US consumer prices rose by 4.9% in the 12 months to April, down from the previous month’s 5%. Wednesday’s figures suggest inflation is moderating and emboldens the case for a pause to interest rate increases.
Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool.
“The Fed will want to see declines in these statistical measures for a few more months before it could feel comfortable about cutting rates,” John Authers writes.
Notwithstanding “sticky price inflation” falling (only “if shelter prices are excluded,” the most challenging “front in the battle on inflation”), applications to purchase and refinance homes rose with yields falling, and that’s exactly what the Fed doesn’t want.
Many maintain the Fed is looking to walk-up long-end yields, and that’s problematic for assets; higher interest rates portend lesser allocations toward risky assets.
Pimco’s Erin Browne and Emmanuel Sharef add that “12-month returns following the final rate hike could be flat for 10-year U.S. Treasuries, while the S&P 500 could sell off sharply.”
Accordingly, bonds look attractive “for their diversification, capital preservation, and upside opportunities,” while “earnings expectations appear too high, and valuations too rich,” warranting “underweight” equities positioning.
Compounding the risks are flows “that eventually will constrain lending and nominal growth on a 6- to 12-month horizon,” writes Goldman Sachs Group Inc (NYSE: GS).
Graphic: Retrieved from Bloomberg via The Market Ear. “The bull in money market funds refuses to cool down.”
In other news was worry over a US debt default.
The US government has been using accounting measures to provide cash after reaching a borrowing limit. Treasury Secretary Janet Yellen informed Congress that these measures might be exhausted by June, resulting in payment disruptions; a default would cause an economic disaster and “global downturn,” threatening “US global economic leadership” and “national security,” Yellen says. A solution (e.g., to raise the debt ceiling) could manifest issuance of “a substantial amount of bills in 2H23 … that would drain liquidity,” Morgan Stanley (NYSE: MS) writes.
Despite the worry, markets are contained in part due to positioning contexts. Decline in realized volatility (RVOL), coupled with implied volatility (IVOL) premium, makes it difficult for the market to resolve directionally.
In fact, Nomura Holdings Inc (NYSE: NMR) said it sees “significant further potential for additional equities re-allocation buying from the vol control space over the next month if this ongoing rVol smash / tight daily ranges phenomenon holds—i.e., +$37.8B of US Equities to buy on theoretical 50bps daily SPX change).”
Options are sold systematically as traders aim to extract the premium; the Ambrus Group’s Kris Sidial says there is a puking off options exposures and short-bias activity (i.e., selling options) used as yield enhancement as traders call bluff on authorities not being there to prevent crises.
Graphic: Retrieved from Sergei Perfiliev. “This is a 1-month vol – it’s 30 calendar days for implied and I’m using 20 trading days for realized – both of which represent a month.” Note that “juicy VRP = big difference between options’ implied vol (what you pay) and realized vol (what you got). Options are cheap historically, but expensive relative to realized vol.”
Should readers wish to hedge the debt ceiling debacle, June call options on the Cboe Volatility Index appear attractive, some suggest. But, with RVOL as low as it is, owning optionality is not generally warranted. The risk is lower volatility, not higher.
About
Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.
Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.
Inflation and employment rates remain high. Additionally, consumers show resilience, and earnings are strong. As a consequence, markets are back to pricing higher rates for longer. This is a pressure on bonds and stocks which appear “overvalued relative to coming bad news on both economic growth and corporate earnings.”
Graphic: Retrieved from Bloomberg via @Marcomadness2. Hedge funds are net short 2Y and SOFR futures.
Morgan Stanley (NYSE: MS) says stocks are at risk of a pullback, accordingly.
Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via The Market Ear. The indexes have front-run the pause and pivot; Goldman Sachs Group Inc (NYSE: GS) data suggests a statistically significant disconnect between the Nasdaq 100 (INDEX: NDX) and yield.
With the percentage of stocks outperforming the S&P 500 the lowest on record, MS added, a slump in technology is the big risk if yields continue to rise; the bear market is not yet over. “If there is one thing that can throw cold water on the large mega-cap rally, it’s higher yields due to a Fed that can’t stop hiking.”
Graphic: Retrieved from Morgan Stanley (NYSE: MS) via Bloomberg.
Moody’s Corporation (NYSE: MCO) expects a “0.25-percentage point increase to the fed funds rate when the FOMC reconvenes in early May.” Following this hike, there is likely to be a pause at a 5.00-5.25% terminal rate for a few months.
Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool.
From a positioning perspective, Kai Volatility’s Cem Karsan stated that in the past 6-9 months, there has been a significant increase in the volume of options with zero days to expiration (0 DTE), which now accounts for 44% of the total volume. This increase in short-dated options volume has been accompanied by a similarly sized decrease in longer-dated options volume.
Further, the majority of trading activity in these short-dated options is split between hedging and directional trading, as well as yield harvesting via out-of-the-money (OTM) options sales. Though the short-dated activity may prompt cascading events in market downturns, the main issue is the reduced use of longer-dated options; a supply and demand imbalance likely resolves itself with an implied volatility repricing of great size where longer-dated options outperform those that are shorter-dated.
Traders can look to position for a potential IVOL repricing, particularly in the back half of the year when dealer positioning is less clear, buybacks are to fall off of a cliff, and the boost from short-covering has played its course.
Traders can continue to play near-term strength via call spread structures and use those profits to reduce the costs of owning longer-dated bets on markets or rates falling and IVOL increasing. If not interested in directional exposure, traders may allocate funds to T-bills and SPX box spreads which allow traders to create a loan structure similar to a T-bill. If savvy, one could find some structures yielding ~5.5%. Traders can also consider blending T-bills and boxes with directional exposure. This way, they can cut portfolio volatility but still have a bit of leverage potential. Please check out our past letters for trade structure specifics. Have a great day!
About
Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.
Separately, please don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.
Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.
Graphic updated TIME AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. Sentiment Risk-On if expected /MES open is above the prior day’s range. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.
Administrative
A shorter letter today, so there may be some holes we patch later. Take care!
Fundamental
The Federal Reserve (Fed) bumped its target rate up 25 basis points to 4.75-5.00% and opened the door to more hikes, barring market-induced financial tightening, as this letter put forward yesterday morning.
“The events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would, in turn, affect economic outcomes,” Fed chair Jerome Powell commented, adding that credit tightening significantly means monetary policy “may have less work to do.”
Further, before the recent collapses of a few financial institutions, including SVB Financial Group, the market was pricing a 50 basis point hike.
The below CME Group Inc’s (NASDAQ: CME) FedWatch Tool shows the market’s expectations on March 8. Note the 5.50-5.75% terminal (peak) rate.
Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool via The Daily Brief for March 8, 2023.
“Absent SVB, the Fed would have likely raised 50 basis points,” TS Lombard’s Steve Blitz said. “SVB did happen, however, and so this FOMC, ever anxious about facing a recession (rising unemployment), is more than happy to let ‘tighter credit conditions for households and businesses … weigh on economic activity, hiring, and inflation.’ As for financial instability, they believe they have the tools to keep a few poorly managed banks from imploding the whole sector.”
Global layoff tally has moved up to nearly 500k since beginning of October per @Bloomberg … Tech & Consumer Discretionary sectors have led; and for nearly 800 companies that have cut jobs, median layoff has left company workforce 10% smaller pic.twitter.com/d6vlsPgQwj
This is far higher than what the markets are pricing. Powell’s go-to measure for spotting economic troubles suggests steep cuts are also coming sooner than later.
Graphic: Retrieved from Bloomberg. “Frankly, there’s good research by staff in the Federal Reserve system that really says to look at the short — the first 18 months — of the yield curve. That’s really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it’s inverted, that means the Fed’s going to cut, which means the economy is weak.” — Fed Chair Powell on March 21, 2022.
Anyways, given that what was expected happened, markets responded positively. If interested in why that is the case following important events as of late, see the Daily Brief for 2/1 and 2/2.
Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via Bloomberg. “Viewed through the lens of implied volatility — or expectations of how much an underlying asset will swing in the future — zero-day options aren’t particularly cheap in reality. The gap over the S&P 500’s realized volatility, something in derivatives parlance known as volatility risk premium, is typically three times higher than longer-dated contracts, according to BofA.” The compression of “will naturally lead to a buyback” that supports the market, Kai Volatility’s Cem Karsan says.
It was Treasury secretary Janet Yellen who took the market lower. Yellen said she has “not considered or discussed anything having to do with blanket insurance of guarantees of deposits,” and markets did not like that.
The likes of Pershing Square’s Bill Ackman responded he “would be surprised if deposit outflows don’t accelerate.” Adding, Federated Hermes’ Steve Chiavarone thought it was “astounding” Yellen and Powell would give contradictory messages.
