Categories
Commentary

Daily Brief For September 21, 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 7:00 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 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

Short and to the point, today, after yesterday’s detailed letter on inflation, monetary policy action, and beyond. Good luck, everyone!

Fundamental

Ongoing is a “messy divorce” between large powers. We have talked about this in the past.

In the news was Putin’s mobilization of troops and renewed warning of a nuclear threat. This is a day after Biden said the US would defend Taiwan against China. In response, Mao Ning, the Chinese foreign ministry spokesperson, said this:

“The US remarks seriously violate the one-China principle … and send a severely wrong signal to the separatist forces of Taiwan independence. China strongly deplores and rejects it and has made solemn complaints with the US side.”

“We will do our utmost to strive for the prospect of peaceful reunification with the utmost sincerity, while we will not tolerate any activities aimed at splitting China and reserve the option to take all necessary measures.”

The aforementioned do more to shift “the pillars of the low inflation world” – de-globalization and populism – which the Federal Reserve (Fed) has a limited toolkit to solve for.

Pending is a large “L”-shaped recession to slow inflation, generate negative wealth effects, lower demand, and position for a recovery that will likely be “fiscally funded industrial policy.”

Shifting to today, the Federal Reserve is to step up its efforts to tame inflation by raising interest rates to the highest level since 2008. The consensus calls for up to a 75 basis point rate hike. 

Bloomberg economist Anna Wong, Andrew Husby, and Eliza Winger put forth:

“Powell will emphasize the committee’s determination to hold rates higher for longer. He will be more forthcoming in acknowledging the likely pain involved in bringing down inflation. He may opt not to say that the committee plans to downshift the pace of rate hikes.”

Positioning

Yesterday, we briefly talked about post-event moves which are often positive and driven by the structural “rebalancing of dealer inventory,” per Kai Volatility’s Cem Karsan.

“In the past four Fed Days, the benchmark index has climbed an average of roughly 1.4% on all days, with more than 2% gains on three of the four,” said Bloomberg’s John Authers. Adding, “the S&P 500 has averaged a gain of more than 1% on Fed Days over the last 10 meetings.”

Graphic: Retrieved from Bloomberg. Via the Bespoke Investment Group.

Basically, into the event, traders have demanded protection and bid implied volatility (IVOL).

Graphic: Retrieved from SpotGamma. 

Should fears be assuaged, the supply of that protection should decrease IVOL, this is what may provide markets a boost.

Graphic: Retrieved from SqueezeMetrics.

From thereon, the “second move and final resolution, if you wait for it, is usually tied to the incremental effects on liquidity (QE/QT).”

In the case of the latter, per The Ambrus Group’s Kris Sidial, “[o]utright tails in single stocks continue to be ‘cheap’ relative to what you are seeing in the broad market.”

“Market is discounting any sort of crash risk. Which seems reasonable granted that a lot of the current macro theme is geared towards a longer-term effect.”

Graphic: Retrieved from Bloomberg. Taken from Kris Sidial. “January 2022 was a time that was associated with really low vol (VIX = ~12). Consumer Staples Select Sector SPDR Fund (NYSE: XLP) 1M 80MNY tails today are only 4 vols over where they were during that time.”

Technical

As of 7:00 AM ET, Wednesday’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.

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

Any activity above the $3,909.25 MCPOC puts into play the $3,936.25 ONH. Initiative trade beyond the ONH could reach as high as the $3,965.25 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 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.

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.

Categories
Commentary

Daily Brief For September 20, 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 6:20 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

A hot topic over the past sessions is speculation on the Federal Reserve’s (Fed) next steps and the impact those steps may have.

Further, in the news, last night, aside from the prospects of another big hike, was “the biggest annual increase since 1994” in two-year Treasury yields. That’s in part due to recent upside surprises in inflation talked about yesterday and last week.

Graphic: Retrieved from Bloomberg. US Government Bonds 2 YR Yield and Fed Funds.

Per the CME Group Inc’s (NASDAQ: CME) FedWatch Tool, there’s a near-80% chance of a 50 to 75 basis point bump to the target rate, as the Fed looks to stem inflation.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

This is all the while the Fed will let their Treasuries mature and, “instead of using the proceeds to buy another Treasury,” they will “buy nothing and reduce their balance sheet,” explained the Damped Spring’s Andy Constan.

Accordingly, “to pay that bond off, the US Treasury has to issue a bond,” and this bond will need to be “bought by the private sector” which has “to sell something to buy the bond, and that starts at the riskiest asset,” like crypto, watches, and cars, for instance.

Let’s unpack this further, below.

The transmission mechanism of quantitative easing (QE) and tightening (QT) is very weak “to economic activity but very strong to financial markets.”

