Categories
Commentary

Daily Brief For January 3, 2022

What Happened

Overnight, equity index futures auctioned higher. Ahead is data on Markit Manufacturing PMI (9:45 AM ET) and Construction Spending (10:00 AM ET).

Graphic updated 6:20 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

Technicals: Given the Monday gap, the S&P 500, based on its relation to Thursday’s failed balance breakout and end-of-week liquidation, is positioned for sideways-to-higher.

To note, however, the persistence of responses to technical levels, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent discovery.

Via volume profile analysis, we see a plethora of low-volume pockets – voids – that likely hold virgin tests. Successful penetration often portends follow-through as the participants that were most active at those levels (quickly run for the exits when wrong).

Graphic: Weekly chart for the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Technically, indices are still positioned for sideways or higher.

Fundamental: The aforementioned trade is happening in the context of higher valuations, interest rates, and tax rates, according to Morgan Stanley (NYSE: MS).

These themes serve as a headwind.

To elaborate, as Nordea recently explained, the Fed will “accelerate its tapering process, and is now set to conclude net purchases already by mid-March vs mid-June with the earlier pace.”

“The dot plot was revised significantly higher, and the plot now shows three hikes for next year, a further three for 2023 and another two for 2024.”

Graphic: The “annual rate of change in the Fed Funds rate” via topdowncharts.com.

At the same time, equity markets tend to rally into the first hike; Moody’s Corporation’s (NYSE: MCO) forecast aligns with that – “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

Why? Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive.

“Our view is that 2022 will be the year of a full global recovery, an end of the global pandemic, and a return to normal conditions we had prior to the Covid-19 outbreak,” JPMorgan Chase & Co (NYSE: JPM) noted

“We believe this will produce a strong cyclical recovery, a return of global mobility, and strong growth in consumer and corporate spending, within the backdrop of still-easy monetary policy.”

Positioning: According to JPMorgan Chase & Co, “S&P 500 skew overprices downside and underprices upside probabilities relative to historical returns.”

Graphic: Via The Market Ear, JPMorgan’s analysis suggests downside protection is overpriced.

This is all the while the S&P 500’s implied volatility remains above pre-COVID levels.

“SPX implied volatility is well above its pre-Covid level across the term structure.” The compression of volatility lowers the counterparties’ exposure to the positive delta. This “vanna” flow may support higher prices.

Taken together (in the face of last week’s options expiration which reduced the level of positive sticky options gamma concentrated mostly at the $4,800.00 level in the S&P 500), current options positioning and buying pressure supports a seasonally-aligned price rise in January.

Explanation: As a position’s delta rises with underlying price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta. Counterparties are to offset gamma by adding liquidity to the market (i.e., buy dips, sell rips).
Graphic: SpotGamma data suggests the pin heading into Friday’s options expiration is no more.

The continued compression of volatility will only serve to bolster any price rise as “hedging vanna and charm flows, and whatnot will push the markets higher.”

Should that thesis not pan out – meaning the removal of hedging pressures associated with “put-heavy” single stock options positions and an end to tax-loss harvesting, among other factors – indices likely succumb to the “stealth correction” of its lesser weighted constituents.

Were participants to reach for downside protection, the implications of this would be staggering. In such a case, markets will tend toward instability. At present, the metrics don’t point to this.

Graphic: Via The Market Ear, amidst heightened cash allocations that are likely to be redeployed, “January is the big inflow month but the seasonality from here is looking less exciting.”

Expectations: As of 6:20 AM ET, Monday’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 higher; activity above the $4,791.00 untested point of control (VPOC) puts in play the $4,799.75 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,805.00 and $4,815.00 extensions, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,791.00 VPOC puts in play the $4,781.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,767.00 VPOC and $4,750.75 overnight low (ONL), 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

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.

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.

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.

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.

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.

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

At this time, 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 16, 2021

What Happened

After the Federal Reserve (Fed) announced it would accelerate its taper to bond-buying, clearing the way for interest-rate hikes, the equity market rallied, broadly. 

With all major U.S. equity index futures trading higher, overnight, it appears that participants’ fears regarding monetary policy have been assuaged

As forecasted, a collapse in event-related implied volatility brought in positive flows that ought to support the market into this week’s weighty “quad-witching” derivatives expiry.

Ahead is data on jobless claims, building permits, housing starts, and manufacturing (8:30 AM ET). Then, there are releases on industrial production, capacity utilization (9:15 AM ET), as well as Markit manufacturing and services PMI (9:45 AM ET). 

Graphic updated 6:15 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

Market hammered out a low, yesterday. 

