Categories
Commentary

Daily Brief For January 7, 2022

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

What Happened

Equity index futures auctioned sideways, mostly, ahead of important economic releases such as data on Nonfarm payrolls, the unemployment rate, and average hourly earnings (8:30 AM ET), as well as Fed-speak (10:00 AM and 12:15 PM ET), and consumer credit data (3:00 PM ET).

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

What To Expect

Fundamental: Participants will receive further clarity around payrolls data.

According to Bloomberg, the expectation is that Friday’s jobs report ought to show the addition of about 450,000 workers, last month. 

“[T]he so-called whisper number has already jumped to 500,000,” in light of this “Wednesday’s consensus-busting ADP Research Institute data that showed U.S. companies added the most jobs in seven months.”

This is all the while major equity indices are down on the week, “fueled by one of the most intense bouts of selling by professional speculators since the financial crisis.”

Per Goldman Sachs Group Inc (NYSE: GS) prime broker data, the sale of highly valued growth stocks reached levels not seen in more than 10 years. Selling worsened after minutes to the Federal Reserve’s last policy meeting pointed to faster hikes and balance sheet normalization.

As higher rates are to fend off inflation, they, too, have the potential to decrease the present value of future earnings making stocks (especially high growth) less attractive. 

“A strong [payrolls] print will see the market factor in hikes/quantitative tightening even earlier,” strategists at Mizuho International Plc said. “We’d therefore prefer to be positioned for more equity downside, and for higher yields.”

Positioning: Bonds down, equities down. Interesting, right?

Fresh in my mind is a conversation I had with Karan Sood, CEO and Managing Director, Head of Product Development at Cboe Vest Financial LLC, regarding his firm’s packaged options and volatility targeting strategies that help investors manage their portfolio volatility.

Moreover, over the past 40 or so years, monetary policy was used as a crutch to support the economy. This promoted deflation, innovation, and the subsequent rise in valuations.

“Bonds have been giving you really good returns because interest rates have been going down since the 1970s when they peaked at about 11%,” Sood explained to me. 

“That’s changing now; we’re at the zero bound, and it’s unlikely that will be as a strong of a tailwind. Worse, it could be a headwind if interest rates start to rise.”

As a result of this dynamic, coupled with participants’ increased exposure to rate and equity market risk which can play into cross-market hedging and de-leveraging cascades, 60/40 can be somewhat of a poor hedge.

“Now, with the Fed poised to hike interest rates to combat raging inflation, the bond-stock relationship could be upended,” Bloomberg explains

“At stake are trillions of dollars that are managed at risk parity funds, balanced mutual funds, and pension funds that follow the framework of 60/40 asset allocation.”

Graphic: Via Bloomberg.

Why mention any of this? Well, it forces us to look elsewhere for protection. 

In this case, the growing asset class of volatility, so to speak, is that protection. Investors are aware of both the protective and speculative efficiency afforded to them by options and that is the primary reason option volumes are so comparable to stock volumes, now.

Notwithstanding, with option volumes higher, related hedging flows can represent an increased share of volume in underlying stocks. Therefore, the correlation of stock moves, versus options activity, is more pronounced.

To put it simply, we can look to the options market for clues on where to next, for lack of better phrasing. So, let’s do that!

Wednesday’s session unwound some of the single-stock bullishness (in stocks like Tesla) that fed into the S&P 500, itself; an expansion in volatility coincided with the demand for downside (put) protection and supply of upside (call) protection.

Conditions settled, Thursday. Though positioning metrics had little to offer in terms of predicting movement, implied volatility remained heightened and many products did not expand range.

All else equal, higher implied volatility marks up options delta (exposure to direction). 

Knowing that demand for downside protection coincides with customers indirectly taking liquidity and destabilizing the market as the participant short the put will sell underlying to neutralize risk, participants ought to keep their eye out on whether implied volatility expands or contracts.

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on the underlying’s order book.

Higher implied volatility, higher delta, more selling. Hedging pressures will exacerbate weakness, as a result of real selling (as talked about above), at the index and single-stock level.

Graphic: The “Biggest tail risk to SPX isn’t any macro data/virus/war but its own options market.”

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

Graphic: Data SqueezeMetrics. Graph via Physik Invest.

As stated yesterday, though the dip lower and demand for protection may serve to prime the market for upside (when volatility starts to compress again and counterparties unwind hedges thus supporting any attempt higher), markets will tend toward instability so long as volatility is heightened and the market remains in short-gamma territory.

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

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

Spike base is at $4,761.25. Above, bullish. Below, bearish.

In the best case, the S&P 500 trades higher; activity above the $4,691.25 micro composite point of control (MCPOC) puts in play the $4,717.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,732.50 high volume area (HVNode) and $4,756.00 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,691.25 MCPOC puts in play the $4,674.25 HVNode. Initiative trade beyond the latter could reach as low as the $4,647.25 and $4,629.25 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.

