Tag: PPI – Producer Price Index

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Commentary

Daily Brief For February 16, 2023

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.

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Graphic updated 6:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS price via MND. Click here for the calendar.

Positioning

In the news is quite a bit of noise surrounding ultra-short-dated options with little time to expiry. To quote Nomura Holdings Inc’s (NYSE: NMR) Charlie McElligott, the trading of these options is adding noise; “US equities are such an untradable mess right now.” 

However, your letter writer, who mainly trades complex spreads on the cash-settled indexes, thinks there has never been a better time to trade. Ultra-short-dated options enable you to express your opinion in more efficient ways. Additionally, the trade of these options, in the aggregate, can influence market movements, and this is added opportunity if you understand it.

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

Darrin Johnson, a volatility trader, recently discussed sharp ways to use these options.

Heading into some big events this week, John noted S&P 500 (INDEX: SPX) implied volatility (IVOL) was trading at ~25% on a five-day straddle. Traders could buy this structure while, in the interim, selling other structures like it “against CPI, Retail Sales, and PPI” where IVOL was higher. This would enable you to lower the cost of having positive exposure to movement or positive gamma via the five-day straddle, though this is operating on the premise “that Friday’s volatility will hold mostly steady, while the other 3 deflate.”

Moreover, the ultra-short-dated options are palatable if we will, and other traders, potentially much bigger in size, are observant of this too. The growing interest in these products (e.g., in the second half of last year, ultra-short-dated options made up more than 40% of the S&P 500’s trading volume) is growing in impact on underlying products like the SPX.

In fact, JPMorgan Chase & Co’s (NYSE: JPM) Peng Cheng found these options have an impact that “can vary from a drag of as much as 0.6% to a boost of up to 1.1%.” 

To explain, though as of late options counterparties may be playing a smaller role as “customers have taken equal and opposite sides” of positions, per SqueezeMetrics, we can naively look at there being a pool of liquidity to absorb the demand for these ultra-short-dated options which are very sensitive to time, price, and volatility. These increased sensitivities are hedged in a way that impacts this available pool of liquidity. If the trade or impact is large enough, it is transmitted onto underlying market prices. 

For instance, consider so-called meme mania and stocks like GameStop Corporation (NYSE: GME) that rocketed as traders’ interest in short-dated options demands rose. To hedge increased demand in call options, for instance, counterparties must buy the underlying stock. This demand boosts the stock.

Likewise, if traders’ consensus is that markets won’t move much until some large macroeconomic events, then their bets against market movement (i.e., sell ultra-short-dated options) will result in counterparties having more exposure to bets on market movement (i.e., positive gamma) which they will hedge in a way that reduces market movement (i.e., buy weakness or sell strength in the underlying stock). So, if traders bet against the movement, resulting in more counterparty positive gamma, then market movement is reduced due to the reaction to this positioning.

On the other hand, if traders’ consensus is that markets may move a lot, particularly to the downside, their bets on market movement (e.g., buy ultra-short-dated put) will result in counterparties having more exposure to bets against market movement (i.e., negative gamma). This demand for protection will bid options prices, particularly at the front-end of the IVOL term structure as counterparties price this demand in, and the counterparty will sell underlying to hedge. If fears are assuaged and traders no longer demand these bets on market movements, the counterparty can unwind their hedge which, in the put buying example provided, may provide a market boost, such as that which we saw immediately following the release of consumer price updates (CPI) this week; to quote Bloomberg, “[w]hen the worst didn’t happen, these hedges were unwound, helping propel a recovery in futures. It’s partly why the Cboe Volatility Index, or VIX, dropped 7% in a seemingly outsize reaction in a market when the S&P 500 ended the session basically flat.”

Graphic: Retrieved from Bloomberg.

Additionally, the re-hedging-inspired recovery was short-lived as well; the impact of ultra-short-dated options, as this letter has stated before, is short-dated. It, too, does much less to influence measures like the Cboe Volatility Index (INDEX: VIX), a floating measure of ~30 day-to-expiry SPX options trading at a fixed-strike IVOL, though it does have an impact. Thus, the dis-interest to hedge stocks traders do not own (or hedge further stocks that may be hedged) out in time, does less to boost the VIX.

Anyways, in January, your letter writer interviewed The Ambrus Group’s co-CIO Kris Sidial about major risks to markets in 2023, as well as reasons why volatility could outperform in 2023 and beyond. Some of the information in that Benzinga interview made it into this newsletter in the days following its release. 

Basically, the SPX and VIX complexes are growing and, on the other side, are a small concentrated group of market makers taking on far more exposure to risk. 

Graphic: Retrieved from Ambrus’ publicly available research.

