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Commentary

Daily Brief For July 19, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

Graphic updated 6:50 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. 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.

Fundamental

After the release of data on consumer prices, earlier this month, the belief was that a de-rate, on inflation, was, potentially, nearing an end, although it was likely to remain at a “higher level than we’ve seen historically,” per the likes of Chevron Corporation’s (NYSE: CVX) CEO Mike Wirth.

Read: National Association of Homebuilders (NAHB) Housing Market Index (HMI) sees record decline. Rental markets cooling. Foreign buying jumps. Food to be the ultimate weapon in the 21st century.

Graphic: Retrieved from Randy Woodward. “Bloomberg commodities index vs. headline CPI.”

Now comes an even deeper compression on earnings?

Graphic: Retrieved from Callum Thomas. “Clear downward momentum in earnings revisions, only 33% of analyst earnings estimates have been revised upward (i.e. the rest downward) — matches the worsening macro.”

Well, maybe. Based on executives’ perspectives, we’re probably “talking ourselves into a recession,” precisely what the likes of Robert Shiller have expressed worry on.

Accordingly, participants are now pricing in shaky earnings, selling the stock of Goldman Sachs Group Inc (NYSE: GS), Apple Inc (NASDAQ: AAPL), and beyond, on those firms’ preparations for an increased potential for an economic downturn.

Up until this week, the Nasdaq 100 (INDEX: NDX) was doing better, consolidating for a potential break above a key response area, like the S&P 500 (INDEX: SPX), highlighted in a section further below.

It failed after the release of earnings from some index heavyweights.

Graphic: Retrieved from Bloomberg. “The Nasdaq 100, down 27% for the year so far, had briefly managed to get above its 50-day moving average on Monday, suggesting that the relentless downward trend was over — but the index failed to stay there, thanks in large part to Apple.”

Pessimism is incredibly strong among investors, however, a sort-of contrarian signal.

In spite of some Bank of America Corporation (NYSE: BAC) indicators pointing to poor fundamentals, sentiment is suggestive of a looming “stocks/credit rally in coming weeks.”

Graphic: Retrieved from Bloomberg. “Investors slashed their exposure to risk assets to levels not seen even during the global financial crisis in a sign of full capitulation amid a “dire” economic outlook, according to Bank of America Corp.’s monthly fund manager survey.”

Positioning

Though we’re far more than halfway through a dot-com type collapse that’s happened “underneath the surface of the indices,” per Simplify Asset Management’s Mike Green, still-strong passive flows continue to support the largest stocks within the indexes.

Graphic: Retrieved from The Market Ear. Via Barclays PLC (NYSE: BCS).

At the same time, options volumes show traders concentrating less on bullish strategies in the single stocks, while the index flows remain steady.

Graphic: Via Deutsche Bank AG (NYSE: DB).

Looking at skew on something like the tech- and growth-heavy Nasdaq 100 (INDEX: NDX), our comments in prior letters (regarding volatility supply from the re-hedging of defensive structures on the put side and volatility demand on the call side from the positioning for a reversal) appear still valid.

Read: Daily Brief for July 15, 2022.

Therefore, spread opportunities still exist and remain attractive.

Graphic: Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim. Skew resembles more of a smile, rather than a smirk.

Read: Trading Volatility, Correlation, Term Structure and Skew by Colin Bennett.

Technical

As of 6:45 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher.

Any activity above the $3,867.25 LVNode puts into play the $3,895.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $3,909.25 MCPOC and $3,943.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,867.25 LVNode puts into play the $3,829.75 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $3,800.75 LVNode and $3,770.75 HVNode, 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.

Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

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, 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 also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, former Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

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