What People Are Saying

Definitions

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

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

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.

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

Options: If an option buyer was short (long) stock, he or she would buy a call (put) to hedge upside (downside) exposure. Option buyers can also use options as an efficient way to gain directional exposure.

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

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

About

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

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

Disclaimer

Physik Invest does not carry the right to provide advice.

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

Categories
Commentary

Daily Brief For December 3, 2021

What Happened

Overnight, equity index futures auctioned in-sync, within the confines of yesterday’s recovery. 

This is as participants position themselves for Friday’s data dump that may shed light on how fast the Federal Reserve (Fed) intends to tighten monetary policy.

Ahead is data on nonfarm payrolls, the unemployment rate, and average hourly earnings (8:30 AM ET). Later is Fed-speak by James Bullard (9:15 AM ET), Markit services PMI (9:45 AM ET), as well as ISM services, factory orders, and core capital goods orders (10:00 AM ET).

Graphic updated 6:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

In the face of strong intraday breadth, the best case outcome occurred, evidenced by the recovery of Wednesday’s value (i.e., the prices at which 70% of that day’s volume occurred).

This action negated the knee-jerk selling that coincided with COVID-19 variant news.

As a result, the S&P 500 is back inside of a short-term consolidation; participants had no interest in transacting the S&P 500 on prices advertised below the balance area.

Context: The Fed’s intent to moderate stimulus and uncertainty with regards to how a new COVID-19 variant will impact the global recovery.

In the face of it all, according to Bloomberg, “The market is again pricing June 2022 as the most likely timing for the first Fed rate hike, same as on Nov. 24. At various stages over the intervening days traders looked at July, or even as late as September.”

This is as an emerging trend from the Fed, confirmed by Chair Jerome Powell’s Congressional testimony – for weeks into this most recent equity – resulted in a re-pricing of bond market risk. 

That fear – demand for protection in the bond market – failed to appear in the equity market. 

Instead, there was an insatiable appetite for stocks, according to Bloomberg, with investors pouring more cash in 2021 than in the past 19 years, combined. 

That appetite for risk fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA), and, more recently Apple Inc (NASDAQ: AAPL). At the same time, the broader market was weakening, evidenced by a decline in breadth. 

With indices pinned, heading into the November monthly options expiration (OPEX), as a result of sticky and supportive hedging flows, correlations declined. 

Think about it. If heavily weighted index constituents are higher and the indices are pinned, then something has to give! 

After OPEX, the removal of certain hedging flows had the market succumb to fundamental forces. The addition of participants’ underexposure to downside put protection, according to SpotGamma, resulted in more rampant two-way volatility.

The reason being? The market quickly entered into an environment known as short-gamma. 

“What the heck is that? Please explain to me like I’m ten.” Okay, hold my beer.

Basically, funds holding long equity, in the interest of lower volatility returns, hedge. The S&P 500 is a benchmark and one of the best places to hedge, given liquidity, and so on.

These participants will sell calls against their long equity exposure. The proceeds from that sale will be put toward downside protection. Long equity, short call, long put. Get it?

The counterparty to this dominant positioning is a buyer (seller) of upside (downside) protection, a carry trade (i.e., long delta). 

This exposure is hedged, yes! However, this exposure will also decay, in time, all else equal. 

Volatility will slide down its term structure (vanna) and time will pass (charm); “as volatility ebbs and time passes, the unwind of these hedges brings in positive flows that can lead to lengthy sprints.” – Cem Karsan of Kai Volatility.

Now, within a certain range, said counterparties are, long-gamma also. Gamma is basically “the rate of change of delta per 1-point move in the underlying,” according to SqueezeMetrics.

As volatility and time to expiration decline, the gamma of at-the-money options rises; “option market-makers will hedge their positions in a fashion that stifles volatility (buying into lows, selling into highs).”

There are times, also, when the market is in a short-gamma; a “negative [gamma] implies the opposite (selling into lows, buying into highs), thus magnifying market volatility.”

With participants underexposed to downside protection, post-OPEX demand kicked the market into short-gamma; the conditions worsened when much of the activity was concentrated in shorter-dated tenors where the sensitivity of options to direction is higher, as stated.

Graphic: VIX term structure 11/25. Backwardation signaled an entry into an unstable environment with activity concentrated at the front-end of the curve.

Once that short-dated protection rolls off the table (and/or is monetized), counterparties will quickly reverse and support the market, buying to close their existing stock/futures hedges.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator on 12/2 shows positive options delta trades firing off, which likely had dealers buying stock/futures into the close.