During moments of stress, as we’ve seen in the past with GME for example, options counterparties may be unable to keep up with the demands of investors, so you get a reflexive dynamic that helps push the stock higher. “That same dynamic can happen on the way down”; counterparties will mark up options prices during intense selling. As the options prices rise, options deltas (i.e., their exposure to direction) rise and this prompts so-called bearish vanna counterparty hedging flows in the underlying.

“Imagine a scenario where [some disaster happens] and everybody starts buying 0 DTE puts. That’s going to reflexively drive the S&P lower,” Sidial said. “Take, for example, the JPMorgan collar position that clearly has an effect on the market, and people are starting to understand that effect. That’s just one fund. Imagine the whole derivative ecosystem” leaning one way.

Graphic: Retrieved from Ambrus’ publicly available research.

Well, that’s what JPM’s Marko Kolanovic just said is a major risk and could exacerbate market volatility. “While history doesn’t repeat, it often rhymes,” he explained, noting that the trade of ultra-short-dated options portends a Volmageddon 2.0. If you recall, in 2018, Volmageddon 1.0 turned successful long-running short-volatility trades on their head when traders who were betting against big movements in the market saw their profits erode in days.

Further, to conclude this section since your letter writer is running short on time, as Sidial said, “if you’re trading volatility, let there be an underlying catalyst for doing so.” From a “risk-to-reward perspective, … it’s a better bet to be on the long volatility side,” given “that there are so many things that … keep popping up” from a macro perspective. Check out our letters from the past weeks where we talked about protecting profits (e.g., sell call vertical to finance and buy a put vertical with a lot of time to expiry).

For Ambrus’ publicly available research, click here. Also, follow Sidial on Twitter, here. Consider reading your letter writer’s past two conversations with Sidial, as well. Here is an article on 2021 and the meme stock debacle. Here is another article talking more about Ambrus’ processes.

Technical

As of 6:15 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a balanced overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,153.25. 

Key levels to the upside include $4,168.75, $4,189.00, and $4,206.25.

Key levels to the downside include $4,136.25, $4,122.75, and $4,104.25.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

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

Definitions

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

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

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

About

The author, Renato Leonard Capelj, works in finance and journalism.

Capelj spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. Separately, Capelj is an options analyst at SpotGamma and an accredited journalist.

Capelj’s 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.

Connect

Direct queries to renato@physikinvest.com or find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram.

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 January 13, 2023

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.

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Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) measure reflects the total attractiveness of owning volatility.

Administrative

A bit late as your letter writer is getting ready to travel. Sorry and have a great Friday!

Fundamental

Thursday’s inflation update was as expected.

The Consumer Price Index (CPI) saw a 6.5% rise year-over-year (YoY) and a 0.1% fall month-over-month (MoM). Core CPI was +5.7% YoY and +0.3% MoM. 

In his post-CPI analysis, Andreas Steno Larsen said inflation has mostly disappeared, and, if we cut shelter costs, which are outdated, “deflation on a quarterly and monthly basis is here.”

Graphic: Retrieved from Andreas Steno Larsen.

The Federal Reserve’s (Fed) “favored statistical measures for underlying inflationary pressure all confirm a decline,” added Bloomberg’s John Authers.

“Prices are beginning to behave more as central bankers would wish,” paving the way to a downshift in tightening, as is priced by the markets. Using the CME Group Inc’s (NASDAQ: CME) FedWatch Tool, traders were split, and the odds of a 25 or 50 basis point hike were more even prior to CPI.

The odds are now skewed toward a 25 basis point hike.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool. Depending on the measure, rates are seen peaking between 4.9% and 5.10%.

Despite the odds of a less aggressive hike – yields falling and swaps suggesting the Fed could skip a hike in March – and the impact that has on valuing businesses (e.g., firm profits worth less at higher interest rates hence the de-rate of 2022), the data suggests that “inflation spikes have never been vanquished until the federal funds rate exceeds the inflation rate,” and, with the return in deflation, Steno Larsen said, the outlook for stocks remains poor.

“Remember that the PPI (and the CPI for that matter) is a leading indicator for EPS.” Consequently, “we are in for negative EPS.”

If you’re not an active trader and unable to participate in both the up- and down-side of markets, then you may capitalize on higher interest rates with Treasury bills or Box Spreads, which allow you to create loan structures similar to a Treasury bill. Upon the spread’s maturity, it settles and earns a competitive interest rate.

Graphic: Retrieved from boxtrades.com.

If you’re an active trader, as I said to one subscriber privately, “the more depressed technology names to the upside for debits [were] attractive” (i.e., buying call option structures in the likes of Tesla and Amazon).

This is while put structures you may monetize in case of a large repricing in volatility have kept their values well amid what appears to be a shift higher in the skew; in the past days, we talked about measures including the Cboe VIX Volatility (INDEX: VVIX) printing at historic levels.

