Daily Brief For April 4, 2023


Administrative Bulletin

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JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic believes the equities rally will falter, with headwinds from bank turbulence, an oil shock, and slowing growth poised to send stocks back toward their 2022 lows over the coming months. Kolanovic says this is “the calm before the storm,” adding that the equity rally is masking weaknesses from recent bank collapses and a decline in corporate profits and growth.

Read: Black Knight Mortgage Monitor Report.

As a validation, we can look to ISM’s inventories exceeding that of new orders, and a dip in cost-push prices, Bloomberg’s John Authers explains. The overall ISM measure is recessionary; the upcoming earnings season may be unforgiving, and companies with weaker EPS are likely to be penalized more due to the prospects of a recession.

Graphic: Retrieved from Sergei Perfiliev. “Based on this relationship, today’s PMI reading of 46.3 implies an earnings contraction of about 8% over the next 12 months or an SPX EPS of 204. Using the current forward PE ratio of 18.7, this leads to an index level of about 3,815. A ‘recessionary’ PE ratio of 15 will see the index at ~3,060, assuming earnings don’t fall further.”

Tech’s outperformance, driven partly by a supply of previously demanded downside put protection, has become even more magnified recently as traders ramped up bets that banking system stresses prompt the Federal Reserve to hit the brakes.

Read: SOFR Futures And Options 1st Edition

Graphic: Retrieved from @countdraghula. “We aren’t seeing the same thing for out-of-the-money calls on front-end futures. BUYING A CALL on front-end futures is taking a bet on Fed rates collapsing, especially if it is considerably out of the money, as below. Pricing for these is still sky high, despite some calm.”

Over the past weeks, we anticipated the markets trading “spiritedly for far longer,” quoting the likes of Kai Volatility’s Cem Karsan, who said the signs of a combustible situation would emerge when options implied volatility is sticky in a market rally.

Typically, as the market trades higher, volatility levels for fixed-strike options should decrease. If broad implied volatility measures are bid and fixed-strike volatility increases, this may lead to a more combustible situation as options counterparties begin to thin out on volatility, resulting in less support.

We maintain that you can monetize the example call structures we provided and roll some profits into bear put spreads (i.e., buy put and sell another at a lower strike), though you may limit your expectations. Some think there is a greater likelihood of a “crash-less selloff, a grinding de-leveraging.”

Read: China’s Yuan Replaces Dollar As Most Traded Currency In Russia.


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.


Market Commentary For 2/8/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures established record all-time highs overnight, alongside hopes of a speedy economic recovery, as a result of pandemic relief efforts.

What Does It Mean: After a quick de-risking event and v-pattern recovery, U.S. stock indexes are positioned for further upside, as high as the 100% price projection, which happens to be above $4,000.00, a primary target in the S&P 500. According to The Market Ear, similar risk rallies have happened after hedge fund de-grossing events; now, “Equities are rising along higher yields, dollar and [volatility], and the magic word here is discounting inflation.”

Important to note also is the persistent presence of bearish undercurrents, as evidenced by non-participatory speculative flows and delta, as well as a divergence in the DIX.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation. 

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

More On 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.

More On Speculative Flows: Participants looking to capitalize on either upside or downside through the purchase and sale of options, the right to buy or sell an asset at a later date and agreed upon price.

What To Expect: Monday’s regular session (9:30 AM – 4:00 PM ET) will likely open on a gap, outside of prior-balance and -range, which — in normal circumstances — suggests the potential for immediate directional opportunity. However, market participants must not discount how far the discovery process has come.

Over 11 sessions (overnight and regular-trade), participants traversed nearly 7%, a non-typical weekly trading range. Adding, the S&P 500 took out its $3,900.00 price extension (i.e., a typical recovery price target) overnight, before leaving minimal excess at the high (i.e., a proper end to price discovery).

Now, in light of the low historical probability associated with overnight rally-highs ending the upside discovery process, the odds favor (1) backfilling or (2) balance before a participants restart the upside discovery process.

So, in the best case, the S&P 500 does some backfilling to repair poor structures left in the wake of strong initiative buying. In such a case, participants would look for responsive buying to surface at or above the $3,840.00 high-volume area (HVNode). In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,840.00 HVNode, would favor continuation as low as the $3,794.75 and $3,727.75 HVNodes.

More On 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.

Today’s go/no-go level is the $3,880.00 HVNode. Below, would portend downside discovery and structural repair. At or above denotes balance, a sign that the market is awaiting new information to make its next move.

Levels Of Interest: $3,880.00 HVNode.

Bonus: It’s very tough to read the market at this juncture.

Buying has run out (as evidenced by the aforementioned bearish undercurrents) and it’s as if market risks are not being priced in correctly, an opinion shared by Nomura’s Charlie McElligott.

According to McElligott, crash and tail risk is holding back dealers from supplying volatility amid “a near-endless need for skew/forward vol/convexity from hedgers.” In an environment in which true fundamental buying is absent, flows as a result of activity in the derivatives market become increasingly impactful.

Adding, as the Heisenberg Report states, “markets are increasingly susceptible to the self-referential, flows-volatility-liquidity feedback loop (colloquially: the ‘doom loop’) and other manifestations of VaR shocks. Long periods of apparent calm hide an underlying fragility in true ‘stability breeds instability’ fashion.”

As a result of this new regime, as stated in the “What To Expect” section above, dealers have a difficult time taking the other side. Due to this, market participants see a persistent bid in volatility, a factor preventing many systematic and hedge fund strategies from going “all-in” on the long-side.