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant, and the positive effects of pro-cyclical inflation and economic growth, improvements in global trade, and continuity at the Fed, among other dynamics, play out.

We see participants opportunistically buying the dip, already, via metrics like DIX that’s derived from liquidity provision on the market-making side.

Graphic: Earnings are rising and helping support historic PE multiples, via Nasdaq

Notwithstanding, the market is still in short-gamma and unless participants began betting on the upside (i.e., committing increased capital to calls at strikes higher in price and out in time), and we cross over to long-gamma, volatility ought to remain.

To assuage fears, though, here is a quote from Goldman Sachs Group Inc (NYSE: GS): 

“We find that the market has already priced in a significant downgrade in the growth outlook off the back of Omicron concerns. While we don’t believe that the most extreme downside scenarios are fully reflected in current market pricing, there are clearly still scenarios that could prove better than anticipated by the sharp shift in pricing in recent weeks, in our view”.

Expectations: As of 6:45 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a negatively 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 sideways or higher; activity above the $4,574.25 high volume area (HVNode) puts in play the $4,590.00 balance area high (BAH). Initiative trade beyond the BAH could reach as high as the $4,629.00 untested point of control (VPOC) and $4,647.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,574.25 HVNode puts in play the $4,551.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,526.25 HVNode and $4,497.75 regular trade low (RTH Low), or lower.

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

What People Are Saying

Definitions

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

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

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.

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

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

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

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

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

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

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For November 5, 2021

Abstract

Equity index futures higher. Commodities were higher. Bonds mixed. Volatility compressed.

Ahead is a heavier day of economic releases, in the face of fundamental narratives and positioning metrics that may support intraday price stability.

What Happened

Overnight, equity index futures were marked up ahead of the House’s plan to vote on President Joe Biden’s economic package and infrastructure, as well as October jobs data.

Also, in the news, there were narratives surrounding China’s dollar surplus, a pandemic resurgence in Europe, Pfizer Inc’s (NYSE: PFE) development of a pill for COVID-19.

Ahead is data on payrolls, unemployment, and average hourly earnings (8:30 AM ET), as well as consumer credit (3:00 PM ET). I apologize as this is what I listed yesterday, mistakenly.

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

What To Expect

On weak intraday breadth and lackluster market liquidity metrics, the best case outcome occurred, evidenced by balanced trade at newly discovered S&P 500 prices.

As also evidenced by the separation of value, overnight, the gap out of yesterday’s range marks a potential willingness to continue the uptrend.

To note, poor structure left behind prior initiative trade adds to technical instability, a dynamic mentioned in prior commentaries. Participants will likely look to check old value (i.e., revisit, repair, and strengthen) pockets of low-volume, feverishly, on any breakdown of trend.

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

Context: The aforementioned trade is happening in the context of a slowdown in economic growth, increased clarity on the Federal Reserve’s (Fed) intent to moderate stimulus, as well as the prospects of renewed fiscal support.

The implications of these narratives on price are contradictory.

To elaborate, supply chain disruptions slowed the pace of economic growth, while participants saw both the Fed’s decision to taper and keep rates unchanged, as well as the potential passage of President Biden’s economic plan, today, as near-term positives.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while supply came in across the VIX futures term structure. That, alongside the long-gamma environment and increased demand for options above current prices (i.e., bets on the upside), points to increased odds of near-term equity market stability.

To quote options analysis and data provider SpotGamma, “​​the term structure of IV (this is how high the IV is for longer-dated options) remains elevated. That suggests near term options could have more ‘bleed’ which could keep the SPX market price tailwind intact.”

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

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

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,663.00 untested point of control (VPOC) puts in play the $4,684.25 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,705.25 and $4,725.50 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,663.00 VPOC puts in play the $4,619.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,590.00 balance boundary and $4,574.25 high volume area (HVNode), or lower.

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

Charts To Watch

Graphic: (NASDAQ: AMZN). (S~3403, R~3580). S is for support. R is for resistance. I am seeking to initiate short-duration call structures against the 3580 gap fill and prior all-time high. Will initiate for credit or finance with put structures.
Graphic: (NASDAQ: FB). (S~326.45, R~336.90). S is for support. R is for resistance. If the stock was to maintain prices above 336.90, there is a potential change in tone. In such a case, I’m targeting Fibonacci retracements with call structures financed with credits on the put side.
Graphic: (NASDAQ: GOOGL). (S~2900, R~3113). S is for support. R is for resistance. I’m targeting prices between 3000 and 3100 with call structures for low cost or credit.
Graphic: (NYSE: SHOP). (S~1482, R~1650). S is for support. R is for resistance. Potential break of trend, move to an all-time high.
Graphic: (NYSE: IWM). (S~234.53, R~241.96, 251.41). S is for support. R is for resistance. Russell 2000 breaks out of balance. In my opinion, upon acceptance, there are potential opportunities for long trades.

