Categories
Commentary

Daily Brief For September 1, 2021

Market Commentary

Equity index futures trade sideways to higher overnight. VIX, bonds, dollar were all lower.

  • Inflows and options and peak growth, oh my!
  • Ahead: Employment and manufacturing data.
  • Indexes are positioned for directional resolve.

What Happened: U.S. stock index futures auctioned sideways to higher overnight as participants get past reports of European hawkishness, as well as position for directional resolve on the basis of new fundamental data.

Ahead is data on ADP employment (8:15 AM ET), Markit manufacturing PMI (9:45 AM ET), ISM manufacturing index, and construction spending (10:00 AM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. 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 approximation. 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 outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on positive but weak intraday breadth and middling market liquidity metrics, the best case outcome occurred, evidenced by trade within Monday’s range. This is significant because it was a validation of Monday’s emotional price discovery.

Graphic: Divergent delta (i.e., non-committed buying 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). 
Graphic: Market Internals (Advance/Decline, Up-Volume/Down-Volume, Tick) displayed as Peter Reznicek at ShadowTrader teaches. Though positive, readings were weak and supportive of responsive trade, similar to what market liquidity (via Bookmap) was showing.
Gap Scenarios In Play: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

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

Further, the aforementioned responsive trade is happening in the context of peak growth and a moderation in the economic recovery, as well as some of the dynamics unpacked in-depth yesterday (e.g., non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition). 

The implications of these themes on price are contradictory; to elaborate, on one hand, yes, inflows and divergent sentiment are a green light with respect to the advance in equities (i.e., markets tend to climb a wall of worry given – all else equal – a decay in options skew and removal of hedges, among other things). 

“I use this analogy of a jet,” Kai Volatility’s Cem Karsan explained, referencing the three factors – the change in the underlying price (gamma), implied volatility (vanna), and time (charm) – that are well known to impact an options exposure to directional risk or delta. “As volatility is compressed, those jets will keep firing because … the hedging vanna and charm flows, and whatnot will push the markets higher.”

On the other hand, as Moody’s Corporation (NYSE: MCO) believes, “The Dow is forecast to have peaked and will gradually decline during the next year. Risks are heavily weighted to the upside, but peak growth, inflation and Fed tapering could weigh on equity markets.”

Graphic: Bloomberg data on S&P 500 seasonality.

Moreover, for today, given the increased potential for balanced trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,529.25 low volume area (LVNode) pivot puts in play the $4,542.25 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,556.25 and $4,592.25 Fibonacci extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,529.25 LVNode puts in play the $4,521.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,510.00 figure (which corresponds with a regular-trade high and small gap) and $4,481.75 HVNode.

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

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

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

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

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

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET. Note the developing balance area (HVNode) surrounding just short of the ONH. 

News And Analysis

Home prices continue to gain, more double-digit growth.

There is no such thing as an independent central bank.

Beginning to see churn below the surface amid outlook.

Shell plans to install 50,000 U.K. on-street EV chargers.

China manufacturing slows first time since March 2020.

Wall Street traders driving record are loaded on hedges. 

China Evergrande says construction of projects stalled.

‘Forever Changed’: CEOs are dooming business travel.

SEC boss: Crypto platforms need regulation to survive.

‘Egregiously mishandled’: Afghanistan dents Biden team.

SEC boss: Banning Payment for Order Flow is on table.

Euro-area inflation may justify end to ECB’s crisis mode.

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 August 29, 2021

Editor’s Note: If this commentary was valuable to you, consider forwarding it to your peers. Alternatively, share on social media and tag either @renatolcapelj or @physikinvest.

Wishing you good health and success!

Market Commentary

Equity index, bond, and commodity futures traded higher Friday. The VIX, US10Y, and dollar were sideways to lower.

  • What happened and things to expect.
  • Ahead is important employment data.
  • Trade Idea: Complex spread in GME.
  • Expecting less volatility to the upside.

What Happened: U.S. stock index futures auctioned sideways to higher last week alongside impactful events like the Federal Reserve’s Jackson Hole Economic Symposium. 

Ahead this coming week is important data on employment, consumer confidence, vehicle sales, manufacturing, and more. See here for updated calendar data.

Graphic updated 7:30 AM ET Sunday. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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 approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: During the prior week’s trade, on mostly strong intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by new all-time highs in the S&P 500 and Nasdaq 100. This is significant because it suggests continued bullishness after a v-pattern recovery.

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.
Graphic: Ally Financial Inc-owned (NYSE: ALLY) Ally Invest chart shows S&P 500 defending advance.

Further, the aforementioned trade is happening in the context of the Jackson Hole Economic Symposium. This event’s implications on price are supportive

To elaborate, given a slow down in the pace of the post-pandemic recovery, the Federal Reserve (i.e., Fed) decided not to manipulate policy to offset temporary factors. The reason being, policy effects are often delayed; doing something now could curb the recovery. 