“Powell essentially said that all deposits are safe; Yellen said, ‘Hold my beer.’ You would have thought that they would have coordinated,” responded Federated Hermes’ Steve Chiavarone.
To keep it brief, we’ll end with references to letters for 3/20 and 3/21, noting that the conditions for weak equity markets are present. The S&P 500 forward earnings are declining, the yield curve is inverted, unemployment is below average, manufacturing PMIs are below 50, and 40% of banks are tightening lending, Morgan Stanley (NYSE: MS) strategists explain.
Technical
As of 8:55 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET) in the S&P 500 will likely open in the middle part of a positively skewed overnight inventory inside the prior day’s range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $3,994.25.
Key levels to the upside include $4,004.25, $4,017.00, and $4,026.75.
Key levels to the downside include $3,977.00, $3,959.25, and $3,946.75.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold, barring an exogenous development.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for some time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.
POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future value tests as they offer favorable entry and exit.
About
The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market.
You may view this letter’s content calendar at this link.
Disclaimer
Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.
Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:10 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.
Fundamental
As well summarized by Eric Basmajian, inflation, and growth are on a downward trajectory. Most leading indicators “suggest recessionary pressure will be ongoing.” The banking crisis and response, which will ultimately “cause a tightening of lending to the private economy,” likely exacerbates the ongoing recessionary pressures.
Most strategists including the Damped Spring’s Andy Constan agree. In a recent video, Constan detailed the implications of policymakers’ intervention. In short, an asset fire sale was turned into a managed sale, and a reduction in credit creation will tighten financial conditions, slowing the economy and inflation.
“Small banks that are facing deposit outflows will see earnings and margins collapse as their cost of funds surges from 1% or 2% on deposits to 4% or 5% at the Fed funding facility,” Basmajian summarizes, noting that the increase in the Federal Reserve (Fed) balance sheet came from the discount window, new bank funding facilities, and spillover from the FDIC insurance backstop, all of which are not to be confused with quantitative easing or QE (i.e., monetary stimulus and a flow of capital into capital markets).
Graphic: Retrieved from Bank of American Corporation (NYSE: BAC) via The Market Ear.
“As deposits leave regional and smaller banks for more yield and safety, they will flow into bigger banks that do less lending or into money market funds that don’t drive credit creation.” Consequently, there will be “a significant tightening of lending standards, and a credit crunch on the private economy as regional and smaller banks face massive funding pressure.”
Graphic: Retrieved from Morgan Stanley (NYSE: MS) via The Market Ear. “MS models show that a permanent +10pt tightening in lending standards for C&I loans leads to a 35bps rise in the unemployment rate over the next two years. Historically, recessions have arrived more than half a year after jobless claims begin a sustained rise.”
Traders are conflicted about the Fed’s coming interest rate decision. Many were expecting a couple more hikes of at least 25 basis points in size. However, following the recent bank turmoil in the US and abroad, it appears that traders think it will be one additional 25 basis point hike before rate cuts ensue in mid-2023.
Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool.
Historically, selling markets on the last Fed rate hike is a good strategy, Bank of America found.
Graphic: Retrieved from Bank of American Corporation (NYSE: BAC) via The Market Ear.
Positioning
Top-line measures of implied volatility or IVOL including the Cboe Volatility Index or VIX are higher heading into Monday’s trade.
Macro uncertainties have some frightened, hence “equity volatility present[ing] itself in a much stronger way,” said The Ambrus Group’s Kris Sidial. For this equity volatility (i.e., implied volatility or IVOL) to continue performing well, realized volatility or RVOL (i.e., the movement that actually happens and is not implied by traders’ supply and demand of options) must shift and stay higher as well (note: in many ways RVOL and IVOL reinforce the other during extreme greed or fear events.
Though big options expiries (OpEx) “may help unpin the market” and manifest market downside and follow-through in RVOL needed to keep IVOL performing, the window for this to happen may be closing.
The monetization of profitable options structures, as well as volatility compression and options decay, may result in counterparties buying back their short stock and/or futures hedges (to the short put positions they have on), thus boosting the market (particularly the depressed and rate-sensitive Nasdaq 100).
If the market rallies, that has the potential to “make things hotter” in the economy, explained Kai Volatility’s Cem Karsan, which emboldens policymakers to make and keep policy tighter. So, barring follow-through to the downside, any equity market upside that arises is likely limited, as a disclaimer, some think.
Apologies for rushing this section, today. More on positioning in the coming letters.
