Tag: QQQ – Invesco QQQ Trust Series 1

Daily Brief For November 23, 2021

Post author By Renato L. Capelj
Post date November 23, 2021
No Comments on Daily Brief For November 23, 2021

What Happened

Overnight, yesterday’s knee-jerk sellers were emboldened by equity index futures auctioning sideways to lower with other products – from commodities to bonds – following suit.

The prevailing narrative is that “[I]nvestors are reducing expectations for a deeper dovish stance by the Fed after Powell got a second term.” Meaningless headlines, like this, are precisely why we, as participants, should opt to avoid making short-term decisions based on the news!

Anyways, ahead is data on Markit Manufacturing and Services PMI (9:45 AM ET).

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

On weak intraday breadth and market liquidity metrics, the worst-case outcome occurred, evidenced by a spike below prices most recently accepted by S&P 500 traders.

Such activity denotes an obvious change in tone, as well as a potential willingness to start a trend in the opposite direction.

To note, however, yesterday’s price action came alongside a few dynamics: (1) an increase in tempo after a failure to solicit more involvement on an initial attempt higher; (2) a volume delta that was in line with price action; (3) breadth (i.e., volume into stocks that are up versus those that are down) on the Nasdaq was negative, divergent from the positive breadth on the NYSE.

Adding, the knee-jerk selling and associated price action left behind poor structure (i.e., participants will look to validate [or invalidate] the move, spending time below [or above] the $4,697.50 spike base). Caution warranted on validation of the spike.

Graphic: Delta (i.e., committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in line with the price action of the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of initiative trade (i.e., directional trade that suggests current prices offer unfavorable entry and exit; the market is seeking balance).

Context: The aforementioned trade is happening in the context of what was an unstable environment after Friday’s monthly options expiration (OPEX).

To recap, heading into OPEX, activity in options tied to the S&P 500 was concentrated in time and price.

During this time – which I, alongside data and analytics providers like SpotGamma (go follow), surmise participants were betting the market would not move, selling-to-open call exposure – dealers/counterparties were left warehousing increased exposure to positive options gamma.

In hedging risks, dealers sold to open (bought to open) the underlying as the price rose (fell).

This responsive buying and selling are what causes the market to balance (i.e., trade sideways) in a tight range. It was expected to end after OPEX, as that options exposure rolled off.

Monday, finally, there was an increase in range; the S&P 500, in particular, closed over 1.00% lower from its intraday high, weighed down by the Nasdaq 100 heavyweights and high flyers of the past weeks.

Moreover, I was focused on two dynamics, primarily: (1) after OPEX, the absence of sticky and supportive hedging flows freed the market for directional resolve, and (2) according to SpotGamma, in light of recent exuberance, “participants [were] underexposed to downside put protection.”

The second part is slightly more important with regards to where we are today.

As the exuberance in individual stocks fed into the stock indices themselves – the place where the world comes to hedge – participants weren’t as quick to add downside protection. No! Instead, they were more so selling to open (buying to open) downside (upside) protection.

Without getting too much into the dynamics of the exuberant positioning, the implications of this, nonetheless, are staggering.

In short, should volatility continue to pick up, those participants (who were once exuberant) are likely to reach for protection forcing dealers to reflexively hedge in a destabilizing manner.

As volatility rises and customers demand out-of-the-money put protection, counterparties are to hedge by selling into weakness. The conditions worsen when much of the activity is in shorter-dated tenors where options gamma is more sensitive if we will.

*Pictured: SqueezeMetrics* *highlights* implications of volatility, direction, and moneyness. The left orange marker is reflective of a basic reaction to call-buying (as observed during the rise of meme stocks). The right orange marker reflects a reaction to put-buying (as observed during the COVID-19 sell-off).

Now, here is the kicker.

If indices turn, and participants start reaching for out-of-the-money protection with positive exposure to gamma (i.e., buy put, market down, put rises in value), especially in shorter-dated expiries, then yes, there may be some near-term instability.

Note that I said shorter-dated.

Once that exposure rolls off the table (and/or is monetized), dealers/counterparties will reverse and support the market, buying-to-close existing stock/futures hedges to negative gamma positions. This flow is stabilizing and maybe the start of what is a seasonally-aligned rally into Christmas.

This last part is educated conjecture. It’s what I also feel as though would frustrate the most amount of participants. Basically, a quick wash (or sideways to lower), followed by a move higher into year-end. Be nimble and responsive!

Expectations: 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 middle part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Spike Scenario In Play: A spike marks 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).

The spike may also be looked at as a pivot; in today’s case, the spike base is $4,697.50.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 micro composite point of control (MCPOC) puts in play the $4,711.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,740.50 minimal excess high and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 MCPOC puts in play the $4,674.25 high volume node. Initiative trade beyond the HVNode could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, or lower.