This was after, to start the week, customers had been increasing their exposure to short-delta (call selling and put buying). The counterparty inventorying the opposite (long-delta) exposure sold (bought) futures into price discovery higher (lower).

Graphic: Customers increased their exposure to short-delta call exposure. “Last week was about selling index calls,” SpotGamma’s Brent Kochuba said on Twitter. “This is likely why the $SPX stopped at $4,700.00.”

This dynamic had the effect of pinning the market; was the S&P 500 to remain in consolidation, customers’ (dealers’) short-delta (long-delta) would have risen which would have made for even more pinning.

That didn’t happen, though.

Into Wednesday’s FOMC event, demand for protection expanded (as evidenced by a higher CBOE Volatility Index reading). That knocked most of the major indexes out of sideways trade.

However, as revealed Tuesday by SpotGamma’s (beta) Hedging Impact of Real-Time Options (HIRO) indicator, “participants saw lower prices as an opportunity to express their opinion of lower volatility into Wednesday’s Federal Open Market Committee (FOMC) update.”

From there on, as Ambrus Group’s Kris Sidial best explained, “vols were static in anticipation of the fed talk,” taking away from supportive flows (as a result of options sliding down their term structure [vanna]) and promoting sideways trade.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator, which is pink in color, was sideways to higher. This suggests positive options delta trades likely had dealers buying stock/futures into the close.

Context: Wednesday’s commentary really hit the nail on the head, so to speak. 

Therefore, I offer some light updates.

As expected, per Nordea, the Fed will “accelerate its tapering process, and is now set to conclude net purchases already by mid-March vs mid-June with the earlier pace.”

“The dot plot was revised significantly higher, and the plot now shows three hikes for next year, a further three for 2023 and another two for 2024.”

Graphic: “[T]he terminal rate being priced in by financial markets is closer to 1.5% vs. 2.5% for the Fed,” Nordea explained. “The market is now pricing that rate hikes could start already in the mid-March 2022 meeting.”

That said, today’s rates support validations better than in the ‘90s.

At the same time, equity markets tend to rally into the first hike; Moody’s Corporation’s (NYSE: MCO) forecast aligns with that – “the Dow Jones Industrial Average increases this quarter and peaks in early 2022, … [followed by] steady decline through 2022.”

Graphic: S&P 500 performance before and after rate hikes.

This positive take is in the face of what has been markedly divergent breadth and extreme relative weakness, especially in rate-sensitive names. 

Why? Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive. 

Graphic: As U.S. stocks’ inflation-adjusted earnings yield turns negative, as seen near the peak of the tech bubble, via Bloomberg, “Investors in the Nasdaq increasingly seem to think that only a few companies have much of a chance. With a growing possibility of more aggressive attempts to prosecute antitrust issues, that’s a riskier position than it appears.”

With the equity market moving higher, here, into the end of the week, we ought to not discount participants’ increasing exposure to leveraged products.

This increases the speed with which volatility is realized and was cited as a risk in one of Moody’s recent commentaries.

So, despite having seasonally-aligned “passive buying support” and supportive positioning metrics, as well as expectations of “the strongest quarterly nominal [economic] growth in more than three decades,” offsides positioning ought to exacerbate underlying price movements.

So what? As stated, yesterday, the market is in a positive-gamma environment wherein the counterparties to customer options trades add market liquidity and temper realized volatility.

With participants’ fears surrounding monetary policy assuaged, there are positive flows that ought to support the market into this week’s weighty “quad-witching” derivatives expiry.

Graphic: VIX term shifts inward; as short-dated protection quickly was monetized or expired, volatility collapsed and dealers’ exposure to positive delta declined which meant they would cover their short futures hedges. This “vanna” flow bolstered an SPX rally into the end-of-day.

Into the end of the week, the expectation is that participants continue to step in and commit increased capital on lower directional volatility (as they had into this week).

With activity concentrated in shorter-dated tenors, counterparties will take on more exposure to positive gamma which they will offset by supplying the market with more liquidity, thereby pressuring the price discovery process.

Graphic: Via SpotGamma data, the above model’s tilt suggests dealers will increasingly sell into strength and buy into weakness, pressuring any price discovery into the end of this week.

Moreover, the decrease in dealer supply (short delta) post-OPEX, via the covering of short stock/futures hedges to put-heavy positioning, ought to bolster any attempt higher.

Below: Though book depth “in isolation is not the correct method to gauge liquidity,” it can help in assessing participants’ demand/supply as volatility (and stress, by that token) increases.