Graphic: Guggenheim Investments unpacks the impact of weaker data on monetary policy.

At the same time, with measures like the Marshallian K – the difference between year-over-year growth in M2 money supply and GDP – turning negative, there are concerns around liquidity and its impact on the equity market.

Graphic: 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.”

According to Moody’s, however, “it will take a while before liquidity concerns are justified even with the Fed likely to begin tapering its $120 billion in monthly asset purchases either late this year or early next.”

Why? Well, for starters, if liquidity was an issue, financial institutions wouldn’t be parking that much money at the Fed. Low volatility in the bond and stock market also implies ample liquidity, Moody’s adds.

So, by not rapidly reducing its asset purchases, the Fed isn’t worried about the economy overheating due to non-temporary inflation; instead, Chairman Jerome Powell maintains that “[o]verall global deflationary trends remain in force.”

Eventually, though, after progress is made on full employment, the Fed will taper, likely keeping inflation expectations in line.

To note, last week’s straight-up trade came alongside the so-called sale of any volatility spike which can – through the process of hedging – support the market. Here’s just one example that received a lot of attention.

“In theory, if a stock was dropping and the retail masses all started to sell puts, they could push market makers to start buying large blocks of shares,” SpotGamma, an important voice in the space, says. “This could stabilize a dropping stock.”

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 counterparty long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

Moreover, given a divergent volume delta and decline in metrics like DIX and GEX, the odds of significant upside volatility are lower. Still, participants may make use of the following objective frameworks for next week’s trade. Check for updated levels in Monday morning’s commentary.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.00 high volume area (HVNode) pivot puts in play the minimal excess all-time high and $4,511.50 Fibonacci extension. Initiative trade beyond the $4,511.50 level could reach as high as the $4,520.25 and $4,556.25 extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,495.00 HVNode puts in play the $4,481.75 HVNode. Initiative trade beyond the $4,481.75 HVNode could reach as low as the $4,454.25 low volume area (LVNode) and $4,427.00 untested point of control (VPOC).

To note, the $4,454.25 LVNode corresponds with an anchored volume-weighted average price (VWAP), 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.

Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.

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.

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.

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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 7:30 AM ET Sunday.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. It is a peek into the thought process here at Physik Invest.

Options offer an efficient way to gain directional exposure. 

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

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

Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.

Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.

Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 

Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.

Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

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

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

Negative (positive) delta = synthetic short (long). 

Negative (positive) theta = time decay hurts (helps).

Negative (positive) vega = volatility hurts (helps).

Trade Idea: SELL -1 1/2 BACKRATIO GME 100 17 SEP 21 530/680 CALL @1.20 LMT

Though I began filling this trade at limits for credit as high as 2.00, the spread collapsed markedly, Friday. Still, there’s an opportunity for unique structures such as the 530C+1, 680C-2 that pay you to be long the stock.

All else equal (i.e., discounting factors such as an increase in volatility), should the spread trade fully in-the-money – meaning the stock travels to the $680 short strike – the 530 strike will be 150 points in-the-money while the at-the-money strikes, combined (based on current at-the-money pricing), will trade around $53.00.

That suggests the spread should price for a credit north of $97.00 to close. Nice!

Thesis: I’m bullish on GameStop and I think the stock may climb over the next week few weeks. 

I will structure a spread above the current stock price, expiring in 18 days. I will buy the 530 call option once (+1) and sell the 680 call option twice (-2) for a $1.20 credit or better. Should the stock not move to my target, I keep the $120.00 credit. Should it move to $680, I could make $15,000.00 at expiry. Should the stock move past $830 break even or so, I may incur unlimited losses. My goal with this spread is to capture the initial credit and close for additional credit if the stock moves higher. 

If necessary, I will hedge the position by either (A) buying stock, (B) widening strikes, (C) buying a far out-of-the-money call option to cap upside in case of an unpredictable move higher, or (D) roll strikes up in price and out in time.

Below is a log chart of GameStop Corporation (NYSE: GME) and the ratio spread profit zone.

News And Analysis

Treasury bears redeemed as Citi, Michael Burry see higher yields.

Visa jumps into the NFT craze, buying a CryptoPunk for $150,000.

The top 7 reasons why COVID-19 could lead to inflationary regime.

Storm Ida roars toward Louisiana with winds of 150 miles per hour.

Chinese health officials reject U.S. allegations on COVID-19 probe.

What People Are Saying

Let’s Hang Out

Los Angeles, CA September 10-12

Salt Lake City, UT September 28-30

About

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

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

Disclaimer

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

Categories
Commentary

Weekly Brief For August 15, 2021

Market Commentary

Equity index futures are set to open sideways Sunday after a divergent advance on light volume and poor structure.