Technical
As of 8:10 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a negatively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $3,946.75.
Key levels to the upside include $3,970.75, $3,994.25, and $4,026.75.
Key levels to the downside include $3,912.25, $3,891.00, and $3,868.25.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 (FUTURE: /MES) bottom-middle.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.
POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
About
The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market.
You may view this letter’s content calendar at this link.
Disclaimer
Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.
Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 6:30 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.
Administrative
A light letter, today.
Check out the Daily Brief for February 27, 2023, for how to take advantage of higher interest rates and define the outcome of your trading.
As an aside, the second to last positioning section paragraph in that letter talks about using short-dated bets like “butterflies, broken-wing butterflies, ratio spreads, back spreads, and beyond.” In the initial version of the letter, your letter writer accidentally wrote box spreads instead of back spreads. Apologies.
Positioning
Yields are ~5.00%, and this is around the S&P 500’s (INDEX: SPX) earnings yield (i.e., the 6-month Treasury yield is about equal to the SPX’s earnings yield of 5.2%).
A nod to rising rates and risk premiums, the likes of Morgan Stanley suggest the S&P 500 (INDEX: SPX) will come under further pressure.
Graphic: Retrieved from Morgan Stanley (NYSE: MS).
Since not all who read the letter are active in the same timeframe, in the interest of expanding the opportunity set if we will, your letter writer detailed ways to express one’s longer-term opinion on the upside or downside in a capital-protected way.
Essentially, traders can create their own structured notes, investing in a manner that returns principal only. The difference between the bond/box spread outlay and cash remaining is invested in leverage potential. At maturity, the worst-case is a return of principal.
Further, through such structures, traders can participate in the upside by about the same amount they would with a traditional construction (e.g., 60/40). However, you cut the downside.
Graphic: Retrieved from IPS Strategic Capital’s Pat Hennessy.
Alternatively, traders can bias themselves short or non-directionally. In a short-bias situation, one can buy a put spread (and/or sell a call spread) with an outlay (or max loss) not exceeding the cash remaining after the purchase of a bond or box spread.
Through a short-biased setup, traders may participate in potential downside on the pricing of equity market headwinds.
Graphic: Retrieved from JPMorgan Chase & Co (NYSE: JPM).
The suggested downside trades are rather attractive now in the absence of hedging demands in longer-dated protection convex in price and volatility. Naive measures like the Cboe VIX Volatility (INDEX: VVIX), as well as the graphic below, allude to the little demands for convexity and a declining sensitivity of the VIX with respect to changes in share prices.
Graphic: Retrieved from Nomura Holdings Inc (NYSE: NMR).
Technical
As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a negatively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $3,992.75.
Key levels to the upside include $4,003.25, $4,012.25, and $4,024.75.
Key levels to the downside include $3,979.75, $3,965.25, and $3,949.00.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.
POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
MCPOCs: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
About
The author, Renato Leonard Capelj, works in finance and journalism.
Capelj spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. Separately, Capelj is an options analyst at SpotGamma and an accredited journalist.
You may view this letter’s content calendar at this link.
Disclaimer
Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS price via MND. Click here for the calendar.
Fundamental
Consumer price updates (CPI) have traders pricing (even) higher rates for longer.
Yesterday’s data showed goods deflation is underway while services inflation persists. Per Unlimited’s Bob Elliott, “the picture of inflation for the Fed today is considerably less sanguine than at the last meeting.”
Graphic: Retrieved from @VincentDeluard. “The most important indices are the prices of wage-intensive services: haircuts, childcare, dentists, lawyers. With the exception of garages (crazy inflation), they all converge towards 6.5 – 7% YoY and 0.4%-0.5% MoM. That is the true long-term inflation.”
This new data confirms the hawkishness expressed by the Federal Reserve’s (Fed) Jerome Powell last week. US Treasury interest rates shifted higher, accordingly.
CME Group Inc’s (NASDAQ: CME) FedWatch Tool places the terminal rate at 5.25-5.50%, up from 5.00-5.25% on Tuesday before the CPI release. Easing is set to happen this year still in the November-December timeframe.
Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) website.
Recall “a higher interest rate environment implies a more potent” monetary tightening and heavier flow of capital out of capital markets (i.e., quantitative tightening or QT), to quote former Fed trader Joseph Wang.
The pressure from the sale of assets (e.g., USTs, MBSs) will increase interest rates and move yield-seeking market participants out of risk, hence the expectation that pressure persists on equities in 2023.