Graphic: Analysis of book depth for the E-mini S&P 500 futures contract, via CME Group Inc’s (NASDAQ: CME) Liquidity Tool. For more on the implications of participants’ options positioning and dealer hedging, read here.

In anticipation of higher prices, low cost, complex options structures like call-side calendars, butterflies, and ratio spreads are top of mind.

Graphic: Via Banco Santander SA (NYSE: SAN) research, the return profile, at expiry, of a classic 1×2 (long 1, short 2 further away) ratio spread.

Expectations: As of 6:15 AM ET, Thursday’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.

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

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 

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. 

Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,712.00 balance area boundary (BAH) puts in play the $4,732.50 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,740.50 minimal excess high and $4,767.00 extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,712.00 BAH puts in play the $4,690.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,674.25 HVNode and $4,657.00 balance low (BAL), 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. Learn about the profile.
Graphic: V-pattern recovery in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, portends continuation. The red, black, and yellow-colored lines are anchored volume-weighted average price levels (VWAPs), 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.

Definitions

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.

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.

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.

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.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

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.

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, 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 November 3, 2021

Abstract

Equity index futures and commodities were mixed. Bonds sideways to higher. Volatility bid.

Ahead is a heavy day of economic releases, in the face of fundamental narratives and positioning metrics that may later support directional resolve.

What Happened

Overnight, equity index futures were flat as participants wait to initiate the next leg – higher or lower – until they are provided clarity on monetary policy frameworks, the pace of the economic recovery, and the like.

Ahead is ADP employment (8:15 AM ET), Markit services PMI (9:45 AM ET), ISM services index and factory orders (10:00 AM ET), as well as Federal Reserve statements (2:00 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 lackluster breadth and market liquidity metrics, the best case outcome occurred, evidenced by participants’ exploration of new prices in the S&P 500.

Intent: The intraday excess high marks potential exhaustion (or willingness to end trend). Also, the rounding of the composite profile (i.e., developing ledge) suggests participants are either painting themselves into a corner or there is a lack of conviction to take price higher.

Validation: Sideways trade, above the $4,590.00 balance area high (BAH), and overlapping value areas, validates the market’s intent to pause ahead 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.

Should the market crack, participants will likely look to check old value (i.e., revisit, repair, and strengthen) these pockets of low-volume. This is called the “cave-fill” process, in volume profile terms.

Graphic: Flat 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 (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: Federal Open Market Committee (FOMC) announcement later today.

The announcement will provide participants with color on the economic recovery and the Federal Reserve’s intent to continue supporting the economy, at the rate it has. 

Nordea’s Andreas Steno Larsen states: “Jay Powell will have to walk on eggshells to prevent an acceleration of the front-end of the USD yield curve. Arguments for the Fed to tighten policy keep piling up and hence we see a swift tapering process (30B a meeting) and a first hike in June.” 

“The combination of 1) even higher inflation prints during Q4 (with several extremely volatile base effects), 2) a removal of USD liquidity, 3) a historically weak credit impulse into 2022 (due to a massive credit expansion 20/21) sounds like the perfect flattener setup to us,” which may weigh on sentiment and long term investments.

Graphic: “Keep flattening the yield curve during tapering,” via Nordea.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was a touch higher, while spreads across the VIX futures term structure widened with demand coming in at the front.

Such a situation, as touched on yesterday, in addition to the long-gamma environment (in which counterparties hedge their warehoused options risk by buying underlying into weakness and selling into strength), has the effect of making it difficult to resolve directionally.

The reasons are: (1) options will slide down their term structure (vanna) and (2) skew decays (charm). When this happens, we expect to see supportive flows as dealers cover their short equity/futures hedges. 

With volatility bid, the effect of vanna and charm is dulled. As a result, it is likely that participants see more movement after the FOMC announcement.

To note, the potential for upside resolve comes down to how participants take the FOMC announcement. We know that, according to SpotGamma, there is increased capital being committed to higher and higher options strikes, a development often seen as bullish.

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

Balance (Two-Timeframe Or Bracket) Is The Status Quo: Rotational trade that denotes current prices offer favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,620.25 high volume area (HVNode) pivot puts in play the $4,628.50 Fibonacci extension. Initiative trade beyond $4,628.50 could reach the $4,639.00 and $4,664.75 Fibonacci levels, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,620.25 HVNode puts in play the $4,590.00 balance area high (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 low volume area (LVNode), 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

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

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.

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.

Ledges: Flattened area on the profile which suggests responsive participants are in control, or initiative participants lack the confidence to continue the discovery process. The ledge will either hold and force participants to liquidate (cover) their positions, or crack and offer support (resistance).