Other charts I’m watching include BABA (S~155.29), ZM (S~245.92), ARKK (S~120.15), PINS (S~42.06), Z (S~58.15), BBY (S~123.65), GOOS (S~40.91), CTSH (R~82.00), LYFT (S~44.41), TMUS (S~118.00), WDC (51.47). S is for support. R is for resistance. 

What People Are Saying

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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

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

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

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

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

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

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

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For November 4, 2021

Abstract

Equity index futures higher. Commodities were mostly higher. Bonds mixed. Volatility compressed.

Ahead is a heavier day of economic releases, in the face of fundamental narratives and positioning metrics that support intraday price stability.

What Happened

Overnight, equity index futures auctioned sideways to higher alongside the Federal Open Market Committee’s decision to taper bond buying and hold rate hikes.

Ahead is data on nonfarm payrolls, unemployment rate, and average hourly earnings (8:30 AM ET), as well as consumer credit (3:00 PM ET).

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

What To Expect

Action: On supportive intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by a spike away from an area of balanced, sideways trade in S&P 500 (INDEX: SPX) (ETF: SPY) (FUTURE: /ES).

Intent: As also evidenced by the separation of value (i.e., the area where 70% of the day’s trade occurred), the spike marks a potential willingness to continue the trend.

Validation: Continued sideways to higher trade, above the $4,627.00 level (a prior all-time high), validates the market’s prevailing intent to markup in the face of new information.

Consideration: Poor structure left behind prior initiative trade (as evidenced by the presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures which denote short-covering and a lack of material, new-money buying) adds to technical instability.

This is a remark, which has been made in the last several commentaries, remains valid; post-FOMC, should the market crack, participants will likely look to check old value (i.e., revisit, repair, and strengthen) these pockets of low-volume, feverishly.

Graphic: Supportive delta (i.e., 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 initiative trade (i.e., directional trade that suggests old prices were not favorable to entry and exit; the market is not in balance).

Context: The aforementioned trade is happening in the context of the FOMC’s decision to taper bond purchases and not raise interest rates.

The implications of this are, as evidenced by a near-vertical price rise, seen as positive

To elaborate, Bloomberg’s John Authers writes: “In 2013, the bond market threw a tantrum at the mere mention of a taper. Real financial conditions had sharply tightened before the Fed could eventually start withdrawing stimulus. This time, real yields are no higher than they were on New Year’s Day. People are still prepared to lend money to the government on the assumption that they will get a return a full percentage point below the inflation rate.”

On the topic of interest rates, “the Fed will warn us in advance – which in effect means that a rate rise should be penciled in for next July’s meeting, or June at the earliest.”

Graphic: Per Bloomberg, “Last week saw a dramatic flattening, in an implicit bet that the Fed was going to hike rates in the near term, and choke off growth in the longer term. The curve had already started to steepen by the end of last week, and it regained more ground after the Federal Open Market Committee and Jerome Powell’s press conference.”

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while the VIX futures term structure came in a bit. To put it simply, participants were assuaged of their fears; the post-FOMC compression in volatility plays into an end-of-year, seasonally-aligned, rally supported by the flows typically associated with decaying, options hedges, according to SpotGamma.

Graphic: Goldman Sachs Group (NYSE: GS) charts S&P 500 seasonality. Taken from The Market Ear.

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

Spike Scenarios Apply: Spikes mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike). The spike reference to go by is $4,627.00, a prior all-time high.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,652.25 high volume area (HVNode) puts in play the $4,662.75 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,672.50 and $4,705.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,652.25 HVNode puts in play the $4,619.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,590.00 balance area high (BAH) and $4,574.25 HVNode, or lower.

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

What People Are Saying

Definitions

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

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

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

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

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

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

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For October 8, 2021

Market Commentary

Equity index futures sideways overnight. Volatility ebbs.

  • Senate passed debt-ceiling raise.
  • Ahead: NFP, unemployment data.
  • Clarity regarding tapering by Fed.
  • Responsive selling into RTH high.

What Happened: U.S. stock index futures auctioned sideways overnight alongside news that the Senate passed a short-term debt ceiling increase. 

Ahead is data on nonfarm payrolls, the unemployment rate, and average hourly earnings (8:30 AM ET), as well as wholesale inventories (10:00 AM ET).

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

What To Expect: As of 6:40 AM ET, Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

During the prior day’s regular trade, on strong intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by the expansion of range and value above the $4,410.25 low volume area (LVNode), between two key anchored-volume weighted average price (AVWAP) levels.