In a detailed explainer, initially quoted in the September 16 letter, we learned “QE creates new reserves on bank balance sheets. The added cushion gives banks … more room to lend or to finance trading activity by hedge funds, … further enhancing market liquidity.”

Therefore, QE (QT) will mildly inflate (deflate) the economy as asset owners are pushed further out (in) on the risk curve. In practice, with QE, owners get pushed from Treasury to corporate bonds, bonds to equities, equities to crypto, and, finally, homes, watches, cars, and beyond.

With QT, as put forth, earlier, the reverse happens.

As Joseph Wang, author of Central Banking 101, said, in short, with QT “consumers have less wealth to spend” and this means that drops in financial markets and the tightening of “financial conditions impact the real economy,” negatively, albeit not as harshly as a rise in interest rates.

Unpacking further, with the Treasury set to increase issuance, thus boosting the government’s checking account, or Treasury General Account (TGA), “the level of reserves in the banking system declines, or the level of RRP could also decline,” Wang added.

This is as all of the above are liabilities to the Fed. Therefore, money comes out of the economy, via a fall in reserves, and this is put into the government’s checking account (TGA boost).

The linked reduction in bank deposits and reserves bolsters “repurchase agreement rates and borrowing benchmarks linked to them,” per Bloomberg. This, then, may play into “an additional tightening of overall financial conditions,” as mentioned, earlier.

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.

Here’s a provision.

It’s the case that the Fed believes it needs a certain level of reserves for the proper functioning of the financial system (~$2 trillion). Wang explained that in 2019, banks dumped a lot of their reserves into repo to earn some extra return. 

When QT was about to end, there was less money in their reserves which preceded a spike in rates and a blow-up among those who needed the money the most, as explained here.

Graphic: Retrieved via Bloomberg.

“The Fed saw the system breaking at around 8% GDP and thinks that is where the limit is,” he added. “This suggests, going forward, the Fed is going to have to do something to top up the reserves in the banking system, and they have tools to do that.”

What’s the result, then?

These tools include capping the RRP, “forcing money out into the banking system,” as well as modifying the supplementary leverage ratio (SLR), making it “cheaper for banks to maintain a large balance sheet.”

Together, this, ultimately, may increase “the capacity of banks to make loans [and] create credit, so that is financial easing.”

As Wang said in another work best: These “easing effects may even overwhelm the tightening impact of a marginally longer QT.”

So, what can we expect? 

In terms of timelines, Wang puts forth that economic data will likely prompt a mid-2023 cut in rates, which is in line with what the futures market is pricing.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

Before then, traders are pricing nearly 225 to 250 basis points of rate increases. Based on where rates are at, now, some argue 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.”

Positioning

We’ve talked about this before but what is expected, after Wednesday’s Fed update, is a move that is “structural,” as Kai Volatility’s Cem Karsan has put it before, and “a function of inevitable rebalancing of dealer inventory post-event.”

“The second move and final resolution, if you wait for it, is usually tied to the incremental effects on liquidity (QE/QT).”

Should participants’ fears with respect to the pace of tightening, for one, be assuaged, then it is likely that the protection demanded heading into the meeting, that’s bidding measures of implied volatility (IVOL), is supplied. This likely provides a boost.

From thereon, markets are more at the whims of macro-type positioning on rising rates and the withdrawal of liquidity.

Technical

As of 6:20 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 $3,909.25 MCPOC puts into play the $3,936.25 ONH. Initiative trade beyond the ONH 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 $3,885.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,857.25 and $3,826.25 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.

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.

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!

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 11, 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!

Graphic updated 7:30 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. 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

Equity market rally spurred by cooler a Consumer Price Index (CPI).

Expected was an 8.7% rise year-over-year (YoY) and 0.2% month-over-month (MoM). Core CPI (which excludes food and energy) was to rise by 6.1% YoY and 0.5% MoM, respectively.

Officially, the headline number rose to 8.5%. The core CPI rose 5.9% YoY and 0.3% MoM, meaning the March peak remains (6.5% YoY, then).

Graphic: Retrieved from CNBC.

Participants responded positively to the number, as expected could happen in a case where the CPI printed lower.

As I talked about in yesterday’s morning letter and in a SpotGamma note, with easing inflation:

(1) investors may command a lower rate of return for their purchasing power and (2) lower rates (if policymakers were to become less aggressive) do less to negatively impact discounted cash flows and the ability to finance future growth.

It is the case that immediately after the release of the CPI, traders dramatically shifted their bets on monetary action.

Previously, it was thought a 75 to 100 basis point hike would follow the report. Now, there are higher odds, as priced by the market, that there is a 25 to 50 basis point hike.

