Categories
Commentary

Daily Brief For December 20, 2022

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 9:45 AM ET AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

In a well-put statement by Tier1Alpha, “2022 was not a ‘classic’ bear market accompanying an earnings recession and economic slowdown, but rather a ‘rebalancing channel’ bear market.”

Essentially, as the Federal Reserve (Fed) raises interest rates and bond prices fall, equities are sold and “a ‘bear market’ occurs due to portfolio rebalancing,” as Michael Green well explained in a recent interview.

Graphic: Retrieved from Ned Davis Research via Bloomberg.

Further, some of the most sensitive (beaten) stocks have been in the technology and innovation sectors and, according to one article by Bloomberg’s John Authers, that’s not surprising.

Graphic: ARK Innovation ETF (NYSE: ARKK) via TradingView.

“These companies are prone to fears of rising interest rates, especially since many of them are valued based on their projected profits far into the future. As the Federal Reserve presses on with its most aggressive tightening of monetary policy in decades, the future profits of tech firms will be worth far less at these higher interest rates. And with recession calls growing louder, it might just spell more trouble ahead for these firms.”

Moving on, given the rule of thumb – “past inflation spikes have never been vanquished until the federal funds rate exceeds the inflation rate” – in the realm of possibilities is a “crash … signaling to the Fed that they have raised rates enough.”

Likewise, per an article by Andreas Steno Larsen making the case for a comeback in deflation, equities have yet to price the negative EPS growth we’re likely to see.

Graphic: Retrieved from Andreas Steno Larsen.

“Those who find a lower inflation print a good opportunity to buy risk assets should look away now,” Steno Larsen said. “Remember that the PPI (and the CPI for that matter) is a leading indicator for EPS … if we allow the oil future to predict PPI, then we are in for negative EPS.”

Graphic: Retrieved from Academy Securities’ Peter Tchir via Bloomberg.

Adding, Steno Larsen is in the camp that thinks “the 1970s playbook is intact.” When “the disinflation in goods spills over to services through the spring of 2023, … the Fed will pivot,” he explained.

Graphic: Retrieved from Andreas Steno Larsen.

Some come off as less pessimistic, though. The Fed is to ease sooner than expected; quantitative tightening (QT) is not likely to run its course, Joseph Wang said.

To explain, “an ideal QT would drain liquidity in the overall financial system while keeping liquidity in the banking sector above a minimum threshold. That is only possible if the bulk of the liquidity drained is sourced from the $2T RRP, which holds funds owned by money market funds. MMFs could facilitate QT by withdrawing funds from the RRP to invest in the growing supply of Treasury bills, but recent data suggests they have lost interest in bills. Households [which include hedge funds] appear to have replaced MMFs as the marginal buyer of bills and are funding their purchases out of funds held in the banking sector. This suggests QT may lower banking sector liquidity below the Fed’s comfort level much earlier than anticipated.”

Hence, the downside that has yet to happen may prove not to be as material. A potential consequence, as Steno Larsen sees, is “double inflation,” bolstered by inflationary deglobalization trends that may accelerate.

For equities, “a revisit of the $3,500.00-$3,600.00 zone should be on the cards for S&P 500,” he said, while other markets, like housing, may see drawdowns reaching “15-20%” in the base case.

We’ll go into more depth on certain points next week. Hope this was a great way to set the stage for future conversations.

Technical

As of 9:25 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Our S&P 500 pivot for today is $3,838.25. 

Key levels to the upside include $3,857.00, $3,867.75, and $3,893.75. 

Key levels to the downside include $3,813.25, $3,793.25, and $3,776.75.

Click here to load today’s key levels into the web-based TradingView platform. All levels are derived using the 65-minute timeframe. New links are produced, daily.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

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


About

In short, an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes.

Categories
Commentary

Daily Brief For September 13, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 900+ that read this report daily, below!

Graphic updated 7:45 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. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

Today, traders get inflation updates. These will help drive perceptions regarding monetary policy.

Expected is an 8.1% rise year-over-year (YoY) and 0.1% fall month-over-month (MoM). In July, these numbers were 8.5% and 0.0%, respectively.