Into the price rise, however, we note that participants sold responsively (i.e., sold in response to prices printing above an area of recent acceptance or balance); as prices came into the resting liquidity (Graphic 2) – also the location of a key AVWAP in – at and around /ES $4,410.25 (SPY $441.00), buying and selling power as calculated by the difference in volume traded at the bid and offer diverged, markedly.

In other words, at the AVWAP – a metric highly regarded by chief investment officers, among other participants, for quality of trade – there were liquidity algorithms programmed to sell.

Why? Liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
Graphic 1: SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, encounters responsive selling at key volume-weighted average price levels. 
Graphic 2: 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).

This trade is significant because it suggests a willingness to slow price discovery and balance (i.e., trade sideways as participants look to establish an equilibrium in light of new information). 

We’re carrying forward the presence of a p-shaped emotional, multiple-distribution profile structure (i.e., old-money shorts covering) left behind prior initiative trade, as well as continued trade below the 20- and 50-day simple moving averages; these dynamics induce anxiety and stress for the technical-driven, weaker-handed buy-the-dip crowd.

Further, the aforementioned trade is happening as investors await key employment data that will provide context on what the Federal Reserve with respect to monetary policy.

According to Bloomberg, Friday’s payroll data – which is likely to indicate strong improvement – likely emboldens tapering initiatives and improves the prospects of a rise in the Fed funds rate.

“What we see in the equity space is a lot of sensitivity to higher real yields,” Joseph Little, chief global strategist at HSBC Asset Management, said. “We are seeing policy normalization everywhere. That creates a little bit of a challenge for equity market because it does change the drivers of equity performance.”

Graphic 3: A “gentle reminder of the fact tapering matters,” via The Market Ear.

Adding, earlier this week, we noted that indices were best positioned for a vicious rebound as near-term downside discovery metrics likely reached a limit. These dynamics remain.

Graphic: ​​On October 5, 2021, according to SqueezeMetrics, “Net Put Delta (NPD) and the customer Vanna-Gamma Ratio (VGR) [] settled in a *bullish* place. Risk to the upside.”

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,381.25 low volume area (LVNode) puts in play the $4,415.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,437.75 micro-composite point of control (MCPOC) and $4,481.75 high volume area (HVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,381.25 LVNode puts in play the $4,363.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,332.25 LVNode and $4,278.00 HVNode, or lower.

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

Definitions

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).

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.

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

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

Short Covering: The profile shape suggests participants were “too” short and had poor location.

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.

News And Analysis

Short-term increase in U.S. debt ceiling passes Senate.

U.S. special operations rotating into Taiwan for training.

Moody’s: Kicking [debt limits] not too far down the road.

Energy Transition: Demand destruction stalking Europe.

APAC CBDCs – pathways plenty, destination uncertain.

Vaccinations and policy decisions are key to EM growth.

Richest Americans flee Treasuries with holdings at lows.

Crypto Mystery: Where’s the $69B behind Tether’s coin.

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 3, 2021

Market Commentary

Equity indexes were sideways to higher with most commodities, yields, and the dollar. 

  • Ahead: NFP, unemployment, and more.
  • Participants await context on Fed taper.
  • Indexes positioned for directional move.
  • Market is closed Monday, September 6. 

What Happened: U.S. stock index futures auctioned higher overnight ahead of Friday’s jobs report which may provide market participants context with respect to the Federal Reserve’s intent to de-stimulate.

Ahead is data on nonfarm payrolls, unemployment rate, and average hourly earnings (8:30 AM ET), as well as Markit services PMI (9:45 AM ET) and ISM services index (10:00 AM ET).

Graphic updated 6:40 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 6:40 AM ET, Friday’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 intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by trade sideways above the $4,526.25 level, a prominent high volume area (HVNode).

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

This is significant because of acceptance, or a willingness to transact at higher prices. We’re carrying forward the presence of poor structure left behind prior trade.

Gap Scenarios Likely 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 trade is happening in the context of Friday’s jobs report. This report may have strong implications on the equity market; to elaborate, the data release will provide market participants color with respect to the Federal Reserve’s intent to wind down stimulus.

Forecasted is the addition of 725,000 jobs in August, according to Bloomberg, a moderate pace in comparison to months prior. 

A strong report would suggest a success, on the part of businesses, to hire after months of crunched labor supply. On the other hand, “The softening in employment activity would be consistent with other economic data that have weakened since the surge in Covid case counts due to the delta variant,” Bank of America Corporation (NYSE: BAC) economists said.

Bloomberg’s Katie Greifeld adds: “[R]ates are more likely to push higher on the heels of an unexpectedly strong jobs print than they are to fall in the wake of a weak one. With that dynamic in mind, bet against bonds.”

Graphic: Wells Fargo & Co (NYSE: WFC) data plotted by Bloomberg. 