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 13, 2021

Editor’s Note: Tuesday’s newsletter tested a new feature to view real-time charts with key levels. From here on out, links to an updated layouts page will be found in the What To Expect section, below. Thanks!

Market Commentary

Equity index futures trade sideways to higher with bonds. Commodities were mixed.

  • Initiative sellers fail to expand the range.
  • Ahead is CPI, FOMC minutes, earnings.

What Happened: U.S. stock index futures auctioned sideways to higher ahead of data that would shed light on inflation and earnings.

Ahead is data on the Consumer Price Index (8:30 AM ET), FOMC minutes (2:00 PM ET), as well as Fed-speak (4:30 and 8:00 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. 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 6:30 AM ET, 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, on positive intraday breadth and divergent market liquidity metrics, the worst-case outcome occurred, evidenced by another spike or knee-jerk, end-of-day move, after initiative buyers lacked the conviction to push for excess.

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).

Overnight exploration failed to provide validation of the spike; indices recovered the area where two-sided trade was most prevalent in Tuesday’s regular session.

Combining the activity over the past couple of sessions, we see an inability – on the part of sellers – to expand the range and value (i.e., the area where 70% of the day’s volume occurred). Trading above $4,360.00 in the S&P 500 invalidates Monday’s spike, likely forcing those short-term participants who sold the break to cover.

Further, the aforementioned trade is happening in the context of a seasonal cycle of rebalancing and earnings, improvement among some positioning metrics, among other things. 

Though these themes support (1) October volatility and (3) an increased potential for sideways to higher trade, some risks exist.

Nordea summarizes it well: “The combination of higher inflation risks and weaker activity data makes the near-term market outlook uncertain. We see more hawkish central banks, higher bond yields, and a stronger USD ahead.”

At the same time, according to a summary put out by The Market Ear, TS Lombard sees (1) China’s economic slowdown spilling over, (2) consumer confidence weakening amidst a bump in inflation expectations, (3) persistent inflationary pressures hastening the global monetary tightening, and (4) COVID-19 mutations leading to renewed lockdowns.

Graphic: Performance of the broad high-yield real estate sector in China, via Bloomberg.
Graphic: TS Lombard visualizes its estimates for slower growth, via The Market Ear.

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 $4,346.75 high volume area (HVNode) pivot puts in play the $4,369.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,381.25 low volume area (LVNode) and $4,415.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,346.75 HVNode pivot puts in play the $4,330.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,299.00 VPOC and $4,278.00 HVNode, or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

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).

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.

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.

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.

News And Analysis

Half of all delinquent homeowners have missed six payments.

China credit growth slows amid property, Evergrande troubles.

JPMorgan smashing estimates on M&A, wealth management.

Low vaccination rates exacerbate America’s caregiving crisis.

Apple finally fell victim to the never-ending supply chain crisis.

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 October 7, 2021

Market Commentary

Led by the Nasdaq 100, equity index futures were higher. Commodities and bonds were mixed.

  • Relief of worries over debt, energy.
  • Claims and credit data, Fed speak.
  • Positioning suggests risk to upside.

What Happened: U.S. stock index futures continued higher overnight alongside ease in angst over debt and energy worries.

Ahead is data on jobless claims (8:30 AM ET), Fed speak by John Williams (8:40 AM ET), Fed speak by Loretta Mester (11:45 AM ET), as well as consumer credit data (3:00 PM ET).

Graphic updated 6:20 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. 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 6:20 AM ET, Thursday’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 heightened potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on negative intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by trade above the level of a key volume-weighted average price (VWAP).

Graphic: SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, encounters responsive buying at key volume-weighted average price levels. 
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 responsive trade or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit).

Thereafter, equity index futures, led by the Nasdaq 100, continued higher overnight, leaving behind a multi-session balance area (between the $4,363.25 and $4,278.00 HVNodes).

This trade is significant because it marks a rejection, or a willingness to not transact at lower prices. We’re carrying forward, though, the presence of poor structures (e.g., Wednesday’s advance away from session value on a taper of volume, and minimal excess lows which suggest a lack of commitment to take prices lower).

Gap + Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) has occurred.

At the same time, gaps ought to fill quickly. Should any gap not fill, that’s a signal of strength; do not fade. 

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

Further, the aforementioned trade is happening in the context of a traditionally volatile October, as well as narratives surrounding adjustments to monetary policy, debt ceiling complications, and energy crises.

These themes support fear and uncertainty; for instance, Nordea believes there are “4 macro reasons why 2022 should be noisier than 2021: liquidity, growth slowdown, cost/margin problems and the risk of the Fed put looking very different if inflation indicators stay elevated.”