Graphic: Updated January 12, 2023. S&P 500 (INDEX: SPX) volatility skew retrieved from Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.

Measures like the VVIX suggests “we can get cheap exposure to convexity while a lot of people are worried,” as The Ambrus Group’s Kris Sidial said in one article. Though volatility can be bimodal (i.e., stay low for longer for lack of better phrasing), from a “risk-to-reward perspective, … it’s a better bet to be on the long volatility side,” given “that there are so many things that … keep popping up” from a macro perspective.

Graphic: Cboe VIX Volatility (INDEX: VVIX) via TradingView.

Technical

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

Our S&P 500 pivot for today is $3,988.25 HVNode. 

Key levels to the upside include $4,000.25, $4,011.75, and $4,028.75.

Key levels to the downside include $3,979.75, $3,959.00, and $3,943.25.

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

As a disclaimer, the S&P 500 could trade beyond the levels quoted in the letter. Therefore, you should load the above link on your browser for more relevant levels.

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

Definitions

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

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

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

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

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 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.

Subscribe
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 16, 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!

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Graphic updated 6:50 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. 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.

Administrative

A longer note so stick with me!

Updates are pending for the above dashboard. Exciting! Beyond this, the newsletter is getting a revamp in other parts. If you have any feedback on what should be changed, please comment!

Also, I am going to refer everyone to a conversation between Joseph Wang and Andy Constan, as well as some updates Cem Karsan of Kai Volatility made (HERE and HERE). That is, in part, a primer for what we will be talking more about, soon.

Fundamental

Talked about yesterday was the prospects of contractionary monetary policy reducing inflation and growth. BlackRock Inc (NYSE: BLK) strategists, even, put forth that a “deep recession” is needed to stem inflation. In short, “there is no way around this,” they claim.

Graphic: Retrieved from The Market Ear. FedEx Corporation (NYSE: FDX) sold 20% on warning about the global economy.

From thereon, we talked about how rates rising would “bring private sector credit growth down,” as well as “private sector spending and, hence, the economy.”

Based on where rates are at, the market may still be too expensive.

Graphic: Retrieved from Bloomberg via Michael J. Kramer. “What is amazing is how expensive this market is relative to rates. The spread between the S&P 500 Earnings yield and the 10-Yr nominal rate is at multi-year lows.”

On the other hand, some argue inflation peaks are in. ARK Invest’s Cathie Wood suggests “deflation [is] in the pipeline, heading for the PPI, CPI, PCE Deflator.” 

Tesla Inc’s (NASDAQ: TSLA) Elon Musk added that he thinks the Federal Reserve (Fed) may make a mistake noting “a major Fed rate hike risks deflation.” Musk suggested the Fed should drop 0.25%, basing his decision on non-lagging indicators, unlike the Fed.

That’s not in line with what CME Group Inc’s (NASDAQ: CME) FedWatch tool shows. Through this tool we see traders pricing an 80% chance of a 0.50-0.75% hike, all the while quantitative tightening (reducing Fed Treasuries and mortgage-backed securities holdings) accelerated on September 15. 

UST and MBS will roll off (which could turn into “outright sales”) at a pace of $95 billion per month, now, increasing competition for funding among commercial banks, and bolstering borrowing costs, as explained, below.

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.

According to Bank of America Corporation (NYSE: BAC), since 2010, nearly 50% of the moves in market price-to-earnings multiples were explained by quantitative easing (QE), the inverse of QT, through which the Fed (or central banks, in general) creates credit used to buy securities in open markets, MarketWatch explains.

Graphic: Retrieved from the Federal Reserve Bank of Richmond. “The Fed Is Shrinking Its Balance Sheet. What Does That Mean?”

The “purchases of long-dated bonds are intended to drive down yields, which is seen enhancing appetite for risk assets as investors look elsewhere for higher returns. QE creates new reserves on bank balance sheets. The added cushion gives banks, which must hold reserves in line with regulations, more room to lend or to finance trading activity by hedge funds and other financial market participants, further enhancing market liquidity.”

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via MarketWatch.

The liability side of the Fed’s balance sheet is what “matters to financial markets.” 

Thus far, “reductions in Fed liabilities have been concentrated in the Treasury General Account, or TGA, which effectively serves as the government’s checking account” to run the day-to-day business.

Given that we’re talking about balance sheets, here, Fed liabilities must match assets. Thus, a rise in the TGA must be accompanied by a decline in bank reserves (which are liabilities to the Fed). This, as a result, decreases the room banks have to “lend or to finance trading activity by hedge funds and other financial market participants, [which] further [cuts into] market liquidity.”