To note, a softer report may pause any talk of taper to asset purchases. A reduction in the Federal Reserve’s balance sheet – a removal of liquidity – could prompt a sort of risk-off scenario in which participants try to get ahead of whatever cascading reactions may come with the taper.

In other words, as Kai Volatility’s Cem Karsan explained to me: “It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

Moreover, for today, given an increased potential for higher volatility and initiative trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,526.25 high volume area (HVNode) puts in play the $4,545.75 overnight high (ONH). Initiative trade beyond the ONH puts in play the $4,556.25 and $4,592.25 Fibonacci extensions. 

In the worst case, the S&P 500 trades lower; activity below the $4,526.25 HVNode puts in play the $4,510.00 level, a regular trade high (RTH High), and gap. Initiative trade beyond the RTH High and gap puts in play the $4,481.75 HVNode and $4,454.25 LVNode.

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.

Initiative Buying (Selling): Buying (selling) within or above (below) the previous day’s value area.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

News And Analysis

Moody’s Weekly Market Outlook on Ida, gas, and inflation expectations. 

Short bets rise against consumer discretionary stocks as stimulus fades.

Traders set to test Powell’s push to delink hikes from bond-buying taper.

Three doses could become a standard COVID regimen, Dr. Fauci says.

The Western U.S. drought is forecasted to continue through fall at least.

U.S. structured finance issuance totaled $57B in August, rising 65% YoY.

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 2, 2021

Market Commentary

Index futures diverge in their attempt to discover higher prices.

  • Conflicting narratives. Only price pays.
  • Ahead: NFP, trade balance, and more.
  • Indices trying to establish value higher.

What Happened: U.S. stock index futures auctioned sideways to higher ahead of the holiday weekend. 

The Nasdaq firmed, relative to its peers, after brief intraday weakness, yesterday. The S&P 500 discovered even higher prices, while the Dow Jones Industrial Average came into technical resistance and held. Though the Russell 2000 was lower, this morning, it has been building energy for a break.

Before the open, participants will have data on June non-farm payrolls. Later releases include the May U.S. trade balance, in addition to factory and durable good orders.

Graphic updated 8:05 AM ET.

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

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by initiative trade above the $4,285.00 Point of Control (POC). Overnight, participants continued the discovery process, establishing a new overnight all-time high (ONH) at $4,318.25 (which was still intact at the time of this writing 7:50 AM ET). 

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.

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

Further, this relentless uptrend comes ahead of data key in gauging the economic recovery; this morning’s payroll release will be a true test of optimism, providing participants more information to either support (or not support) this most recent directional move on narrowing breadth and tapering volumes ahead of the holiday weekend.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,311.50 high volume area (HVNode) puts in play the $4,318.25 ONH. Thereafter, if higher, participants may look to the Fibonacci price extensions at $4,236.25 and $4,337.75 for potential exhaustion. 

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 worst case, the S&P 500 trades lower; activity below the $4,311.50 HVNode puts in play the $4,299.00 and $4,285.00 POCs. Thereafter, if lower, the $4,256.75 HVNode may come into play as a level where responsive buyers surface.

To note, it’s Friday, a good day to limit expectations, overall.

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

News And Analysis

Economy | U.S. payrolls jump 850K in June, versus EST: 720K. (BBG)

Economy | ECB’s Lagarde warns that recovery remains fragile. (REU)

Markets | Robinhood seizes the meme-stock moment with IPO. (BBG)

Economy | Treasury yields signal investors’ waning exuberance. (WSJ)

Markets | 15% minimum corporate tax will have a limited impact. (Axios)

COVID | J&J shot shows strong response against Delta variant. (REU)

What People Are Saying

Innovation And Emerging Trends

Mobility | Rumors of the demise of cars have been exaggerated. (BBG)

FinTech | Fintechs asked CFPB for guidance on AI, ML, LendTech. (BD)

Markets | The crypto basis trade status after May retail liquidations. (BBG)

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 30, 2021

Market Commentary

Index futures rotate as participants begin the bracketing process.

  • More delta variant fears. End to a slow quarter.
  • Ahead is employment, home sales, Fed speak.
  • Participants positioning for upcoming catalysts.

What Happened: U.S. stock index futures auctioned sideways to lower alongside fears surrounding COVID-19 variants. 

To note, though, Moderna Inc (NASDAQ: MRNA) announced that its shot produced antibodies against the concerning delta variant. In other areas, cryptocurrencies took a hit ahead of the House Committee on Financial Services hearing on crypto.

Adding, tomorrow participants will get clarity on OPEC’s decision on crude supply.

Before the market opens, the latest ADP Employment report will be out. Thereafter, Chicago PMI, pending home sales data, some Fed speak, and earnings are on deck. 

Graphic updated 7:40 AM ET.

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

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by sideways trade above the $4,271.00 Point of Control (POC), up to a new – likely secure – regular-trade high (RTH High) at $4,291.00.