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

“I think the market is a bit overly giddy on this CPI number and it’s probably unlikely that the [Federal Reserve] (Fed) will start to ease up and take a less hawkish stance,” The Ambrus Group’s Kris Sidial put forth.

“The increase in risk assets somewhat gives the Fed the green light to be able to move more swiftly with a hawkish tone.”

Accordingly, the Fed’s Mary Daly said it is too early to declare victory in the inflation fight (and rightfully so), signaling, however, that she may support a slower pace of hikes.

Graphic: Retrieved from Bloomberg.

This is as home buyers and renters, in some areas, are seeing large hikes in prices. For instance, per one Bloomberg article, a Miami native saw their rent increase “by $650 to $2,400.00 a month,” forcing them to search for new places to live.

The Ambrus Group’s Sidial adds:

“Inflation is one of those things that is difficult to control when it’s out [of] the bag (historically). I think the Fed understands this and if they have the opportunity to tame it, while not completely obliterating risk assets, it seems like a perfect scenario.”

Ultimately, farther out in time, some metrics, which have incredible success in forecasting pivots, show the Fed likely to cut in 2023, shortly following the aggressive hiking cycle.

Graphic: Retrieved from Alfonso Peccatiello of The Macro Compass.

On the topic of (eventual) declines and slowing in the risk assets (like housing), “in most cases today, a borrower with 60 points of equity in their property, even facing moderate declines in their current home price, are not a big default risk,” explains Dan Ivascyn of PIMCO.

“A lot of what we like in the market today is seasoned-type risk that benefits from the multi-years of home price appreciation, and therefore is much less sensitive to what goes on from this point forward.”

From an S&P 500 (INDEX: SPX) perspective, the index has basically recouped half its losses for the year. This often came after the bear lows were in.

Graphic: Retrieved from Bloomberg.

Notwithstanding, here’s our updated liquidity tracker that is monitoring the “preeminent driver of markets during the post-crisis decade.”

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.

Positioning

As of 7:15 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.04%. Net gamma exposures increasing may promote tighter trading ranges.

Given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of options structures (i.e., replacing static directional exposures or delta with those that are dynamic) tied to the broader measures we follow like the S&P 500 (given increased average stock correlation and lower return dispersion).

The reason why? 

Per SpotGamma: “From an options perspective, a lot of the boost from volatility compression has played out. With implied volatility at a lower bound, it may be opportune to replace static delta bets for those that are dynamic (i.e., long option exposures) and have less to lose in this lower volatility environment.”

“In a case where market participants see the Fed keeping its commitment to aggressive monetary policy action, negative delta options exposures may outperform static short equity (bets on the downside).”

Technical

As of 7:30 AM ET, Thursday’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 $4,227.75 HVNode puts into play the $4,253.25 HVNode. Initiative trade beyond the latter could reach as high as the $4,275.75 LVNode and $4,303.00 Weak High, or higher.

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

Any activity below the $4,227.75 HVNode puts into play the $4,203.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,189.25 LVNode and $4,153.25 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.

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 August 10, 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!

Graphic updated 7:40 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. 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

Wednesday’s inflation figures – the CPI (Consumer Price Index) – will help drive perceptions regarding future Fed activity.

Expected is an 8.7% rise year-over-year (YoY) and 0.2% month-over-month (MoM). In June, these numbers were 9.1% and 1.3%, respectively. 

Core CPI (which excludes food and energy) is expected to rise by a rate higher than in June, 6.1% YoY and 0.5% 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.

Over the last 6 months, immediately after the release of CPI data, the average movement in the S&P 500 was -1.27%.

Moreover, businesses with promising futures often command a price high above their level of earnings (P/E). However, with inflation, prices in the economy rise, resulting in investors requiring better rates of return to maintain their purchasing power, per Investopedia.

Accordingly, if investors demand a higher rate of return, the P/E has to fall. That’s because you are “paying less for more earnings and, as earnings grow, the return you achieve is higher.”

Graphic: Retrieved from the Weekly S&P 500 ChartStorm. Via Schroders Plc (OTC: SHNWF).

In response to much hotter inflation participants may make significant changes in their forecasts for action by the Federal Reserve (Fed). 

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool.

To explain, to stem inflation, the Fed reversed its easy monetary policies and is both raising rates and engaging in quantitative tightening (QT), which amplifies the effects of the former and is the opposite of quantitative easing (QE), “widely seen as the preeminent driver of markets during the post-crisis decade.”

Those stocks commanding some of the highest prices in anticipation of future growth are (and will) be impacted the most as their discounted cash flows and ability to finance growth reduce.