However, the Senate is nearing a deal to raise the debt ceiling, relieving the threat of imminent default; this was a likely development given that “lawmakers [knew] that voting against raising the debt ceiling would have enormous economic costs,” Moody’s noted.

Also, on the energy crisis front, Russia offered to export record volumes of fuel to Europe as winter approaches fast.

Given these developments, Tracie McMillion, head of global asset allocation strategy at Wells Fargo & Co’s (NYSE: WFC) Investment Institute said the following on Bloomberg: “We have several things that we are watching right now – certainly the debt ceiling is one of them and that’s been contributing to the recent volatility, … but we look for these 5% corrections to add money to the equity markets.”

Adding, prior to yesterday’s advance, this newsletter noted that indices were best positioned for a vicious rebound as near-term downside discovery metrics likely reached a limit

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.”

After consolidating for numerous sessions, participants resolved the developing balance area (between the $4,363.25 and $4,278.00 HVNodes) on new information that warranted a directional move. 

In other words, the overnight session confirmed the bull thesis

We note, amidst a decline in top-of-book depth, as well as back and forth entry (exit) into (from) short-gamma, we limit our expectations based on some of the recent realized volatility.

In a quote highlighted by The Market Ear, Bank of America Corporation (NYSE: BAC) explained: “last Thursday was the 24th time since 1928 that the S&P experienced two or more 3-sigma shocks in 10 trading days, … [and] only in 3 of 23 episodes (and 1 in the last 50yrs) did the S&P surpass the prior month’s peak in the month following the second shock.”

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 $4,377.00 overnight point of control (O/N POC) puts in play the $4,410.25 low volume area (LVNode). Initiative trade beyond the LVNode 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 $4,377.00 O/N POC 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 7:10 AM ET.

Definitions

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

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

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

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

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.

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.

News And Analysis

NFT game wants you to spend real money buying fake shares.

Senate is poised to pull nation back from default brink, for now.

Global banks retain competitive advantage amid big obstacles.

Russia offers to ease Europe’s gas crisis with strings attached.

Digitalization of markets: how digital bonds can disrupt market.

U.S. utilities and regulators gear up for electric vehicle outlook.

ECB studies a new bond-buying plan for when crisis tool ends.

S&P on navigating a pathway to a low-carbon global economy. 

Rivian’s electric truck gets all attention but fate tied to Amazon.

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 October 6, 2021

Market Commentary

Equity index futures, commodities, and bonds trade sideways to lower.

  • Fed action, debt ceiling fear mounting.
  • Ahead: ADP Employment, Fed speak.
  • Indices position for directional resolve.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside narratives surrounding adjustments to monetary policy and debt ceiling complications.

Ahead is data on ADP employment (8:15 AM ET) and Fed speak (9:00 and 11:30 AM ET).

Graphic updated 6:30 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 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 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting an increased potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on positive albeit weak intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by trade up to $4,358.00, the level of a key anchored volume-weighted average price (VWAP).

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

Thereafter, equity index futures, led by the Nasdaq 100 and Russell 2000, liquidated overnight, leaving behind Tuesday’s prominent point of control (POC) before finding responsive buyers at a key high volume area (HVNode) for this most recent developing balance area (between the $4,363.25 and $4,278.00 HVNodes).

This trade is significant because it marks acceptance, or a willingness to transact at lower prices. We’re carrying forward, though, the presence of poor structures (e.g., Friday’s advance away from session value on a taper of volume, and a minimal excess low, suggests a lack of commitment to take prices lower).

Given the overnight gap inside of balance, the following scenarios apply.

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

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

Further, the aforementioned trade is happening in the context of a traditionally volatile October, as well as narratives surrounding adjustments to monetary policy and debt ceiling complications.

Despite these themes supporting fear and uncertainty, Marko Kolanovic, JPMorgan’s chief global markets strategist, said the following in a note Monday: “We do not believe the recent bout of de-risking will lead to sustained falls, and maintain the stance to keep buying into any weakness.”

On the other hand, in support of continued volatility, Nordea believes there are “4 macro reasons why 2022 should be noisier than 2021: liquidity, growth slowdown, cost/margin problems and the risk of the Fed put looking very different if inflation indicators stay elevated.”

Graphic: According to Nordea, “The Fed is also quickly moving closer to a tapering decision, which now sounds almost as a done deal for November. The previous three episodes of QE tapering have all gone hand in hand with rising volatility. Our scenario with Fed rate hikes in the second half of 2022 would add to those volatility risks.”