With the Treasury set to increase debt issuance, boosting TGA, it will effectively take “money out of the economy and put[] it into the government’s checking account.” The linked reduction in bank deposits and reserves bolsters “repurchase agreement rates and borrowing benchmarks linked to them, like the Secured Overnight Financing Rate,” per Bloomberg.

Graphic: Retrieved from the Federal Reserve Bank of New York. “The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.”

Adding, this may play into “an additional tightening of overall financial conditions, in addition to the increase in the main fed funds rate target that the central bank intends to continue boosting.”

This will “put more pressure on the private sector to absorb those Treasurys, which means less money to put into other assets” that may be riskier, like equities, said Aidan Garrib, the head of global macro strategy and research at Montreal-based PGM Global.

Positioning

As of 6:50 AM ET, Friday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.44%. Net gamma exposures decreasing may promote generally more expansive ranges.

Graphic: Via Physik Invest. Data retrieved from SqueezeMetrics.

Given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of options structures.

This is as there’s been a lot of speculation, particularly on the downside (put options), setting the stage for a more volatile and fragile market environment, says Kai Volatility’s Cem Karsan.

“On the index level, people are not well hedged,” a departure from what the case was heading into and through much of 2022. It’s the case that heading into 2022, traders were well hedged. Into and through the decline, traders’ monetization of existing hedges, as well as counterparty reactions, “compressed volatility” realized across US equities, as explained on July 15, 2022.

This made for some attractive trade opportunities seen here.

Graphic: Retrieved from The Market Ear. “VIX has decoupled from cross-asset volatilities.”

Now, given that the go-to trade is to sell stock and puts, short interest has grown, as have other risks, associated with this activity; essentially people are “los[ing] faith in convexity and risk premia’s ability to work,” as a result of “poor performance of vol,” and, the reaction to their “pain and financial loss,” is setting the stage for tail risks heading into the Q1 and Q2 2023.

The sale (purchase) of the front (back) expirations will bolster market pinning; as SpotGamma puts forth, “the positive impact of put closers and rolls, as well as decay,” is easing the market drop. However, this “positioning likely compounds drops and adds to volatility,” in the future.

To quote: “Though the removal of put-heavy exposures can boost markets higher, too add, the positive impacts are dulled via the demand for put exposures at much lower prices.”

Graphic: Retrieved from SpotGamma.

These particular options, which are at much lower prices, “are far more sensitive to changes in direction and IVOL,” as I explained in a SpotGamma note. These options can go “from having very little Delta (exposure to direction) to a lot more Delta on the move lower,” quickly.

Graphic: Via Mohamed Bouzoubaa et al’s Exotic Options and Hybrids.

“If we maintain that liquidity providers are short those puts, a positive Delta trade, then those liquidity providers [will sell] futures and stock, a negative Delta trade to stay hedged.”

Graphic: Via Banco Santander SA (NYSE: SAN) research.

Technical

As of 6:50 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside of 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 $3,909.25 MCPOC puts into play the $3,935.00 VPOC. Initiative trade beyond the latter could reach as high as the $3,964.75 HVNode and $4,001.00 VPOC, or higher.

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

Any activity below the $3,909.25 MCPOC puts into play the $3,857.25 HVNode. Initiative trade beyond the latter could reach as low as the $3,826.25 and $3,770.75 HVNodes, 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.

Considerations: A feature of this 2022 down market was responsiveness near key-technical areas (that are discernable visually on a chart). This suggested to us that technically-driven traders with shorter time horizons were very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

That’s changing. The key levels, quoted above, are snapping far easier and are not as well respected. That means other time frame participants with wherewithal are initiating trades. 

Those are the participants you should not fade.

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.

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.

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.

Categories
Commentary

Daily Brief For August 9, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 750+ that read this report daily, below!

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Graphic updated 6:35 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. 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

Pardon the light read, today!

Jefferies Financial Group Inc (NYSE: JEF) analyses suggest that after the S&P 500’s nearly two standard deviation rally, outcomes are quite large in both directions.

However, “when the six-month performance into the rally is negative, there is a much greater chance of negative outcomes,” The Market Ear summarizes.

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.

What is bolstering this relief rally?

This relief is the product of a “knee-jerk re-leveraging flow,” as explained by some, bolstered by a “cohort of quantitative-based investment strategies [buying] equities when volatility is lower.” 

From hereon, some, like JPMorgan Chase & Co (NYSE: JPM) strategists, see equities rising on “robust corporate earnings [and] … better-than-feared economic data,” all the while others, from Morgan Stanley (NYSE: MS) and Goldman Sachs Group Inc (NYSE: GS), don’t see corporate profit margins expanding into 2023 because of “sticky cost pressures and receding demand.”

Graphic: Retrieved from The Market Ear. Via MS Research. Margins are in trouble “over the next several quarters … [as this is] the mirror image of what happened in 2020-21 when companies had extreme pricing power and costs were lagging.”

