring crops. (S&P)

Economy | States ending jobless benefits early hit labor milestones. (REU)

Markets | Spotlight turning to mergers, acquisition for fintech SPACs. (S&P)

Economy | Jobs gain largest in 10 months; employers up wages. (REU)

Energy | Cal-ISO, utilities ask consumers to conserve amid heatwave. (S&P)

Economy | Economic growth hiccup to derail credit spread stability. (BBG)

Markets | Record S&P 500 masks fear trade gripping stock market. (BBG)

Innovation And Emerging Trends

FinTech | BTC mining now easier, more profitable after crackdowns. (CNBC)

FinTech | ‘Flight to quality’ as private insurtechs draw big investments. (S&P)

FinTech | Bank customers cement relationships with digital channels. (S&P)

Markets | Money-losing companies sell record stock, flashing signal. (CNBC)

Markets | Wall Street rebels warning of ‘disastrous’ $11T index boom. (BBG)

Mobility | When do electric vehicles become cleaner than gas cars? (REU)

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For May 17, 2021

Market Commentary

Index futures in balance.

  • Themes: Inflation, COVID outbreaks.
  • Ahead: Manufacturing, housing data.
  • Indices are lower but holding up well.

What Happened: U.S. stock index futures auctioned lower, overnight, alongside a so-called flight to safety. Bonds and metals were higher while risk assets, like equities and cryptocurrencies, were down.

At the same time, supply-side disruptions continue with coronavirus outbreaks in Asia; Taiwan’s benchmark index fell nearly 4% during overnight trade.

In terms of releases, participants are looking forward to Empire Manufacturing and the NAHB housing market index for May. Also, an Atlanta Fed conference begins, today.

Graphic updated at 7:00 AM EST.

What To Expect: Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during Friday’s regular trade, the best case outcome occurred, evidenced by initiative trade up to the $4,177.25 high volume area (HVNode). This is significant because that level marks a major pivot on the composite profile (i.e., above = bullish, below = bearish-to-neutral). To note, however, participants were unable to introduce meaningful excess at the recovery high.

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

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

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

It is important to touch on the push-pull dynamic in markets, over the past few weeks. 

Historically speaking, equities are in a seasonally weak period. At the same time, inflation and uninspiring economic data are major worries investors are attempting to price in. Despite these emerging themes, JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic, in a CNBC appearance, said that the market is a little oversold, and his S&P 500 target of $4,400.00 remains in play.

“I think market is now actually getting cheap, in some sense,” Kolanovic said. “I think we’re at the end of this upset. I think the market is going to go higher here. That said, we do still again prefer reflationary themes.”

Given the brief fundamental context, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,177.25 HVNode pivot may reach as high as the $4,227.00 POC. Initiative trade beyond the POC targets the $4,238.00 overnight high (ONH).

POCs: POCs (like HVNodes described above) are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

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

In the worst case, the S&P 500 trades lower; activity below $4,177.25 has the potential to reach down, through the $4,129.25 and $4,069.25 HVNodes, to the $4,050.75 low volume area (LVNode). 

Trading beyond the LVNode, caution longs. The S&P 500 may rapidly discover lower prices, repairing the poor, low-volume structure down to the $3,979.50 Fibonacci retracement. Closeby is the $3,953.25 HVNode and $3,908.25 composite HVNode (a key response area).

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week. It appears that participants were positioning themselves in strikes across further-dated expiries (e.g., June 18, 2021) suggesting more commitment.

News And Analysis

Trade | Surging corporate demand is upending global supply chains. (BBG)

Credit | Fiscal stimulus, borrower discipline behind loan asset quality. (Moody’s)

Economy | Households and most U.S. children to get monthly stimulus. (REU)

Travel | United to add more than 400 daily flights in July amid demand. (REU)

Trade | EU agrees to a partial truce with the U.S. over old Trump tariffs. (REU)

Markets | Companies flush with cash, ready to pad shareholder pockets. (WSJ)

What People Are Saying

Innovation And Emerging Trends

Travel | Bankers flee Wall Street, head home to virus-free Australia. (BBG)

FinTech | Crypto, blockchain must accept problems, lead in sustainability. (TC)

Energy | The electrification of everything: what you need to know. (WSJ)

FinTech | How you can build a DIY robot-advisor using Passiv. (BZ)

About

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

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

Disclaimer

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

Categories
Commentary

Weekly Brief For May 16, 2021

Market Commentary

Key Takeaways: Index futures are back in balance.