Prior to yesterday’s advance, this newsletter noted that indices were best positioned for a vicious rebound as near-term downside discovery metrics likely reached a limit

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.”

The overnight liquidation challenges that thesis, putting indexes in a peculiar position; it’s likely that participants are seeking more information to base a directional move.

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 $4,278.00 HVNode puts in play the $4,332.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as $4,349.00 untested POC (VPOC) and $4,410.25 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,278.00 HVNode puts in play the $4,260.00 overnight low (ONL). Initiative trade beyond the ONL could reach as low as $4,233.00 VPOC and $4,202.25 LVNode, or lower.

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

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).

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.

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.

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). In conjunction with the rapid recovery, lower rates solicit hawkish commentary as policymakers look to inhibit inflation.

News And Analysis

‘Volmageddon’ history as SEC greenlights leveraged VIX ETFs.

World trade rebounds at a faster clip than was initially expected.

Treasuries’ pain deepened amid the grimmest year since 2013.

European gas surges 60% in two days as EU sounds the alarm.

Unrelenting political brinkmanship edging U.S. closer to default.

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 October 4, 2021

Market Commentary

Equity index futures were sideways to lower with bonds and the dollar.

  • Nordea: Macro backdrop worsens.
  • Ahead is a relatively light calendar.
  • October is volatile while Q4 bullish.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside reports that China was showing little interest in a direct bailout of Evergrande and U.S. political leaders remain at odds on the debt limit.

Ahead is data on factory orders and core capital goods orders (10:00 AM 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. 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 6:30 AM ET, Monday’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, on a strengthening of intraday breadth, among other metrics including positioning measures, the best case outcome occurred, evidenced by a recovery of Thursday’s $4,365.00 untested point of control (VPOC). 

Given the overnight response at the top of Friday’s value area – the bulk of where trade was conducted – it looks as though participants are interested in slowing the pace of downside discovery. 

Still, the S&P 500 is well below its 20- and 50-day simple moving averages and multiple distribution profile structures denote emotion, as well as a lack of commitment

Graphic: S&P 500 daily chart with 20-, 50-, and 200-day simple moving average.

Further, the aforementioned trade is happening in the context of a traditionally volatile October and a fraying in the buy-the-dip psychology.

According to Nordea, despite a calm, upward-sloping term structure, there has been “a slightly upward tilting trend” in futures tracking the S&P 500 volatility index, likely warranted by several macro reasons including a worsening in liquidity, a slowdown in growth, cost/margin problems, and risks to the Fed put.

Graphic: Fed’s GDPNow estimate lowers expectations for U.S. economic growth, via The Market Ear

LPL Research adds that aside from October, no other month has seen more 1% moves, and the fourth quarter is “historically the best for stocks, with the third quarter the worst.”

Graphic: LPL Research unpacks S&P 500 seasonality. 

Moreover, for today, given expectations of heightened volatility, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,332.25 low volume area (LVNode) puts in play the $4,363.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,410.25 LVNode and $4,437.75 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,332.25 LVNode puts in play the $4,299.00 VPOC. Initiative trade beyond the VPOC could reach as low as $4,260.00 overnight low (ONL) and $4,233.00 VPOC, or lower.

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

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.

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.

Responsive Buying (Selling): Buying (selling) in response to prices below (above) an area of recent price acceptance.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level).

News And Analysis

EM bond markets continue to grow, as do vulnerabilities.

There’s is no inflation without income; there’s no income.

Action on Evergrande to avoid financial, social instability.

Global growth steady as delta spurs big regional swings.

Doomsday clock for U.S. debt ticks on political clashings.

Global Credit Conditions Q4: supply strain, inflation pain.

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 August 11, 2021

Market Commentary

Equity index futures are sideways and divergent.

  • Senate passes new $3.5T economic blueprint.
  • Ahead: Data on CPI, Federal Budget Balance.
  • Sideways chop as participants position for CPI.

What Happened: U.S. stock index futures auctioned sideways ahead of data that would provide clarity on the direction of consumer prices.

According to Moody’s: “The CPI rose 0.9% in June, but it likely moderated in July, since we don’t expect used car prices to have risen as quickly as they have recently. Elsewhere on the inflation front, we will get data on producer and import prices. After the release of the CPI and PPI, we will have a good idea of what the core PCE deflator, the Fed’s preferred measure of inflation, did in June.”

Ahead is also data on the Federal Budget Balance and Fed speak.

Graphic updated 6:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator. VIX reflects a reading of the CBOE Volatility Index from 0-100.