That said, however, MS explains said that “the next leg lower may have to wait until September when [their] negative operating leverage thesis is more reflected in earnings estimates.”

Graphic: Retrieved from The Market Ear. Via Societe Generale SA (OTC: SCGLY). “Not only are central banks not there to backstop markets as they have been in recent years, but Growth stock profits are proving somewhat fragile as well.”

The outlooks by corporates are far more positive, though, it appears.

Tesla Inc (NASDAQ: TSLA) CEO Elon Musk explained the trend in commodity prices is down, “which suggests we are past peak inflation.” This is as Loews Corporation (NYSE: L) CEO Jim Tisch says that the “significant reduction in inflation in the coming 6 to 12 months” should help avoid a “truly damaging wage-price inflation spiral that was so problematic in the 1970s.”

Full employment, healing supply chains, and easier consumer spending is among the factors balancing commitments to tighten and, potentially, put the economy on an “L” trajectory (i.e., drop and flatline for a period), as explained in our August 3 letter.

Graphic: Retrieved from Bloomberg. Data via Realtor.com. “The [Fed’s] effort to curb inflation by raising benchmark interest rates has put the brakes on the pandemic housing frenzy.”

Positioning

As of 6:35 AM ET, Tuesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.14%. Net gamma exposures decreasing may promote larger trading ranges.

Given the market environment, read the August 5 letter for an in-depth take on how to position for the next move higher or lower, while lowering costs (and potential losses), if wrong.

Technical

As of 6:25 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $4,153.25 HVNode puts into play the $4,189.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,227.75 HVNode and $4,259.75 LVNode, or higher.

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

Any activity below the $4,153.25 HVNode puts into play the $4,117.75 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $4,073.00 VPOC and $4,040.75 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: Updated 8/8/2022. 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

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.

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

About

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.

Categories
Commentary

Daily Brief For March 15, 2022

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

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What Happened

Overnight, equity index futures explored lower prices alongside most commodities. Bonds and implied volatility metrics were bid, also.

The narrative is that this is follow-on selling as participants look to price in the implications of COVID-19 lockdowns in China, as well as the Russia-Ukraine conflict. Arguably, there is some pre-Federal Open Market Committee (FOMC) positioning going on, too.

Ahead is data on the Producer Price Index and Empire State Manufacturing (8:30 AM ET).

Graphic updated 6:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Fundamental: Keeping it short, today. Please check out Monday’s commentary, if you haven’t!

Weak start to 2022 as participants look to price slower growth and inflation, tighter monetary policy, geopolitical tensions, a resurgence in COVID-19, potential Russian defaults, and beyond.

Graphic: Via S&P Global Inc (NYSE: SPGI). 

Bolstering inflation pressures are supply-demand challenges. For instance, geopolitical tensions are stifling vehicle production here in the U.S.

Graphic: Via S&P Global Inc (NYSE: SPGI). 

Since Russia’s invasion of Ukraine, gas in the U.S. climbed about $0.80/gallon, also, prompting talk of gas tax holidays.

Graphic: Via Reuters.

Pursuant to these remarks, Goldman Sachs Group Inc (NYSE: GS) economists suggest the probability of recession in the next year is between 20-35% while Morgan Stanley (NYSE: MS) strategists see equity valuations overshooting to the downside with out of control inflation.

Graphic: Via Goldman Sachs Group Inc.

In opposition, JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic suggests there is too much negativity priced in and that investors should add equity risk. 

“We believe that the past month’s correction has induced too much negativity in markets, e.g., reflected by our market-implied recession probabilities, on the fear that growth will be severely affected by the war. We stay with a pro-risk stance as we do not believe that we will see a recession or that we have entered a sustained bear market.”

Graphic: Via Bloomberg. “A Moody’s Analytics computer model suggests that the U.S. as a whole would be able to avoid a recession, even if military hostilities are prolonged.”

Positioning: Per Goldman Sachs Group Inc’s derivatives team, “puts are more overvalued than any time over the past five years.”

Graphic: Via SpotGamma. “Netting call & put delta, you can see we’re near extremes in terms of put:call positions. Often large put positions are removed by expirations, which seems to coincide with market lows. Many of these are quarterly expirations which coincide w/FOMC meetings – such as next week.”

Further, it is expected that the compression of volatility (via passage of FOMC), as well as the removal of customer puts and (accordingly) counterparty negative gamma exposure (OPEX) may serve to alleviate some of this pressure.

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “18-Mar has more expiring near-the-money SPX open interest than any expiration since 2019.”

In taking the other side of this demand for protection, counterparties carry exposure to positive delta and negative gamma (losses amplified to the downside). In hedging their own exposure, counterparties will sell underlying(s), and this is where the aforementioned pressure arises.