Core CPI (which excludes food and energy) is expected to rise by a rate higher than in July, 6.1% YoY and 0.3% MoM, respectively.

Mattering most is core inflation, which the Fed has more control over. If lower than expected, that may warrant some appetite for risk.

Graphic: Retrieved from Bloomberg.

Notwithstanding, prior to July’s release, the average movement in the S&P 500, after CPI, was -1.27%. Still, though, the expectation is that August data will show improvement.

“The market has concluded that both the ECB and even the Fed, despite their protestations otherwise, are both being viewed as data-dependent,” Peter Tchir of Academy Securities said. 

“I cannot see any scenario where the market doesn’t decide that CPI is heading the right direction and … [this] should allow markets to continue to enjoy the strength.”

Graphic: Retrieved from Bloomberg. “Stronger evidence that a wage-price spiral can indeed be avoided came from Monday’s publication of the New York Fed’s latest Survey of Consumer Expectations.”

At this point, in spite of the prospects of inflation continuing to cool, expectations regarding Fed (Federal Reserve) action remain sticky with the fed funds futures pricing a peak in rates of 4%.

Graphic: Retrieved from Bloomberg.

Unchanged, all else equal, this means markets have accounted for the rise in interest rates and their impact on valuations. From hereon, further de-rating is not out of the question, particularly if inflation continues to rise and/or growth fears materialize, as some like Fitch Ratings believe.

Graphic: Retrieved from The Market Ear. Via Morgan Stanley (NYSE: MS). “MS Research thinks the lows for this bear market will likely arrive in the fourth quarter with 3,400 the minimum downside and 3,000 the low if a recession arrives.”

According to Fitch, a decline in corporate profits is likely to speed up in the coming quarters, and this will highlight economic slowing (below-trend GDP growth) that leads to a 2023 recession.

Graphic: Retrieved from Bloomberg, via Bank of America Corporation (NYSE: BAC). “Bank of America … remains ‘fundamentally and patiently bearish.’”

To quote CFO Dive, “Downward revisions to consensus expectations for earnings next year ‘will likely accelerate as monetary tightening continues to reduce inflation and growth slows.’”

Thus far, the economy has shrunk 0.6% in the second quarter, after slumping 1.6% in the first, which is “the common definition of a recession” despite the continued growth of the economy as shown by other metrics like “nonfarm employment, consumer spending, industrial production, and weekly hours worked.”

Positioning

As of 7:45 AM ET, Tuesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.24%. Net gamma exposures increasing may promote some market stability.

It’s the case that there is this trend in demand for equity downside put options protection. This is evidenced by figures of open interest, volume, as well as bid implied volatility (IVOL) metrics like the Cboe Volatility Index (INDEX: VIX).

Graphic: Retrieved from Bloomberg.

“They’re buying protection against a crash at a pace unlike anything the market has ever seen,” said Jason Goepfert, chief research officer at Sundial. This is as Nomura Holdings Inc’s (NYSE: NMR) Charlie McElligott says more traders are taking shots amid “hawkish global central bank escalations,” and tightening measures of liquidity, among other things.

Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.

Goepfert adds that the “massive hedging activity” feels “unsettling.” That has to do with what the reaction to that protection entails should markets drop lower and IVOL increase, accordingly.

Graphic: Retrieved from SqueezeMetrics. Learn the implications of volatility, direction, and moneyness.

Notwithstanding, should nothing bad happen, the activity, which is structured in soon-to-expire options, will quickly fall out of favor (as will the probability of those options paying out). Liquidity providers, on the other side of those trades, will reduce their negative Delta (short futures and stock) hedges which may further add support to markets.

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).

The concern is that soon after this big options expiration passes, new fear and demand for protection may feed into another bout of weakness as traders rush to re-protect and liquidity providers add pressure in their hedging, accordingly.

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).

Technical

As of 7:00 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

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

Any activity above the $4,127.00 VPOC puts into play the $4,189.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,231.00 VPOC and $4,253.25 HVNode, or higher.

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

Any activity below the $4,127.00 VPOC puts into play the $4,071.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,018.75 HVNode and $3,991.00 VPOC, 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.

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.

About

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

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

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

Disclaimer

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