Though “rates take up most attention,” what’s more important are “the decisions the Fed — and other central banks — have to make about bringing their balance sheets down,” per Bloomberg.

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.

Positioning

As of 7:15 AM ET, Wednesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.17%. Net gamma exposures decreasing may promote larger trading ranges.

Adding, volatility is at a low point and the “flattening in the downside fixed strike skew” seems to have played its course.

As SpotGamma explains, “given that implied volatility is at a low point, if participants’ fears with respect to [CPI] are assuaged, volatility compression would likely do less to bolster equity market upside than when the VIX was at a higher starting point (e.g., 30).”

On the other hand, “the marginal impact of increased demand for options strikes down below, further out in time, is likely to do a lot to add to underlying market pressures.”

So, per Kai Volatility’s Cem Karsan, though the first market moves after CPI may be a “function of inevitable rebalancing of dealer inventory post-event,” if the “final resolution is lower,” per  “the incremental effects” of liquidity (i.e., QE and QT), then options could outperform their delta (i.e., exposure to direction), not like what happened over the past half-year, as said August 5.

Sample structures to consider include low- or zero-cost bullish call ratio spreads to the upside, against the trend resistances in products like the S&P 500 (INDEX: SPX).

Graphic: Retrieved from Bloomberg. Drawn on by Physik Invest.

Technical

As of 7:30 AM ET, Wednesday’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 balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity, all else equal.

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

Any activity above the $4,117.75 MCPOC puts into play the $4,153.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $4,189.25 LVNode and $4,227.75 HVNode, or higher.

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

Any activity below the $4,117.75 MCPOC puts into play the $4,073.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,040.75 and $4,015.25 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.

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 August 4, 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!

Graphic updated 7:10 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

A heavy week content-wise. 

Monday, we talked about some of the big narratives participants are seeking to price. Tuesday and Wednesday we elaborated, providing information on the calculation of net liquidity and its relationship with equity index prices, as well as the probable paths the economy may traverse.

Today, we’ll add context with respect to some of the big headlines heading into today’s trade.

At the top of the list is geopolitical tension. US House Speaker Nancy Pelosi traveled to Taiwan. 

It’s the case that “China views Taiwan as a breakaway island” subject to mainland rules. The visit by Pelosi, who, per NPR, “has long been a critic of China and an advocate for Taiwan’s democracy,” China viewed as a provocation.

Accordingly, China responded with trade boycotts and military exercises such as the firing of 11 missiles into the sea around Taiwan.

Graphic: Retrieved from Bloomberg.

White House officials, per Bloomberg, were said to be “fuming” at Pelosi. In response, the Biden administration was seeking to put brakes on friendlier US and Taiwan policies.

In other news, an ISM Services reading climbed unexpectedly, easing the concern of economic slowing while other data showed material and commodity prices falling.

Graphic: Retrieved from S&P Global Inc’s (NYSE: SPGI) commodity insights.

Still, more firms, from the likes of Credit Suisse Group AG (NYSE: CS) to Robinhood Markets Inc (NASDAQ: HOOD), are seeking to cut thousands of jobs and restructure.

Graphic: Retrieved from The Daily Shot.

And, though equity markets are enjoying some relief, profit forecasts continue to be cut, and broad measures of the supply of money are falling.

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.

Additionally, many maintain that conditions are set to get tighter with the Bank of England raising rates the most since 1995 and a Fed funds rate of 5-6% not out of the realm of possibilities.

Graphic: Retrieved from @ConvexityMaven. “Home buyers don’t panic, retail Mortgage rates should soon be under 4.90%. MBS (mortgage bonds) usually trade ~75bp above the 10yr swap rate  (~85bp above the UST10yr rate). The retail Home loan rate should be ~100bp above MBS rate (chart). Mortgage brokers will be begging soon.

Positioning

As of 7:10 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.14%. Net gamma exposures increasing may promote tighter ranges at higher price levels.

Context: Customers concentrate bets at and above current S&P 500 (INDEX: SPX) prices. 

Taking the naive view and assuming this activity is, indeed, aligned with historical trends (i.e., customers sell calls and use those proceeds to finance protection, down below), then counterparts are likely taking on exposure to more long call positions, which they hedge by selling underlying. Into strength, some more underlying will be sold. Into weakness, some underlying will be bought. This activity can promote mean-reversion at higher prices.
Graphic: Retrieved from SpotGamma. Changes in call open interest.

As well put in our August 3 letter, given where realized (RVOL) and implied (IVOL) volatility are, as well as skew, it is beneficial to be a buyer of options structures (e.g., put back spread).