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on the underlying’s order book. For instance, in selling a put, customers add liquidity and stabilize the market. How? The market maker long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

Given present supply and demand conditions (customer hedging in months prior), the incremental pressure counterparties add with each leg lower is less, if you will. 

Here’s a good explanation:

“When implied volatility is high, that same 1% move lower is much more ‘expected’ so there generally won’t be the same upward pressure on volatility and in fact it might decline,” said Christopher Jacobson, a strategist at Susquehanna Financial Group LLP.

“Along the same lines, investors at that point have had more opportunity and time to hedge, so those same market moves may not lead to as much hedging activity.”

Pictured: SqueezeMetrics highlights implications of volatility, direction, and moneyness.

Adding to that last remark, as Amy Wu Silverman of Royal Bank of Canada’s (NYSE: RY) capital markets group puts it well: “You’re also seeing people selling that volatility and doing some overwriting. That can probably dampen volatility.”

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator for QQQ shows strong put selling 3/14/2022. Divergences often precede reversals in the underlying.

There is the potential, according to SpotGamma, for some “path dependency,” however, as “the expiration and/or covering of a large swath of these put hedges may place the market back into an ‘underhedged’ position.” In such a case, new demand would add fuel to weakness.

Technical: As of 6:15 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited 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 $4,129.50 overnight low (ONL) puts in play the $4,177.25 high volume area (HVNode). Initiative trade beyond the $4,177.25 HVNode could reach as high as the $4,227.75 HVNode and $4,249.25 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,129.50 ONL puts in play the $4,101.25 ONL. Initiative trade beyond the ONL could reach as low as the $4,069.25 HVNode and $4,055.75 LVNode, or lower.

Considerations: Push-and-pull, as well as responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

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

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.

About

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

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

Disclaimer

Physik Invest does not carry the right to provide advice.

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

Categories
Commentary

Daily Brief For February 15, 2022

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

Subscribe

What Happened

Overnight, equity index futures auctioned sharply higher after Russia announced a pullback of some forces near Ukraine.

Ahead is data on the Producer Price Index and Empire State Manufacturing Index (8:30 AM ET).

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

What To Expect

Fundamental: In the face of what participants feel will be an aggressive wave of monetary tightening and geopolitical tensions, markets had sold.

The number of interest-rate increases implied by the market for overnight index swaps, according to Bloomberg, increased to seven. Higher rates ding valuations, hurting most high-flying technology stocks and junk bonds.

Graphic: Via The Macro Compass – The 5y-30y OIS curve, which is may eventually invert, “trades at a meager 16 bps and Powell didn’t remove the hawkish Fed tail risks (e.g. 50 bps hike in March or hiking at every meeting) and validated the aggressive hiking cycle pricing amidst a clear slowdown in economic growth impulse.”

JPMorgan Chase & Co strategists led by Marko Kolanovic suggest what the market is pricing will not materialize. 

“We believe risky asset markets have mostly adjusted to monetary policy shifts by now,” the JPMorgan analysts wrote. “Short-term rates markets have likely moved too far vs. what CBs will ultimately deliver in hikes this year.”  

The team at JPMorgan concludes that though the risk of conflict in Ukraine is high, the impact on global equity markets would be limited and “likely prompt a dovish reassessment by CBs.” 

“We expect risky asset markets to rebound as they digest these risks and sentiment improves, aided by inflows from systematic investors and corporate buybacks.” 

Graphic: Sentiment via Bloomberg.

Pursuant to those remarks, Goldman Sachs Group Inc (NYSE: GS) “saw the largest net buying since late December (+1.0SDs), driven by risk-on flows with long buys outpacing short sales 8 to 1.”

“All regions were net bought led by North America (driven by long buys) and to a lesser extent DM Asia (driven by short covers). 8 of 11 global sectors were net bought led in $ terms by Info Tech, Materials, Financials, and Consumer Disc. Net buying in US Info Tech continued this week.”

Positioning: As much as this newsletter sounds like a broken record, not much has changed in terms of positioning.

Lower prices and higher implied volatility (the byproduct of demand for protection) compounded macro flows, exacerbating weakness.

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

According to options modeling and analysis provider SpotGamma, “When long a put, investors are offered the potential to make asymmetric payouts. They are long gamma and have positive exposure to convexity.”

Dealers, on the other side, have the potential to realize multiplied losses if markets trade down. 

“To protect against ‘blowout’ situations, dealers can and will buy puts against their existing exposure. At a certain point, the convexity of the dealers’ own insurance kicks in and basically reduces the amount of added hedges needed on increases in volatility or lower markets.”

Therefore, markets have reached a potential lower bound, in light of this dynamic. Participants, en masse, would have to commit more capital to strike prices much further down and out in time to indirectly add pressure.