What To Expect: As of 6:45 AM ET, 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 initiative trade above the $4,422.75, a prior balance area high (BAH), up to the $4,438.50 Fibonacci extension. 

Initiative Buying (Selling): Buying (selling) within or above (below) the previous day’s value area.

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). 

This advance happened in spite of top-line divergences, as well as lackluster metrics with respect to market liquidity and breadth.

Unlike on the NYSE side of things (which sported positive breadth with an inflow into stocks that were up versus down), internals on the Nasdaq were markedly weak with negative breadth supporting a liquidation in the Nasdaq 100 (INDEX: NDX). 

In terms of market liquidity, the cumulative volume delta – a measure of buying and selling power as calculated by the difference in volume traded at the bid and offer – revealed no actionable divergences.

Coming into today’s Consumer Price Index (CPI) release, participants will notice the S&P 500, in particular, trading within a 3-day balance area, above a prior 10-day balance area. In short, since last week’s breakout, little has changed. What was thought would happen (i.e., expansion of range) didn’t happen.

Instead, trade was volatile, establishing excess just a tick short of the $4,438.50 Fibonacci extension as participants likely worked to position themselves for the mid-week data dump. As a result, until after the first couple of impulses on the CPI release, participants are cautioned on early trade.

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.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,422.75 BAH likely puts in play the $4,433.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,438.25 regular trade high (RTH High) and $4,446.25 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below the $4,422.75 BAH likely puts in play the $4,415.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,411.00 VPOC and $4,406.25 LVNode.

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.

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

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Graphic updated 6:45 AM ET.

News And Analysis

Earnings historically strong and policy transition.

Hackers steal $600M in likely largest DeFi theft.

Economic activity restart is real and broadening.

A turning point for markets meriting a hard look.

Biden administration to urge OPEC output boost.

The Senate passed a $550B infrastructure plan.

Delta forces hospitals to ration scarce ICU beds.

Mortgage applications rise with rates below 3%.

A systemic cyberattack presents risks for banks.

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 August 10, 2021

Market Commentary

Equity index futures are sideways and divergent.

  • Taper talk, COVID-19 fears, infrastructure news.
  • Ahead: NFIB, productivity, unit labor, Fed speak.

What Happened: U.S. stock index futures auctioned sideways alongside COVID-19 fears, infrastructure, crypto regulation, and taper talk.

This comes as core inflation is expected to come in around 4.8%, “likely unhinging Powell and expediting the talk about talking about tapering as early as in September,” according to Nordea.

Ahead is data on the NFIB small-business index, productivity, unit labor costs, and earnings. Cleveland Fed President Loretta Mester speaks at 10:00 AM ET.

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator. VIX reflects a reading of the CBOE Volatility Index from 0-100.

What To Expect: As of 6:30 AM ET, Tuesday’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 at the $4,422.75 balance area high (BAH). This is significant because the BAH marked a shift in tone (i.e., a transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Given that the BAH was not lost, the default balance break scenarios remain in play (i.e., play the break rather than fade the edges). As a result, we monitor for rejection (i.e., a return inside of balance). This would portend a move to the opposite end of balance, or the $4,365.25 low volume area (LVNode) in the S&P 500 future.

Graphic: 65-minute candlestick charts of the cash-settled S&P 500 (INDEX: SPX), Nasdaq 100 (INDEX: NDX), Russell 2000 (INDEX: RUT), and Dow Jones Industrial Average (INDEX: DJI). The S&P 500, of the four index products covered, has yet to invalidate its breakout.

To note, briefly, yesterday’s rangebound trade came alongside divergences with respect to price, market liquidity, and market internals. 

For instance, breadth at the exchange level was negative with a minuscule inflow into stocks that were down, versus those that were up. The cumulative volume delta – a measure of buying and selling power as calculated by the difference in volume traded at the bid and offer – diverged from mid-afternoon prices inspiring confidence in responsive trade. 

Responsive Buying (Selling): Buying (selling) in response to prices below (above) an area of recent price acceptance.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,422.75 BAH puts in play the $4,429.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,433.25 regular trade high (RTH High) and $4,438.50 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below the $4,422.75 BAH puts in play the $4,415.76 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,411.00 untested point of control (VPOC) and $4,406.25 LVNode.

Initiative Buying (Selling): Buying (selling) within or above (below) the previous day’s value 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.

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.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Graphic updated 6:20 AM ET.

News And Analysis

China’s top oil refiner said to cut run as delta hits.

Biden’s agenda teed up for Senate endorsement.

SoftBank cut China investments until more clarity.

Major shocks see a divergence in rating migration.