Graphic: Updated 8/3/2022. Time-lapse skew on the S&P 500 (INDEX: SPX) for Tuesday, Monday, and one week ago. Retrieved from Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.

According to SpotGamma, “data suggests markets have entered into a period of normalization” and “IVOL likely reached a lower bound (see the bid skew).”

Graphic: Retrieved from Bloomberg. “The CBOE VIX index shows price swings usually rise in the summer and early autumn, and the S&P 500 is now entering its period of the worst historical returns over the past 25 years.”

“To maintain a risk-on (rally) environment, traders would need to position themselves into call options, now, further up in price, farther out in time, which they seem to be doing, albeit in not overly significant quantities.”

Notwithstanding, as SpotGamma adds, “with participants getting rid of commodity inflation and long volatility hedges that performed poorly, [this] (1) leaves equity markets more susceptible to the whims of potentially negative underlying macro forces and (2) leaves volatility markets more prone to jumps.”

Thus far, it’s the case that we’re far more than halfway through a dot-com type collapse that’s happened “underneath the surface of the indices,” per Simplify Asset Management’s Mike Green. Should those strong passive flows falter, that likely takes from some of the support in the largest of index constituents.

Graphic: Retrieved from The Market Ear. Via Barclays PLC (NYSE: BCS).

Were the latter to happen, you’d want protection in the form of structures that would enable you to monetize on some sort-of non-linear repricing in volatility (e.g., butterflies and back spreads), should participants seek protection in a way they haven’t this year.

If nothing were to happen, the bid in skew would, at least, assist those structures in maintaining their value better, essentially.

Technical

As of 7:00 AM ET, Thursday’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, just 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: 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 August 3, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 700+ that read this report daily, below!

Graphic updated 9:15 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. 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

Our August 1 letter assessed, mainly, the impacts of a burgeoning economic war that is hot as well put by a recent note authored by Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar.

Read: Dr. Pippa Malmgren’s “A Hot War In Cold Places,” which was quoted by Credit Suisse’s Pozsar. Additionally, check out our archives for more analysis of Malmgren’s perspectives.

“Great powers are waging hot wars involving the flow of technologies, goods, and commodities,” the big “contributors to inflation,” a longer-lasting structural issue, Pozar puts forth.

Further, it is the case that “the pillars of the low inflation world are changing,” and geopolitics are the factors bolstering longer-lasting uncertainty and risk premia.

What was the case, before?

Previously, central bankers were waging wars “against deflationary impulses coming from the globalization of cheap resources (labor, goods, and commodities),” which we covered before.

Now, central bankers have a more difficult task stemming inflationary impulses coming from a complex and non-linear economic war between the U.S., China, and Russia that will do more, long-term, to “weaken the pillars of the globalized, low inflation world.”

So: 

  • Deflation, on globalization (and outward supply shifts), was fought with asset price inflation. 
  • Inflation, on de-globalization (and inward supply shifts), is fought with asset price deflation.

Exacerbating the de-globalization pulse on popular sovereignty, which I had the honor of talking on with Andy Constan, recently, are “wealth gains sapping labor force participation” and trends such as ESG, among other things. 

“It’s a mess: it’s easier to deal with the politics of wage setting than it is to ‘grow’ people – even in The Matrix, that’s possible only over time. Until then, we are stuck with a labor shortage, and President Biden’s top labor lawyer is the anti-Reagan: she’s encouraging the unionization of workers from Amazon to Starbucks…as opposed to firing them,” Pozsar explains.

For context, among the factors that helped Chairman Volcker stem inflation were new energy investment and the weakening of unions.

Accordingly, in a move from “generating demand structurally to soak up an excess supply of cheap stuff, to curbing demand structurally to adjust to shortages,” the prevailing tightening effort is not cyclical, as in corresponding to a business cycle. It’s structural.

It requires the sharp, “inward shift of supply curves across multiple fronts (labor, goods, and commodities),” putting the economy on an “L”-shaped path (i.e., a vertical drop in activity via recession, and flatline for a period of time as rates remain higher for longer to prevent a sharp rise in inflation, again).

Market participants, because of this, should be thinking about how deep (i.e., long-lasting) a recession is needed to curb inflation (rather than if a recession will happen at all); necessary is the purge of the “Super Size Me” mentality, Pozsar explains, and slow “interest-rate sensitive parts of the economy (housing and durables),” as well as reduce “demand for labor in services, … a function of the level of wealth across a range of assets (housing, stocks, as well as crypto).

“[W]hat the Fed is telling us when it flat-out dismisses two-quarters of negative GDP growth is that it isn’t focusing as much on the rate-sensitive parts of the economy as it did in the past,” Pozsar well summarizes, adding that 5-6% rates are not out of the realm of possibilities.