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

Graphic: Data SqueezeMetrics. Graph via Physik Invest.

To conclude, the dip lower and demand for protection may prime the market for upside (when volatility starts to compress again and counterparties unwind hedges to put-heavy exposures). 

Technical: As of 6:30 AM ET, Tuesday’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 $4,438.00 puts in play the $4,499.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,526.25 high volume area (HVNode) and $4,565.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,438.00 puts in play the $4,393.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,365.00 POC and $4,332.25 HVNode, or lower.

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

What People Are Saying

Definitions

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.

About

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

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

Disclaimer

Physik Invest does not carry the right to provide advice.

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

Categories
Commentary

Daily Brief For October 14, 2021

Update: This morning’s 7:55 AM ET release of the newsletter failed to include updated S&P 500 levels in the very first graphic, below. That graphic has been updated, now. Sorry!

Market Commentary

Equity index, commodity, bond futures trade sideways to higher. Volatility ebbs.

  • Consumer prices rose. Taper in play.
  • Ahead: Claims, PPI data, Fed speak.

What Happened: After news that consumer prices rose more than expected, alongside the release of Federal Open Market Committee (FOMC) minutes which revealed an intent to taper asset purchases, U.S. stock index futures auctioned higher.

Ahead is data on jobless claims and the producer price index (8:30 AM ET). After is Fed-speak by Lorie Logan (12:00 PM ET), Tom Barkin (1:00 PM ET), and Patrick Harker (6:00 PM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. 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, 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 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.

Adding, during the prior day’s regular trade, on positive intraday breadth and divergent market liquidity metrics, the best case outcome occurred; after numerous sessions of a minimum separation in value (i.e., the area where 70% of the day’s volume occurred) failed to support downside price discovery, participants took back Monday’s spike and weak close. 

The activity now puts in play the minimal excess high just short of the $4,408.75 low volume area (LVNode), as well as the $4,415.00 untested point of control (VPOC), two areas where initiative buyers were unable to counter the fading momentum from short covering.

Looking across the spectrum, the Nasdaq 100 and Russell 2000 are firming, relative to the S&P 500 and Dow Jones Industrial Average, two indices that held the relative strength mantle, prior. 

This rotation, if we will, may support sideways-to-higher trade in the coming sessions as participants clash head-on with the 50.00% and 61.80% Fibonacci retracements, levels that overlap key anchored volume-weighted average price (AVWAP) levels.

Note: VWAP is 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. We look to buy above a flat/rising VWAP pinch. Sell below a flat/declining VWAP pinch.
Graphic: SPDR S&P 500 ETF (NYSE: SPY) top left, Invesco QQQ Trust Series 1 (NASDAQ: QQQ) top right, iShares Russell 2000 ETF (NYSE: IWM) bottom left, SPDR Dow Jones Industrial Average ETF Trust (NYSE: DIA) bottom right. Spending more than a few hours of trade above trend, VWAP (yellow), and the 61.80% Fibonacci retracement suggest good odds of upside continuation.

Further, the aforementioned trade is happening in the context of weakness into a seasonally bullish cycle of rebalancing and earnings. 

Some risks include the prospects of tapering off asset purchases, next month, alongside dangerous inflation pressures, as indicated by minutes from the FOMC meeting last month.

“Markets took the hint. Two-year yields are their highest since March last year, when the pandemic first hit,” said Bloomberg’s John Authers. “Meanwhile, the 10-year yield retreated from an approach toward its post-pandemic high. The two-year reflects the now-strong likelihood that the Fed will raise rates within the next two years; the 10-year reflects concerns about growth.” 

In terms of positioning, conditions may be supportive. 

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,381.25 LVNode puts in play the $4,393.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,415.00 VPOC 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 $4,381.25 LVNode puts in play the $4,360.25 LVNode. Initiative trade beyond the $4,360.25 LVNode could reach as low as the $4,349.00 VPOC and $4,330.25 LVNode, 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.

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.

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

Consumer prices rise more than expected as energy costs surge.

Global minimum tax pact ups the chance of multinational tax hike.

Global gas crisis is spilling over into the oil markets, IEA explains.

China’s power cuts stressing economic growth and supply chains.

Federal Reserve officials seeing mid-November, December taper.

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.

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Commentary

Daily Brief For August 13, 2021

Editor’s Note: Happy Friday! If you found today’s note helpful, consider sharing!

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Market Commentary

Equity index futures are sideways to higher on light volume and poor structure.

  • Themes of inflation, jobs, and liquidity.
  • Ahead: Import Price Index, Sentiment.
  • Yields drop; Nasdaq 100 strengthens.