  • Fundamental context – the good and bad.
  • Ahead a heavy week in terms of releases.
  • A narrow rally on unsupportive dynamics.
  • A simple way to hedge off your downside.

What Happened: U.S. stock index futures auctioned sideways to higher last week as the baseline Dow Jones Industrial Average is forecast to have peaked, according to Moody’s.

Ahead is data on the Empire State manufacturing index (8/16), retail sales (8/17), industrial production (8/17), capacity utilization (8/17), business inventories (8/17), NAHB home builders’ index (8/17), building permits (8/18), housing starts (8/18), Federal Open Market Committee (FOMC) minutes (8/18), jobless claims (8/19), Philadelphia Fed manufacturing index (8/19), and the index of leading economic indicators (8/19).

Graphic updated 9:30 AM ET Sunday. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index (DPI) and Gamma (GEX). A higher DPI approximation is bullish. At the same time, the lower the GEX approximation, the more volatility. SHIFT data used for options activity approximation. Note that options flow is sorted by the call premium spent; if green and more positive then more was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index from 0-100.

What To Expect: During the prior week’s trade, on weak intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by trade above the $4,422.75 balance area high (BAH). This trade is significant because it validated a balance area breakout.

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

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

Further, the aforementioned trade is happening in the context of peak growth, moderating inflation, renewed fiscal stimulus efforts, and increased odds of Fed tapering early next year. 

The implications of this fundamental context on price are contradictory; to elaborate, as Michael Gayed of The Lead-Lag Report recently said, narrow high yield spreads offer little potential for capital growth, and “conditions that favor higher volatility – the Fed backing off stimulus measures, the upcoming battle over the debt ceiling, high current inflation and/or longer-term deflation – could be not far off into the future.”

As an aside, this leads us into the narrative on the so-called shift from monetary to fiscal; in a conversation for a Benzinga article, Kai Volatility’s Cem Karsan said the following: when liquidity is removed, as policymakers look to fiscal policy to address inequality, for instance, corporations may have to worry about making money, again.

“We’ve seen this throughout history,” Karsan said in reference to this thesis playing out over the next decade, at least. “These cycles are a lot shorter than the monetary supply-side cycles but they tend to be very bad for multiples and great for economic growth.”

Adding, in Friday’s note, the theme of liquidity was discussed. Simply put, the gap between the rates of growth in the supply of money and the gross domestic product turned negative for the first time since 2018.

“Put another way, the recovering economy is now drinking from a punch bowl that the stock market once had all to itself,” said Doug Ramsey, Leuthold Group’s chief investment officer.

Graphic: 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.”

Moreover, for next week, given expectations of middling volatility and responsive trade, on factors like the upcoming August 20 monthly options expiration, participants may make use of the following frameworks.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,459.00 untested point of control (VPOC) puts in play the $4,463.25 minimal excess high. Initiative trade beyond the minimal excess high could reach as high as the $4,470.75 and $4,483.75 Fibonacci-derived price targets.

In the worst case, the S&P 500 trades lower; activity below the $4,459.00 VPOC puts in play the $4,439.00 VPOC. Initiative trade beyond the $4,439.00 VPOC could reach as low as $4,430.00 – a visual low likely generated by short-term (i.e., technically driven) participants who may be unable to defend retests – and the previously discussed $4,422.75 BAH.

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

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

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.

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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 9:30 AM ET Sunday.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. It’s a response to a solicitation for simple ways to hedge against a move lower, into the end of the month.

Options offer an efficient way to gain directional exposure. 

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

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

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

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

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

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

Trade Idea: BUY +1 BUTTERFLY SPX 100 (Weeklys) 31 AUG 21 4450/4400/4350 PUT @4.90 LMT.

Thesis: I’m neutral to bearish on the S&P 500 and I think the index may trade sideways to lower into the next month. I will structure a spread below the current index price, expiring in 15 days. I will buy the 4450 put option once (+1), sell the 4400 put option twice (-2), and buy the 4350 put option once (+1) for a $4.90 debit or so. Should the index not move to my target, I may lose the $490 debit. Should it move to $4,400.00, I could make $4,510.00 (i.e., the $5,000.00 payout less debit at entry) at expiry. Should the index move below $4,354.90, I may lose the entire $490 debit. My goal, with this spread, is to close for credit (e.g., $9.80-14.70) if the index moves lower. Note that this trade carries a positive theta at entry.

If necessary, I will hedge the position by either (A) buying S&P 500 futures, (B) narrowing strikes, (C) selling call credit to reduce cost, or (D) roll strikes up in price and out in time.

News And Analysis

Rates recovering; realtors see price moderating.

This turning point for markets merits a hard look.

Market disruptions as Fed balance sheet swells.