“Instead, it is focusing much more on the services economy and the labor market, which still remain strong. And therein lies the cautionary tale for the market.”

Looking out further in time, after inflation has been stemmed, the question is how the economy accelerates, again, and achieves stable growth. That depends on the West developing its own supply of things so “that ‘L’ becomes ‘L/’ and … that recovery [will be driven by] fiscally funded industrial policy.”

Graphic: Retrieved from Bloomberg. “Interest rates may be kept high for a while to ensure that rate cuts won’t cause an economic rebound (an ‘L’ and not a ‘V’), which might trigger a renewed bout of inflation,” Pozsar wrote in his note. “The risks are such that Powell will try his very best to curb inflation, even at the cost of a ‘depression’ and not getting reappointed.”

Positioning

Regarding the topic of liquidity – money available for circulation – which was discussed in-depth Tuesday, August 2, below is an updated chart of our Liquidity Tracker. Conditions are mostly unchanged.

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.

Moreover, in terms of options-related positioning, as of 8:50 AM ET, Wednesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.21%. Net gamma exposures increasing may promote tighter ranges.

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

The reason why? 

Well, as discussed in-depth Tuesday, prevailing policy narratives are likely to bolster risk premia “everywhere else,” and that does more to support our recent positioning analyses and the case for an “untethering” in equity implied volatility (IVOL), “one of the most supportive things into the decline,” per statements by Kai Volatility’s Cem Karsan.

Basically, given the macro risk, IVOL is likely at a lower bound (as validated by the S&P 500 trading higher and downside skew holding a bid) and, per The Ambrus Group’s Kris Sidial, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”

Through downside protection (e.g., butterfly and back spreads) you can position yourself to monetize on the sort-of non-linear repricing in volatility we’re alluding there is potential for. The bid in skew is helping those structures maintain their value better, essentially.

Graphic: Time-lapse skew on the S&P 500 (INDEX: SPX) for Tuesday, Monday, and one week ago. Retrieved from Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.

Technical

As of 6:30 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, 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 $4,117.75 MCPOC puts into play the $4,149.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,164.25 RTH High and $4,189.25 LVNode, or higher.

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

Any activity below the $4,117.75 MCPOC puts into play the $4,073.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,040.75 and $4,015.25 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.

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 July 29, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 600+ that read this report daily, below!

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. 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.
Updates: Hey, team! I’m offering some updates on the letter and gauging your thoughts, if any.

Been incredibly busy juggling what is, basically, 3 jobs. Here’s a bit about me, if interested. That said, my attention has been elsewhere, to put it simply, so the letters have taken a bit of a hit. Sorry!

The few options I’ve been faced with include (1) lowering the frequency of letters to improve quality and/or (2) continuing pace but increasing simplicity for some time.

I’m aware that many rely on the key levels I provide, daily, as well as some of the narratives and trade ideas often included in the positioning section. Therefore, I’m soliciting feedback and will follow through with the consensus, if any. Have a great weekend!

Fundamental

The Fed’s preferred inflation measure – the personal consumption expenditure deflator (PCE) – is set to update. Per Bloomberg, this measure grew an annualized 7.1% for the second quarter. 

This is on the heels of the Federal Reserve’s (Fed) interest rate hike aimed at reining inflation, as well as data that suggests the “drumbeat of recession” growing louder.

Graphic: Retrieved from Bloomberg. “GDP fell at a 0.9% annualized rate after a 1.6% decline in the first three months of the year []. Personal consumption, the biggest part of the economy, rose at a 1% pace, a deceleration from the prior period.”

Yelena Shulyatyeva and Eliza Winger, economists cited by Bloomberg, comment that the fall in GDP growth “raises the risk that the economy will fall into recession by year-end.”

However, based on the research and expert commentary set forth in past letters, the case is the economy may already be in recession.

Notwithstanding, what’s the impact on equity markets (i.e., now earnings compression)?

It’s the consensus that equity markets endured one of the sharpest de-rates in three decades as participants priced the compression in multiples on the rise in interest rates and flow of capital to capital markets – the quantitative tightening (QT) – component.

For context, beyond raising costs to borrow and innovate, higher interest rates may mean future discounted valuations are lower. Additionally, yield-hungry investors may seek less risky assets, now, given that their yields are more attractive.

Recall that in engaging in practices such as quantitative easing (QE), central banking authorities purchase assets from private sector entities through the creation of central bank reserves. The unwind of this through the QT exercise removes reserves from balance sheets either through asset sales or non-reinvestment of the principal sum of maturing securities.

In less complex terms, the Fed’s purchase of assets depressed their yields forcing investors into risk. Liquidity withdrawal ought to have the opposite effect, amplifying the impact of rate hikes.