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.

Coming into today’s session, the Nasdaq 100 remains relatively strong. Despite Tuesday’s corrective activity – as evidenced by a higher high and low in the S&P 500 – offering participants favorable entry and exit within the trend, signs of exhaustion are apparent. After strong buying by longer time frame participants, short-term traders took over; moves are mechanical, halting at key, visual references. 

It’s likely that last night’s break is the start of bracketing (i.e., the trend ceases and the auction becomes volatile as participants, with similar views of value, look to position themselves for the next catalyst). At the same time, as stated in prior commentaries, markets are just days from breaking out of weak seasonality; July 4 marks the start of the best 2-week period going back to 1950. 

Graphic: Historical data suggests the market is entering into a seasonally strong period, via The Market Ear

Overall, the outlook is rather cloudy. Given seasonality metrics and a strong uptrend, participants should keep an open mind when assessing the implications of narrowing breadth and tapering volumes. The uptrend will end after (1) buyers are exhausted or (2) responsive sellers deem the price too far from perceived value. 

Further, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the micro-composite POC at $4,273.25 puts in play the $4,285.25 high volume area (HVNode). Initiative trade beyond that HVNode could reach as high as the $4,291.00 RTH High and $4,294.75 Fibonacci-derived price target. 

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 worst case, the S&P 500 trades lower; activity below $4,285.25 puts in play the $4,256.75 HVNode. Thereafter, if lower, the poor, low volume structure surrounding the $4,239.75 HVNode comes into play. On an aggressive liquidation that finds acceptance (i.e., more than 1-hour of trade) past that $4,239.75 figure, participants ought to look out for responses at the $4,213.00 HVNode.

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

News And Analysis

Markets | China’s digital yuan a key risk for euro, ECB says. (BBG)

Economy | Private payrolls rise 692,000, topping projections. (CNBC)

Markets | Microsoft, Google end six-year truce on legal battles. (FT)

Economy | Unemployment lifeline disappears around country. (Axios)

Health | Heart inflammation after COVID shots is heightened. (REU)

Economy | If the Federal Reserve stopped buying mortgages. (Axios)

Economy | Supreme Court declines to lift eviction moratorium. (Axios)

What People Are Saying

Innovation And Emerging Trends

Space | Musk: SpaceX is prepared to spend $30B on Starlink. (FT)

FinTech | Coinbase rolling out high-yield USDC product offering. (Block)

FinTech | IG Group and tastytrade completed a $1B partnership. (BZ)

Media | Munger says he loves Zoom, thinks video trend will stay. (CNBC)

About

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

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

Disclaimer

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

Categories
Commentary

Weekly Brief For May 9, 2021

Market Commentary

Key Takeaways: Index futures in price discovery.

  • JPMorgan puts emphasis on reflation.
  • Earnings were great. NFP not so much.
  • Indices diverge. S&P 500, Dow higher.

What Happened: Last week, U.S. stock index futures were divergent with the Nasdaq 100 and Russell 2000 lagging behind the S&P 500 and Dow Jones Industrial Average.

The push-pull between equity indices comes as market participants doubled down on the so-called “reflation” trade. JPMorgan Chase & Co (NYSE: JPM) strategists, led by Marko Kolanovic, warned many managers will “need to quickly switch gears from their deflationary playbook or risk an ‘inflation shock,’” according to Bloomberg.

“We expect a strong pickup in inflation this year, which the market will likely be slow to recognize and is poorly positioned for,” Kolanovic and his colleagues said. “A combination of boomy global growth and significant bottleneck price pressures should keep inflation on an upward trajectory while most central banks remain committed to their very accommodative stances and are looking through the inflation pickups.”

Kolanovic recommends participants cut cash and credit to increase their allocations to cyclical and value assets.

In parallel, while companies look to cut costs and boost prices, the April jobs report failed to meet expectations as people who increasingly looked for jobs had a difficult time getting hired.

Graphic: Bloomberg data shows first-quarter earnings from S&P 500 companies surging.

“We still think growth will be historically strong this year, but today’s jobs report is a reminder that there’s still work to be done,” Ally Inc-owned Ally Invest strategist Callie Cox said. “It’s a big data point for the inflation worries, too. If hiring slows for the next few months, businesses may not be able to pass on higher costs to consumers.”

Adding, though the April payroll miss was big enough to likely limit the Federal Reserve’s taper or rate hike discussions, traders signaled otherwise.

Earlier this week, Bloomberg reported on a large option bet over quicker rate hikes by the Federal Reserve. The Eurodollar bet carries a notional value of $40 billion and is focused on a potential surprise at the Jackson Hole symposium, used in the past to signal policy changes.