What Happened: U.S. stock index futures auctioned sideways to higher alongside a dip in yields after data revealed persistence in business-related inflationary pressures and a drop in jobless claims.

“While inflation has been the overarching theme this week, U.S. jobless data from yesterday highlighted the improving employment backdrop as well,” said Jim Reid, a strategist at Deutsche Bank AG (NYSE: DB) in London. “Yesterday’s U.S. producer prices surprised to the upside, highlighting the ongoing inflationary pressures from ever-rising commodity costs and supply chain bottlenecks.”

Ahead is data on the import price index (8:30 AM ET) and University of Michigan sentiment (10:00 AM ET).

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

What To Expect: As of 6:45 AM ET, Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting a higher potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on weak intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by trade above the $4,434.75 low volume area (LVNode). This is significant because the aforementioned advance and overnight gap occurred in the face of light volume, poor structure, and unsupportive breadth.

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

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.
Graphic: Multi-timeframe analysis of the S&P 500, Nasdaq 100, and Russell 2000, as well as breadth metrics on the NYSE and Nasdaq exchanges.
Graphic: SPDR S&P 500 ETF Trust (NYSE: SPY) market liquidity via Bookmap.

Further, the aforementioned trade is happening in the context of liquidity concerns. This theme’s implications on price are contradictory; to elaborate, the gap between the rates of growth in the supply of money and the gross domestic product turned negative for the first time since 2018. 

“Put another way, the recovering economy is now drinking from a punch bowl that the stock market once had all to itself,” said Doug Ramsey, Leuthold Group’s chief investment officer.

Graphic: According to Bloomberg, “While stocks kept rising during frequent negative Marshallian K readings in the 1990s, the pattern since the 2008 global financial crisis — a period when the central bank was in what Ramsey calls a “perpetual crisis mode” — begs for caution.”

Moreover, for today, given expectations of middling volatility and responsive trade, amid Friday’s options expiration (OPEX), participants may make use of the following frameworks.

Options Expiration (OPEX): 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 worthless) and the reduction dealer gamma exposure.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,453.75 high volume area (HVNode) pivot puts in play the $4,459.75 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,470.75 and $4,483.75 Fibonacci extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,453.75 HVNode pivot puts in play the $4,447.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,439.00 untested point of control (VPOC) and $4,430.00, a visual low likely generated by short-term (i.e., technically driven) participants who may be unable to defend retests.

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

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

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

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.

Initiative Buying (Selling): Buying (selling) within or above (below) the previous day’s value area.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:45 AM ET.

News And Analysis

Traders pile into tail-risk bets that Fed will not hike.

U.S. high yield default rate lowest start in 14 years.

The Treasury market keeps on humbling investors.

COVID downside risks are less than in prior waves.

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.

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Categories
Commentary

Daily Brief For August 12, 2021

Market Commentary

Equity index futures sideways overnight.

  • Bond and equity volatility diverge.
  • Ahead: Claims, PPI, and WASDE.

What Happened: U.S. stock index futures auctioned sideways to higher after the release of Consumer Price Index (CPI) data and progress on stimulus. 

Ahead is data on jobless claims, as well as the PPI and latest WASDE report. 

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, Thursday’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 balance area high (BAH), to the $4,443.50 overnight high (ONH). Thereafter, the S&P 500, in particular, traded sideways on strong intraday breadth, evidenced by an inflow into stocks that were up versus down.

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

In comparison to the stronger S&P 500, Russell 2000, and Dow Jones Industrial Average, the Nasdaq 100 traded to a new two-day low, this week, amidst a divergence in equity and bond market volatility, as well as a general rise in rates.

Notwithstanding, despite the S&P 500 continuing to make higher highs in the face of strong inflows and equity buybacks, among other things, trade has been mechanical, halting short of visual references. 

Given that this trade suggests the participants involved are short-term (i.e., technically driven) in nature, caution exists on the entry of longer-term, fundamentally driven participants who deem prices to be too high and unfair.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,434.75 low volume area (LVNode) pivot puts in play the $4,443.50 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the Fibonacci extensions at $4,446.25 and $4,449.25.

In the worst case, the S&P 500 trades lower; activity below the $4,434.75 LVNode puts in play the $4,429.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,422.75 balance area high (BAH) and $4,415.75 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.

Initiative Buying (Selling): Buying (selling) within or above (below) the previous day’s value area.
Graphic: 30-minute profile chart of the Micro E-mini S&P 500 Futures. Graphic updated 6:45 AM ET.

News And Analysis

China goes after online insurance amid wide crackdown.

U.S. infrastructure bill to provide a small boost to growth.

Traders brace for a debt ceiling ‘hot potato’ rattling rates.

China has partly shut down the world’s third-busiest port.

Delta variant is bringing a midsummer pause for airfares.

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.

Subscribe