The fully vaccinated are still catching COVID-19.

Analysts are warning on buy now, pay later trend.

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

Market Commentary For The Week Ahead: ‘Mostly Sunny’

Key Takeaways:

  • $1.9T relief package is enacted.
  • Inflation to print past Fed goal.
  • Policy actions to limit volatility.
  • Potential for late-March selling.
  • Bond, equity volatility diverged.
  • U.S. to lead economic recovery.

What Happened: U.S. stock index futures closed higher, last week.

This came alongside (1) the enactment of a massive, $1.9 trillion coronavirus relief plan, (2) convergence in the 10-year Treasury rate and S&P 500 dividend yield, as well as (3) a material divergence in bond and equity market volatility.

What Does It Mean: The pandemic disrupted the global economy, hitting the hardest airlines, leisure facilities, energy, manufacturing, and restaurants, among other industries.

The stock market tumbled, as a result, and the subsequent recovery was lead by technology, which delivered its strongest annual average return since the Global Financial Crisis (GFC).

Now, as virus case counts fall, the pace of vaccinations accelerates, and massive coronavirus relief bills are passed, shares of stocks in beaten-down industries are becoming favorites.

This reopening trade, as it’s called, comes alongside projections the U.S. will lead the 2021 global economic recovery.

Amidst the bullishness, the yield on a 10-year Treasury, a risk-free asset, which was — per Axios — “artificially depressed by the flight-to-quality trade during the coronavirus pandemic, as well as by large-scale purchases by the Federal Reserve,” converged with S&P 500’s dividend yield. 

Graphic 1: Goldman Sachs Group Inc (NYSE: GS) projects yields to rise and the curve to steepen.

Typically, the S&P 500’s dividend yield is less than the risk-free rate because investors expect to earn less in dividends than they would holding the same amount in bonds, absent rising stock prices.

Values are derived using the discounted cash flow calculation; as interest and discount rates go up, the present value of future earnings goes down, which will drag stock prices, especially in growth categories, as evidenced by the Nasdaq-100’s relative weakness.

Graphic 2: Nordea Group expects inflation to print above the Federal Reserve’s target, soon.

Still, historically speaking, rising yields aren’t that harmful. Looking as far back as the 1960s, there are 13 periods in which the yield on a 10-year Treasury rose by at least 1.5%.

“In nearly 80% (10 of 13) of the prior periods, the S&P 500 Index posted gains as rates rose, as it has so far in the current rising-rate period,” a statement by LPL Financial said. “In fact, the average yearly gain for the index during the previous rising-rate periods, at 6.4%, is just a little lower than the historical average over the entire period of 7.1%, while rising rates have been particularly bullish for stocks since the mid-1990s.”

Further, despite an attempted pricing in of rising debt levels and inflation, a divergence in bond and equity market volatility persists.

Historically, fear across markets tends to move in tandem. That’s not the case today.

Graphic 3: Divergence in volatility across the bond and equity market. 

What To Expect: Balance, or two-sided trade as participants look for more information to base their next move on after last week’s rapid recovery.

Coming into the weekend, market liquidity suggested (1) buying pressure was leveling out and/or (2) buyers were absorbing resting liquidity (opportunistic selling or selling into strength), while speculative options activity was concentrated on the put-side. 

Graphic 4: 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 March 12, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, in strikes as low as $353, which corresponds with $3,530.00 in the cash-settled S&P 500 Index (INDEX: SPX).

What To Do: In the coming sessions, participants will want to pay attention to the VWAP anchored from the $3,959.25 overnight rally-high, as well as the $3,840.00 high-volume area (HVNode).

Volume-Weighted Average Prices (VWAPs): Metrics 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.

More On Volume Areas: A structurally sound market will build on past areas of high-volume (HVNode). Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area (LVNode) 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.

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

In the best case, the S&P 500 remains above the $3,840.00 volume area, and VWAP anchored from the $3,959.25 peak. This would suggest buyers, on average, are in control and winning since the February 15 rally-high.

Any activity below the VWAP anchored from the $3,959.25 peak may (1) leave the $3,840.00 HVNode as an area of supply, offering initiative sellers favorable entry and responsive buyers favorable exit.

Graphic 5: Profile overlays on a 30-minute candlestick chart of the Micro E-mini S&P 500 Futures.
Graphic 6: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s trade is $3,840.00.

Any activity at this level suggests market participants are looking for more information to base their next move. Anything above (below) this level increases the potential for higher (lower). 

Levels Of Interest: $3,840.00 HVNode.

Photo by Aleksandar Pasaric from Pexels.