Adding, per Joseph Wang, who we’ve quoted in the past, with bank deposits expected to drain ~1T by year-end, the competition for cash forces investors to continue “lower[ing] their selling prices to compete for the cash they want.”

Accordingly, the “Fed will continue to hike interest rates until something breaks,” as explained by Andreas Steno Larsen. In ending forward guidance, “the Fed will rely even more on lagging indicators such as the unemployment rate and the monthly CPI report.”

Graphic: Retrieved from Andreas Steno Larsen. “Most leading indicators for inflation point (seriously) down, while early unemployment indicators are ticking up, but the Fed will not admit to it until risk assets have taken another beating.”

“Once unemployment starts increasing alongside weakening momentum in the inflation reports, it will likely be at least 3-6 months too late to pivot.”

The Eurodollar – which reflects the interest offered on U.S. dollar-denominated deposits at banks outside of the U.S. (i.e., participants’ outlook on interest rates) – curve is inverted and implies rate cuts ahead, “6-7 months from now.”

Given the above, portfolios can “stay away from highly speculative assets, own USD cash, and start allocating towards 5-10y+ government bonds,” as Alfonso Peccatiello explained well.

Context: A stronger dollar, on the tightening of liquidity and credit, as well as increased demand and competition for money, does more to pressure risk and, is an equity headwind. 

Additionally, per Morgan Stanley (NYSE: MS) research, "The simple math on S&P 500 earnings from currency is that for every percentage point increase on a year-on-year basis it’s [] a 0.5 hit to EPS growth.”

Positioning

For the past few sessions, we did much to unpack and understand some of the implications of participants’ market positioning.

In summation, own volatility where the market is likely to not expire. Sell it where the market is likely to expire. Just because implied (IVOL) volatility is at a high starting point does not mean it should be sold, blindly, particularly on the put side, below the market.

Read: Explanations and Applications – Moontower on Gamma.

Technical

As of 6:30 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced 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 $4,111.00 RTH High puts into play the $4,149.00 VPOC. Initiative trade beyond the $4,149.00 VPOC could reach as high as the $4,164.25 RTH High and $4,189.25 LVNode, or higher.

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

Any activity below the $4,111.00 RTH High puts into play the $4,073.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,041.25 and $4,015.75 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: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Considerations: This week’s advance was strong, based on market internals. Given this information, the rally is to not be sold, blindly.

Graphic: Market Internals (Advance/Decline, Up-Volume/Down-Volume, Tick) as Peter Reznicek at ShadowTrader teaches. Though positive, readings were weak and supportive of responsive trade, similar to what market liquidity (via Bookmap) was showing.

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 July 28, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 600+ that read this report daily, below!

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 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

Key, yesterday, was the Federal Reserve’s (Fed) move to rein inflation with another 75 basis point interest rate hike. This lifted the target for the federal funds rate to 2.25-2.5%.

Accordingly, with inflation (which is to be dampened) a negative for stocks, a primary driver behind this year’s de-rate, already, equity markets closed sharply higher.

Graphic: Via Schroders plc (OTC: SHNWF). Taken from the Weekly S&P 500 ChartStorm.

Despite room for higher rates, the Fed explained future decisions would “depend on the data,” and that, per Bloomberg, the economy is likely “to withstand rapid monetary tightening.”

Graphic: Retrieved from Bloomberg. Tighter liquidity and credit bolster demand for money as well as the deflation of risk assets. “There used to be too little demand. Now there’s too little supply. And in a world of too little supply, the country doing the most to generate demand, which is the US, is exporting its problem—its problem being inflation,” per Harvard’s Jason Furman.

Adding, participants are, now, pricing in the potential for a federal funds rate peak in the range of 3.25-3.50% early-to-mid 2023, down from 4.00-4.75% after the last rate hike took place.

Graphic: Via CME Group Inc’s (NASDAQ: CME) FedWatch Tool.

Strategists at the likes of Bank of America Corporation (NYSE: BAC) put forth that it is likely, given an economic slowing, that the Fed, indeed, cuts rates next year and ends quantitative tightening (QT).

“The Fed is likely to stop QT with rate cuts due to the contradictory signal it sends on monetary policy and to simplify policy communications; the Fed will likely not want to be easing with rate cuts but tightening with QT,” the bank’s strategists explained. 

An end to QT would cut the supply that the “Treasury needs to issue to cover Fed redemptions. It also means the Fed may conduct secondary purchases, further limiting the amount of supply the market needs to absorb.”

This is in comparison to the narrative we discussed earlier this week, put forth by Damped Spring Advisors’ Andy Constan.