Graphic: Eurodollar bet on SHIFT’s institutional platform. The purchase of 98.00 strike put options suggests traders are looking to add “two Fed hikes to [current] expectations.”

Moving on, technically speaking, equity indexes are at an interesting juncture. 

The Dow Jones Industrial Average and S&P 500 resolved their multi-week consolidations, to the upside, while the Russell 2000 is rotating within prior range and Nasdaq 100 is relatively weak, losing support and auctioning into a low-volume area.

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.

Further, the strong break in the S&P 500, which targets the Fibonacci-derived price extension near $4,300, has thus far been validated by numerous hours of trade outside of the consolidation zone (i.e., balance area). To note, though, the structure left behind Friday’s price discovery was very poor, opening the door for potential repair.

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).

Participants ought to be cautiously optimistic given the weakness in heavily-weighted sectors like technology. Should weakness accelerate, the S&P 500 may succumb. 

Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). The Dow is the strongest of the four. The Nasdaq is the weakest.

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 balance area it just broke from.

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above the $4,210.75 boundary targets the $4,235.25 price extension. Initiative trade beyond the price extension could reach as high as the $4,266.50-$4,272.75 confluence of Fibonacci-derived price targets.

In the worst case, the index trades lower; activity below $4,210.75 puts in play the $4,179.50 spike base. Trading below the spike base negates end-of-week bullishness.

Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending May 7, 2021. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $404.00, which corresponds with $4,030.00 in the cash-settled S&P 500 Index (INDEX: SPX).

News And Analysis

Economy | Forbearance exits soar as more plans expire last week. (MND)

Economy | Demand decline fuels price wars across mortgage industry. (WSJ)

Markets | Focus shifts to U.S. prices after the jobs disappointment. (BBG)

Politics | Infrastructure talks could set course of Biden spending plans. (WSJ)

Markets | New SEC chairman sets sights on firms Citadel and Virtu. (WSJ)

Markets | Pipeline hack may push pump rices to $3, ahead of holiday. (BBG)

Recovery | Fauci says ‘no doubt’ the U.S. undercounted virus deaths. (BBG)

What People Are Saying

Innovation And Emerging Trends

Crypto | German, U.S. regulators tighten focus on the crypto market. (FT)

Space | China’s ambitions in space: national pride or taking on U.S. (FT)

Crypto | Crypto startup Dfinity set to launch a blockchain AWS rival. (FT

About

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

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

 Disclaimer

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

Categories
Commentary

Daily Brief For May 7, 2021

Market Commentary

Index futures in balance.

  • Fed warns over asset valuations.
  • Ahead: Data on nonfarm payrolls.
  • Value strong, tech relatively weak.

What Happened: U.S. stock index futures auctioned higher overnight ahead of non-farm payroll data.

Graphic updated at 8:43 AM EST.

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

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by initiative trade above the $4,177.25 high volume area (HVNode), which is significant because it marked a crucial pivot, on a larger time frame.

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.

Further, the compressed range over the past few sessions was resolved during Thursday’s end-of-day spike, as participants likely looked to price in expectations of strong jobs data. 

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

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,179.50 spike base targets puts in play the $4,210.75 minimal excess high. Initiative trade beyond $4,210.75 could reach as high as the $4,235.25 Fibonacci-derived price extension. 

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

In the worst case, the S&P 500 trades lower; activity below $4,179.50 puts in play the $4,163.00 POC.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: SHIFT search suggests participants were most interested in call strikes at and above $4,200.00 in the cash-settled S&P 500 Index (INDEX: SPX), Thursday.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). The Dow is the strongest of the four. The Nasdaq is the weakest.

News And Analysis

Markets | Credit Review and Outlook: Bonds and the Booming Economy. (Moody’s)

Markets | Fed is warning of hidden leverage lurking in the financial system. (FT)

Markets | EU climate change head warns against curbing carbon price rally. (FP)

Markets | Cathie Wood’s ARK Innovation ETF is selling off. May it worsen? (Barron’s)

Politics | Merkel pushes back on vaccine patent waiver in row with the U.S. (BBG)

Economy | BoE foresees biggest U.K. spending boom since Thatcher era. (BBG)

Markets | Traders ramp up bets on a hawkish Fed surprise at Jackson Hole. (BBG)

Recovery | Gandhi warns ‘explosive’ COVID wave threatens India and the world. (REU)

Markets | Investors eye inflation, seasonally weaker market as tech wobbles. (REU)

What People Are Saying

Innovation And Emerging Trends

FinTech | Citi weighs launching crypto services after a surge in client interest. (FT)

FinTech | Payments, lending, and neobanks rule fintechs in emerging markets. (TC)

FinTech | Chime forced to ditch the use of word ‘bank’ after regulatory pushback. (AB)

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, Canadian 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.