Graphic: Retrieved from TS Lombard. “Without a recession, the disinflation from the 2021 slowdown ends sometime soon, setting up for a re-acceleration later this year. Not to 8%, but high enough for the Fed to rue its choice of slowing rate hikes when it did.”
In other words, processes like QT manifest themselves as less demand for assets. Per Fabian Wintersberger, central bankers must “recycle bonds into the markets on an unprecedented scale, which could easily lead tolower bond prices/higher yields” causing a “reflux of capital to safe-haven assets, like treasuries.”
Graphic: Retrieved from Fidelity Investments. “The recent rally in stocks deviated from liquidity conditions, which have held steady but have not improved. This is just one reason to question whether there is an adequate foundation to support a new bull market.”
You can produce the above chart yourself. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
Moreover, the above chart which this letter has produced for you in the past and some would say is naive, shows so-called net liquidity.
But, according to Morgan Stanley (NYSE: MS), the correlation between net liquidity and the S&P 500 (INDEX: SPX), over the past ten years is about ~0.70 and explains more than half of the movement in price-earings multiples over the past decade.
After CPI, there was short-lived relief, as this letter expected. Following CPI, weakness surfaced and measures of traders’ activity in options markets showed a bearish tilt.
Big trades that fired off include the purchase of put options expiring in March on the S&P 500 and call options expiring in May on the Cboe Volatility Index (INDEX: VIX).
The net effect is pressure on the indexes that remain well-supported and compressed heading into big options expirations (OpEx) this week, after which the door may open to enable them to move freely and in sync with their constituents, some of which, like Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG), are trading rather weak.
Graphic: Retrieved from Tier1Alpha. “With implied correlation having fallen back to levels not seen since 2021, it’s notable that realized comovement shows no such improvement and instead sits near record highs. Whether this presages a violent snapback is unknowable, but certainly the conditions are in place.”
To explain, after OpEx, counterparty exposure to positive gamma (i.e., positive exposure to movement hedged in a way that reduces movement) will decline and “leave markets more at the whim of macro-type repositioning”; counterparties will do less to disrupt and more to bolster (i.e., add to movement). For how to trade (or how these events impact trades), see this case study by Physik Invest.
Should there be a large break lower, then “convexity could become an issue,” The Market Ear explained in a statement quoting Goldman Sachs Group Inc (NYSE: GS). “Inflecting CTA flow could translate to an approximately 20% sell-off in US equities over a month in a down-tape scenario.”
Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).
Technical
As of 7:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,136.25.
Key levels to the upside include $4,147.00, $4,159.00, and $4,168.75.
Key levels to the downside include $4,122.75, $4,104.25, and $4,083.75.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.
POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
About
The author, Renato Leonard Capelj, works in finance and journalism.
Capelj spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. Separately, Capelj is an options analyst at SpotGamma and an accredited journalist.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility.
Fundamental
In late December 2022, this letter unpacked the likelihood that concerns over inflation were overblown. Strength in markets would re-appear despite earnings deterioration.
Graphic: Retrieved from Morgan Stanley (NYSE: MS) via The Market Ear.
“If the market sniffs out an inflation-driven pause or a pivot from the Fed, even before a drawdown in risk assets is seen, we may get a disinflation rally,” this letter quoted Andreas Steno Larsen explaining. Accordingly, when the Fed upped its benchmark rate by 25 basis points last week and chairman Jerome Powell appeared “not ‘overly combative,” traders turned ultra-optimistic and levered up.
Notwithstanding, the Damped Spring’s Andy Constan believes that pressures are set to remain strong. Traders are pricing higher rates for longer after some new data last week, and the flow of capital, out of capital markets (via quantitative tightening or QT), will be a strong headwind.
Fabian Wintersberger added that if central banks, indeed, are “more restrictive for longer to dampen the pressure of rising consumer prices, … [this] supports the thesis that stocks and bonds will have to fall … [leading] to a demand shift, back from financial markets into the real economy, … [and] the current consumer price disinflation is probably just an injury break before we see the real slowdown between inflation and central banks next year.” Consequently, the double-top inflation playbook appears intact, and volatility in financial markets is likely to persist.