Job data eases fears of a slowdown in recovery.

U.S. high yield default rate lowest start in 14 yrs.

Delta variant will not impact Fed’s tapering plan.

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 11, 2021

Market Commentary

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

  • Ahead: Economic data and earnings.
  • SPX, RUT, DJI firm. NDX tad weaker. 

What Happened: Last week, U.S. stock index futures auctioned sideways to higher, only after enduring a brief liquidation alongside anxieties surrounding the spread of COVID-19 variants, as well as an evolution in monetary policy. 

The liquidation, though, was not unwarranted. For weeks broad market indices, led by the Nasdaq 100, rose on narrowing breadth and tapering volumes.

Graphic: Breadth metrics from JPMorgan Chase & Co (NYSE: JPM), via The Market Ear.

Then, during the unraveling, a meaningful divergence was observed with the Nasdaq 100 trading relatively weak. This came as rates on the 10 Year T-Note rebounded after testing trend support near 1.25%.

Graphic: In line with projections future inflation is easing, the yield curve flattened while bond yields fall substantially, via Bloomberg

Technical factors – issuance, short coverings, a fading reflation trade, and peak growth – are to blame for lower Treasury yields.

“Technical factors appear to be pushing rates lower and this should be temporary as current 10-year Treasury yield of 1.3% is well below its economic fair value,” Moody’s Corporation (NYSE: MCO) strategists wrote July 8. 

Through an ordinary least squares regression using an estimate of monthly real U.S. GDP, CPI, the current effective fed funds rate, the Fed’s balance sheet as a share of nominal GDP, and a Fed bias measure via fed funds futures, Moody’s comes up with an implied “economic fair value” of 1.6% and 1.65% for the 10-year yield.

Going into year-end, on the heels of the strongest and quickest recovery in history, Moody’s sees the 10-year rising to 1.9% as the Fed announces its intent to taper in September. Once monthly asset purchases have been reduced to zero, “the Fed will reinvest proceeds from maturing assets to ensure its balance sheet doesn’t contract, which would be contractionary monetary policy. [L]ook for the first-rate hike in the first quarter of 2023.”

With that, Goldman Sachs Group Inc (NYSE: GS) suggests “[e]xpectations of higher interest rates and higher corporate tax rates by year-end are the primary reasons [to] forecast that the S&P 500 will trade sideways during the next six months.” Supporting that view are earnings estimates, the inventory positioning of participants, as well as early July seasonality metrics.

Graphic: Seasonality metrics via the Capital Market Outlook by Merrill.

Risks Ahead: As discussed in prior commentaries, after mid-July, 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. 

Why? Coming into the options expiration (OPEX) cycle, which starts on the third Friday of each month, associated hedging forces make it so there’s more liquidity and less movement. In other words, the market tends to pin. 

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

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

Graphic: Volatility before and after OPEX, via SpotGamma.

Considerations: Ahead are some releases on consumer, producer, and import prices, as well as industrial production, consumer sentiment, and retail sales. Also, big banks kick off the earnings season with reports on second-quarter results.

Moody’s notes: “data on inflation, retail sales and industrial production could alter … estimate[s] of second-quarter U.S. GDP, which [are] currently tracking 8.2% at an annualized rate.”

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 $4,341.75 high volume area (HVNode) pivot.

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.

In the best case, the index trades sideways or higher; activity above $4,341.75 leaves in play the $4,363.50 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the Fibonacci-derived price targets at $4,373.00 and $4,398.50. 

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

In the worst case, the index trades lower; activity below $4,341.75 puts in play the $4,312.25 HVNode. Thereafter, if lower, the $4,291.00 untested Point of Control (POC), $4,285.75 micro-composite HVNode, and $4,239.25 HVNode come into play.

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.
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 most interested in call strikes at and below the price in the cash-settled S&P 500 (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. Noting, over the past few weeks, there’s been increased activity in long-dated put options.

News And Analysis

Markets | Lower stress capital buffers a credit negative for many U.S. banks. (Moody’s)

Economy | A faster recovery boosting prices, but runaway inflation unlikely. (Fitch)

Economy | Is the Fed “tempting FAIT” by assuming inflation is just transitory? (BLK)

Economy | The Fed’s dot plots are not enough in a quantitative easing world. (S&P)

Economy | China’s fading ‘first-in first-out’ rebound sending a global warning. (BBG)

Markets | Commodity boom dwarfs oil spat as emerging markets set to win. (BBG)

Economy | Unpacking several paths to higher-than-expected interest rates. (Fitch)

FinTech | Meet Unbound, a new decentralized cross-chain liquidity protocol. (VV)

Travel | Richard Branson, Virgin Galactic pull-off key test for space tourism. (BBG)

What People Are Saying

About

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

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

Disclaimer

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