With “most of [the Fed] balance sheet reduction to be run-off” – non-reinvestment of “proceeds from maturing assets they own” – coupled with the Treasury halving “coupon issuance that the market must absorb,” Constan explained, instead, that the “Fed is done for the summer.”

This is likely to “result in less surprise and falling asset volatility” as investors realize “they are now under-risked,” which may drive a “risk premium contraction” and demand for risk assets.

Positioning

As of 6:50 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.22%. Net gamma exposures increasing may promote tighter ranges.

It is often, just after an event, that market movement is the result of inventory rebalances. Per Kai Volatility’s Cem Karsan, the subsequent move is to be “tied to the incremental effects on liquidity (QE/QT).” 

Graphic: Retrieved from MarketWatch.

Rising rates and the withdrawal of liquidity, coupled with the impact of inflation and an economic slowing, could prompt continued pressure on equity markets.

Given the macro risk, and the poor performance of implied volatility (IVOL), relative to that which markets have realized (RVOL), per The Ambrus Group’s Kris Sidial, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”

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

Should investors “ditch their [old] hedges in frustration as sentiment improves, because they didn’t work properly in a falling market,” this may set up “the potential for a second-leg-down event,” in the next year, as well explained in the Systemic Individual Investor.

“During the next sell-off, panic put-buying can cause a much more violent downward spiral, because options dealers are forced to sell an increasing amount of S&P futures into an accelerating down move.”

So, what to do? 

With call options outperforming “their delta to the upside,” it continues to make much sense to replace static equity long exposure with that which is dynamic, Karsan explained.

Technical

As of 6:50 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to 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.

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

Any activity above the $4,015.75 HVNode puts into play the $4,041.25 HVNode. Initiative trade beyond the $4,041.25 HVNode could reach as high as the $4,071.50 BAL and $4,095.00 VPOC, or higher.

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

Any activity below the $4,015.75 HVNode puts into play the $3,971.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,943.25 HVNode and $3,921.00 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.

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 July 14, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

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.

Fundamental

Adding fuel to the fire – dollar strength, crypto bankruptcies, China contagion fears – was a hot consumer price index (CPI) report released Wednesday.

Expected was an 8.8% rise year-over-year (YoY) and 1.1% month-over-month (MoM). Core CPI (which excludes food and energy) was to rise by 5.7% YoY and 0.5% MoM, respectively.

Officially, the headline number rose to 9.1%. The core CPI rose 5.9% YoY and 0.7% MoM, meaning a peak was established in March (6.5% YoY, then).

“Though CPI’s spike is led by energy and food prices, which are largely global problems, prices continue to mount for domestic goods and services, from shelter to autos to apparel,” says Robert Frick of the Navy Federal Credit Union. 

Graphic: Via Bloomberg.

Accordingly, expectations regarding the Federal Reserve’s (Fed) response to hot inflation prints have changed. Participants now are pricing an increased potential for a 100 basis point hike in interest rates, something the Bank of Canada implemented, yesterday.

Graphic: Via Bloomberg

This is a negative for stocks, at the surface. High inflation, and the response to it, tends to hurt multiples (which has been the principal driver of this year’s de-rate, already).

Graphic: Via Schroders plc (OTC: SHNWF). Taken from the Weekly S&P 500 ChartStorm.

The market expects a Fed Funds peak below 4%, followed by aggressive easing. This is as the Fed’s Beige Book showed signs that inflation is (or soon will be) peaking, amid slowing demand and recession worries.

Graphic: Via Bloomberg.

Positioning

Little change in the dynamics talked about in past letters. Therefore, we continue rolling forward our positioning narratives.

Post-CPI, the market moved lower, first, and higher, later. This was, in part, the result of dealer inventory rebalancing, as Kai Volatility’s Cem Karsan has explained well many times before.

The subsequent move is likely to be “tied to the incremental effects on liquidity (QE/QT).”

Rising inflation probably bolsters the Fed’s backing of a 75 to 100 basis point rate hike. So, don’t fight the Fed. Rising rates and the withdrawal of liquidity, coupled with the impact of inflation and an economic slowing, may prompt continued pressure on equity markets.

Check out The Ambrus Group’s Kris Sidial speak on implied volatility (IVOL) suppression and the implications of a dash for cash (investor exit) and reach for protection.

Technical

As of 6:45 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 negatively skewed overnight inventory, just beyond 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 $3,755.00 VPOC puts into play the $3,774.75 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,807.00 VPOC and $3,830.75 MCPOC, or higher.

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

Any activity below the $3,755.00 VPOC puts into play the $3,715.75 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,688.75 HVNode and $3,639.00 RTH Low, 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: 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, former 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.