Positioning
Late last week, this letter talked about data that pointed to weaker returns over a 5- to 10-day window. This was, in part, the result of short-dated options activity. After implied volatility (IVOL) compression helped catalyze a rally, SpotGamma, noted that traders’ open interest at slightly higher S&P 500 (INDEX: SPX) prices, and associated counterparty hedging, would likely result “in range suppression or pressure” as time passes and volatility falls. Why? Well, if a long call option’s probability of having value at expiration falls, the counterparty’s risk falls as well and, so, they can sell some of their hedges. This is market pressure.
Anyways, SpotGamma added, yesterday, that “pressure surfaced just when the … data said it was most likely to surface. This appears coincidental, however … [as] the SPX drops began during the first round of [some] VIX [trades]. Some traders entered into 300,000 VIX March 24 and 26 strike calls. The selling accelerated into Monday when nearly 122,000 VIX June 30/40 call spreads fired off. Dealers who may be short VIX calls are likely hedged with VIX futures (or other long volatility hedges). This hedging is market pressure.”
Graphic: Retrieved from SpotGamma’s PM Note on 2/6/2023.
If you’re playing for expansive moves, an attractive way to protect portfolios includes selling rich call verticals to finance put verticals with months left before expiration.
Technical
As of 7:00 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,122.75.
Key levels to the upside include $4,136.75, $4,147.00, and $4,165.75.
Key levels to the downside include $4,100.25, $4,079.00, and $4,052.25.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.
POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
About
The author, Renato Leonard Capelj, works in finance and journalism.
Capelj spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. Separately, Capelj is an options analyst at SpotGamma and an accredited journalist.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 7:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility.
Positioning
The Federal Reserve (Fed) upped its benchmark interest rate by 25 basis points. This puts the target rate range between 4.5% and 4.75%.
The Fed’s Jerome Powell signaled that toughness on inflation will last; though the “disinflation process has started,” and markets are pricing about 50 basis points of cuts by year-end, Powell said rates will continue to increase at least a couple more times. He said rates may reach as high as 5.25% to cut “inflation to 2% over time.”
Markets rallied sharply when Powell began talking. Some suggest his not “overly combative” responses were a reason. Looking back to the Daily Brief for February 1, 2023, we said that in spite of “toughness from the Fed,” markets would likely trend sideways to higher as traders would “not be able to justify the pricing of the ultra-short-dated options they demanded heading into Wednesday.”
Consequently, the supply and expiry of short-dated options coincided with dealers, who were short-stock against the puts they supplied, buying back their hedges. Kai Volatility’s Cem Karsan put this well in a media appearance pre-Fed.
He said that “vol structurally affects how markets move” and that put options, which traders own and dealers are short (and hedging with short stock, as well), would likely go down in value as the “event vol” falls; “those vanna and charm effects will naturally lead to a buyback.”
Graphic: Retrieved from SqueezeMetrics. Click to learn the implications of volatility, direction, and moneyness.
For context, vanna is the change in an options delta with respect to changes in IVOL. Charm is the change in an options delta with respect to changes in time. These are second-order derivatives of an option’s value, once to time or IVOL, and once to delta.
The positive market response, however, should not overly excite. Rather, the market is in a precarious position, and the compression of volatility, given its low starting point, probably does little to encourage a long-lasting rally.
Graphic: Small spread between realized (RVOL) and implied (IVOL) volatility. Retrieved from Bloomberg via CME Group Inc (NASDAQ: CME) analysis.
Trades this letter put forth (e.g., call butterflies and ratio spreads) that would benefit from a sharp move higher while limiting the downside, in products like the Nasdaq 100 (INDEX: NDX), are working spectacularly. In fact, while your letter writer was traveling, his trading partner initiated some +1 x -2 (17 FEB 23 13500/14000) call ratio spreads for free (i.e., $0.00 debit or better to enter), and those spreads are now pricing over $6.00 credit to close. That’s $600.00. Nice job, Justin!
Anyways, though markets could continue trending higher, the risks for a move lower, particularly after mid-February, are increasing some say. Additionally, though we keep our technical analysis usually limited to volume and market profiles, there are a few anchored volume-weighted average price levels sticking out just above current prices.
For context, VWAPs are metrics highly regarded by chief investment officers, among other participants, for the quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
Knowing that longer-dated S&P 500 (INDEX: SPX) implied volatility (IVOL) is cheap, now attractive trades include selling rich call verticals to finance put verticals.
As an aside, there are a number of reasons for calls pricing the way they do. Some of them include the opportunity cost of forgone interest (i.e., buy a call and invest the outlay difference in an interest-bearing account), as well as a fear of missing out in the context of a lower liquidity environment and less supply to absorb demand for hedging (hence higher lows in the VIX).