  • Economic data failing to surprise.
  • JPM: “Market is a little oversold.”
  • Indices reject lower prices, rotate.

What Happened: Last week, U.S. stock index futures auctioned lower alongside the release of uninspiring economic data.

In particular, the S&P 500 advertised prices below a key consolidation area but failed to solicit aggressive selling. Thereafter, participants rotated the index back inside the aforementioned consolidation, suggesting they were seeking more information to base a directional move. 

As stated in the last few weekly commentaries, participants have a lot to account for in positioning themselves during one of the weakest stretches of the year. Among their worries are inflation expectations – in part due to “choke points in global supply chains” – and stalling retail sales, as well as consumer price and job data misses. At the same time, sentiment and positioning metrics are waning while inflows remain strong, across the globe, and many year-end index targets remain clustered at and above current prices.

Of all the factors mentioned, inflation is a key concern. Why? Generally speaking, inflation and rates move inverse to each other. Low rates stimulate demand for loans (i.e., borrowing money more attractive). With the rapid recovery, though, market participants are fearful that rates may have to rise to protect the economy from overheating.

Higher rates have the potential to reduce the present value of future earnings, making stocks, especially those that are high growth, less attractive. To note, however, rates remain rangebound; rates on the 10 Year T-Note sit below their March high and are likely to continue higher, which, according to research by JPMorgan Chase & Co (NYSE: JPM), the market will likely absorb.

In fact, JPMorgan’s Marko Kolanovic, in a CNBC appearance, said that the market is a little oversold, and his S&P 500 target of $4,400.00 remains in play.

“I think market is now actually getting cheap, in some sense,” Kolanovic said. “I think we’re at the end of this upset. I think the market is going to go higher here. That said, we do still again prefer reflationary themes.”

Looking back, also, according to The Market Ear, even during the so-called Taper Tantrum, in the early 2010s, rates settled in a wide range, and equities rallied big. 

Graphic: Nasdaq 100 rallies in 2013 after rates settle in a wide range, via The Market Ear.

To add, technically speaking, after testing into a composite low volume area (LVNode), the S&P 500 rejected lower prices and quickly traded back to the valuable $4,177.25 high volume area (HVNode).

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

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

This volatility was expected; coming into the May 13 reversal, stock indexes were positioning for a vicious rebound as near-term downside discovery reached a potential limit, based on market liquidity metrics and the inventory positioning of participants. According to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggested there was more risk to the upside than the downside.

More On Gamma: In the simplest way, gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades to hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the $4,177.25 HVNode pivot.

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above the $4,177.25 HVNode may reach as high as the $4,227.00 POC. Initiative trade beyond the POC could reach as high as $4,238.00 overnight high (ONH) and $4,294.75 Fibonacci price extension, a typical recovery target.

POCs: POCs (like HVNodes described above) are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

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

In the worst case, the index trades lower; activity below the $4,177.25 HVNode has the potential to reach the $4,136.25 HVNode. Beyond that level, of interest is the $4,122.25 HVNode, the $4,104.75 LVNode, and the $4,069.25 HVNode. 

Trading below the $4,029.25 overnight low (ONL) suggests a continuation of the bear trend. Caution longs.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week. It appears that participants were positioning themselves in strikes across further-dated expiries (e.g., June 18, 2021) suggesting more commitment.

News And Analysis

Markets | Rates remain resilient after the recent inflation scare. (MND)

Markets | Caught-short strategists are a stealth market accelerant. (BBG)

Ratings | Out-of-court restructurings may lead to repeat defaults. (S&P)

Energy | Oil, and gas benefiting from rising crude, value rotation. (BBG)

Energy | Colonial Pipeline resumes normal operations after hack. (Axios)

Markets | Selected indicators – global automotive manufacturing. (REU)

Ratings | Risk of supply chain financing, partial asset sell-downs. (S&P)

Economy | U.K.’s worse recession to turn into a stronger recovery. (S&P)

Economy | Don’t you dare say stagflation; safeguards are slipping. (BBG)

What People Are Saying

Innovation And Emerging Trends

Working | Reimagining the workplace – adapting to new normals. (S&P)

Banking | US banks could cut nearly 200K jobs over the next decade. (FT)

Space | China has made history with its successful Mars landing. (Axios)

FinTech | Cryptocurrency, and blockchain must lead in sustainability. (TC)

Energy | California Governor proposes a $3.2B EV investment plan. (TC)

About

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

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

Disclaimer

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