Graphic: Retrieved from Morgan Stanley (NYSE: MS).
Technical
As of 7:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of the prior range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,153.25.
Key levels to the upside include $4,165.75, $4,189.25, and $4,202.75.
Key levels to the downside include $4,136.75, $4,122.50, and $4,100.25.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels hold weight barring an exogenous development.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.
About
In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:45 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility.
Fundamental
Since the start of 2023, markets have trended higher. This has coincided with traders’ expectations that inflation has peaked and the pace of tightening should slow or peak soon, China re-opening, and the aversion of an energy crisis abroad, given a warmer-than-expected winter.
Investors continue to sit on a lot of cash, at this time.
Graphic: Retrieved from Bank Of America Corporation (NYSE: BAC) via Bloomberg.
Some, in their desire to put their cash to work, have demanded Treasuries.
Graphic: Retrieved from Bloomberg. “Each of the Treasury auctions this month were awarded at a yield lower than expected based on pre-sale trading, known as ‘stopping through’ — meaning that demand was strong. Primary dealers (who are obligated to bid) in Thursday’s $35 billion offering of seven-year notes picked up just 6.1% of the securities, the smallest in any Treasury note or bond auction in data going back to 2003.”
Strong demand during Treasury auctions (i.e., bond bid and yield pressured), as some suggest, is forcing investors into previously depressed equities which Goldman Sachs Group Inc (NYSE: GS) showed investors selling heavily leading up to 2023.
Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via The Market Ear.
In fact, Treasury auctions have coincided with big demand for short-dated exposure to call options and short-covering.
Graphic: Retrieved from SpotGamma’s Weekend Note. “Last week’s bullishness appeared to be bolstered by very strong treasury auctions, which ignited the trade of short-dated (i.e., 0 DTE) call options. You can see this relationship in the image below wherein large 0DTE options flow (bottom) were triggered by the 1 PM ET treasury auction (red vertical line).”
Additionally, the markets have enjoyed a liquidity boost, also a driver of equity market relief. The Treasury General Account (TGA), or the government’s checking account, if we will, was driven down and played into an easing of financial conditions which has benefitted stocks.
Per past letters, we note that a falling TGA is likely to be accompanied by a rise in bank reserves (liabilities to the Fed), increasing the room banks have to lend and finance trading activities which add to market liquidity. This added market liquidity, some suggest, is due to the debt ceiling. Consequently, once a debt ceiling deal is signed, run for the hills!
Graphic: Retrieved from Fabian Wintersberger. “One driving factor is the US is facing its debt ceiling (again). Hence, the US treasury needs to run off its Treasury General Account, which injects liquidity into markets from which stock markets benefit.”
“[T]he single most important driver of equities over the last year has been excess liquidity, and it’s about to turn more restrictive. The amount of liquidity in the system is about to change again – the Treasury is increasing bill issuance sizes, which will drain liquidity from the system. The Treasury could build cash by more than $200 billion over the span of a month – which on top of QT will effectively drain nearly $300 billion from bank reserves – which implies the S&P 500 should be 6% lower over the net month.”
Anyways, strategists think markets are underestimating the Fed which is likely to keep rates higher for longer. There are not enough restrictions to reduce inflation. This would ultimately boost capital costs, leading to earnings misses and lower EPS.
Graphic: Retrieved from Morgan Stanley (NYSE: MS) via The Market Ear. “[M]isses, both on revenue and margin, were not punished as much as they have been historically.”
If this market strength is, in part, the result of a so-called front-running of the Fed’s pivot from tightening, either the failure to realize a pivot or an eventual pivot may be followed by the markets selling (i.e., buy the rumor and sell the news scenario).
Graphic: Retrieved from Fabian Wintersberger. “Neither the ECB nor the Fed is restrictive enough to bring inflation back to 2 %. A look at the Volcker era shows that it is necessary to increase real interest rates above the inflation rate for a prolonged period to achieve that.”
A chart to tack on here at the end of the section is FINRA margin debt versus the S&P 500 (INDEX: SPX). In short, this measure is not supportive of the move up in stocks. More on this sometime later. Take care!
Graphic: Retrieved from Tier1Alpha via Callum Thomas.
Technical
As of 8:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside of the prior range, suggesting a potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,050.25.
Key levels to the upside include $4,061.75, $4,071.50, and $4,087.00.
Key levels to the downside include $4,028.75, $4,011.75, and $3,998.25.
Disclaimer: Click here to load the key levels via the TradingView platform. New links are produced daily. Quoted levels hold weight barring exogenous event.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.
POCs: Areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
About
In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Administrative
We will issue a content calendar, soon, revealing the dates letters are likely to be published and the content that may be covered. That said, due to the writer’s travel commitments, from 12/6 to 12/9 and 12/12 to 12/16 there will be no commentaries. If any queries, or if you are local to New York City or Paris, ping renato@physikinvest.com or Renato Capelj#8625 on Discord.
Reflections
Fundamentally, our Wednesday letter pointed to some macro-type forces creating an uncertain context for traders.
Key crosswinds are numbered (1-4).
Alongside (1) easing financial conditions, the markets roared higher with boosts coming from (2) a “vol crunch” and “systemic exposure reallocation,” Nomura Holdings Inc’s (NYSE: NMR) Charlie McElligott November 28, 2022, said.
Our November 30, 2022 letter noted Morgan Stanley (NYSE: MS) strategists were seeing a (3) “contraction … [or] squeezing of liquidity that, alone, implies an 8% drop for the S&P 500.”
Strategists JPMorgan Chase & Co (NYSE: JPM) agreed:
On “a significant decline in corporate earnings, at a time of higher interest rates (implying lower P/Es and lower prices relative to the 2022 lows), … [a] market decline could happen between now and the end of the first quarter of 2023.”
With (4) “the financial system … evolved around an environment of near-zero interest rates, … [built up] market interdependencies … can cause selloffs” that feed on themselves (i.e., large market drops statistically add to the likelihood of further large drops).
In light of the above (1-4) crosswinds, we took a step back and asked:
How do we get bullish – particularly if policymakers ease the pace of rate increases – and not lose much money if the market falls, or position ourselves for the drop many expect?
Graphic: Retrieved from Bloomberg.
To quote our November 30, 2022 letter, the Nasdaq 100’s (INDEX: NDX) “volatility skew … was smile-shaped, … making for some great trades to the upside,” we said, adding: “we can use the richness of further away calls to reduce the cost of our bets on the market upside.”
Graphic: Updated 11/28/2022. Retrieved from Interactive Brokers (NASDAQ: IBKR). Nasdaq 100 (INDEX: NDX) volatility skew resembles the so-called smile.
The sample trade provided: 500-1000 points wide call ratio spreads (buy the closer leg, sell two of the farther legs) expiring in fifteen days may work well (e.g., SELL -1 1/2 BACKRATIO NDX 100 16 DEC 22 [AM] 13425/13925 CALL @.20 CR LMT).
The trade’s key greeks (+Delta and +Gamma) suggested upside would result in profit. The NDX did rise, and the sample trade priced as high as +2,000%. Adding, as sized by the letter writer, if NDX -10.00%, the loss was limited to $60.00. If the NDX +10.00%, with other conditions the same, profit ~$12,000.00.
Graphic: Retrieved from the Charles Schwab Corporation-owned (NYSE: SCHW) thinkorswim platform. Nasdaq 100 options prices.
Back to the present. What now?
With news that China is loosening its grip on Covid, and the Federal Reserve seeing inflation fall in some parts of the economy (despite markets showing the terminal rate at ~5.20% next spring) ahead of PCE inflation updates this morning, there is a chance for follow-on bullishness.
Graphic: Via Charles Schwab Corporation’s (NYSE: SCHW) TD Ameritrade thinkorswim. Observed is the Eurodollar, the interest offered on U.S. dollar-denominated deposits held at banks outside of the U.S. (i.e., participants’ outlook on interest rates).
So, what is the takeaway?
The purpose of this letter, though it seems we venture beyond it at times, is to ponder theory as well as generate actionable trade ideas based on the application of theory to recent happenings.
Though there are factors that may skew the expected distribution of returns one way or another, a trade is a coinflip; your bet either works or it does not. Using the factors of volatility and time to our advantage may lower the risk and cost of bets, in case they do not pan out.
In short, we don’t know if up or down, but we can use market context to lower our costs and live to fight another day! See you later.
Technical
As of 7:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
Our S&P 500 pivot for today is $4,069.25.
Key levels to the upside include $4,093.00, $4,122.75, and $4,136.75.
Key levels to the downside include $4,049.25, $4,024.00, and $4,000.25.
Click here to load today’s key levels into the web-based TradingView platform. 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.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: 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: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
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
In short, an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