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

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

Charts To Watch

*Graphic: (NYSE: SPY). (S~$460, R~$471). S is for support. R is for resistance.*

*Graphic: (NYSE: QQQ). (S~$388, R~$402). S is for support. R is for resistance.*

What People Are Saying

When developing a trading strategy that is predicated on a signal in equities, you cannot be time agnostic. The same way how you have to factor in price sensitivity, you have to account for a running time factor.

Trades at 3pm are not the same as 12pm despite the same signal. pic.twitter.com/sF8cHRxLrf
— Kris Sidial🇺🇸 (@Ksidiii) November 22, 2021

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.

DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.

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

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

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

About

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

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

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Tags Fibonacci, FOMC - Federal Open Market Committee Event, Gap, HVN - High Volume Node, MCPOC - Micro Composite Point Of Control, Minimal Excess, NDX - Cash Nasdaq 100 Index, OPEX, Poor Structure, QQQ - Invesco QQQ Trust Series 1, Seasonality, Spike, SpotGamma, SPX - Cash S&P 500 Index, SPY - SPDR S&P 500 Trust ETF, SqueezeMetrics, VPOC - Virgin Point Of Control

Commentary

Daily Brief For November 9, 2021

Post author By Renato L. Capelj
Post date November 9, 2021
No Comments on Daily Brief For November 9, 2021

What Happened

Overnight, equity index futures were divergent.

The Nasdaq-100 led while the Russell 2000, which broke out of massive range, recently, slowed its pace of price discovery, trading relatively weak.

Ahead is data on the PPI (8:30 AM ET) and real household debt (11:00 AM ET).

*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.* *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

On lackluster intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas (i.e., where 70% of the prior day’s trade occurred, or +/- 1 standard deviation), at the current S&P 500 prices.

This activity, which marks a potential willingness to continue balance as participants seek new information to resolve on, is built on poor structure, a dynamic that adds to technical instability.

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

Context: The aforementioned trade is happening in the context of a lot of big-picture dynamics such as the growth of derivatives exposure and tail risk, the heightened moneyness of nonmonetary assets, trends in seasonality, buybacks, earnings surprises, and more.

The implications of these themes on price are contradictory.

To elaborate, on one hand, seasonality, buybacks, and earnings surprises have bolstered (and will continue to bolster) the most recent price rise, since early October.

S&P 500 EPS growth has surprised consensus estimates over the past 12 months by a record 23.9%! pic.twitter.com/C5dlG35wlJ
— Julien Bittel, CFA (@BittelJulien) November 6, 2021

Similarly, participants are seeing a trend of outperformance in the extended day, due in part to the front-running of increasingly impactful vanna and charm flows (both of which are tied to the hedging of options exposure), as a result of increased options activity (which, at least at this juncture, exposes customers to high leverage and risk).

I say “high leverage and risk” as a result of short-term speculators’ record call buying and put selling over the past weeks.

As stated in a SpotGamma note, yesterday, “Should there be an adverse move, those short-term speculators are likely to cover (sell) their short put (long call) positions as they lack the wherewithal (capital) to maintain exposure.”

With exposure concentrated in shorter-dated expiries, the November 19 monthly options expiration (OPEX) is somewhat of a concern for us.

The reason being?

Presently, the S&P 500 is pinned near options strikes at which positive options gamma – delta sensitivity to underlying price – is highest.

I note those participants that take the other side of options trades will hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma (e.g., Tesla), they buy into strength and sell into weakness, exacerbating volatility. 

When long-gamma, counterparties buy into weakness and sell into strength, calming volatility.

Coming into OPEX, the forces that promote pinning turn stronger; counterparties supply more liquidity as their long gamma becomes longer (i.e., rises), so to speak.

As OPEX is essentially a reset (or reduction) in dealer gamma exposure, participants ought to see an increase in realized volatility as a lot of the exposure that warranted dealers’ supply of liquidity comes off the table, thus necessitating less liquidity.

Less liquidity means more movement. 

More liquidity means less movement. 

Get it?

With short-term speculators taking on the risks that we’re seeing them take on, and the prospects of a front-running of post-OPEX volatility – given that, according to Pat Hennessy, “OPEX week returns peaked in 2016 and have trended lower since” – there is a potential that adverse moves force those that are off-sides cover (sell) their short put (long call) positions, thereby exacerbating near-term volatility.

We see recent options activity reflected in a sideways to higher CBOE Volatility Index (INDEX: VIX) and shift up in the VIX futures term structure; both suggest a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade.

“The moves have been large and the demand for upside in single stock land insatiable,” s a id Danny Kirsch of Cornerstone Macro LLC. “Single stock vols clearly feeding into the index.”

Expectations: As of 6:20 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 balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Market Is In Balance: Current prices offer favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 micro composite point of control (MCPOC) puts in play the $4,722.00 Fibonacci. Initiative trade beyond $4,722.00 could reach as high as the $4,735.00 and $4,772.50 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 MCPOC puts in play the $4,674.75 visual low. Initiative trade beyond the visual low (likely paid attention to by short-term, technically driven market participants who seldom defend retests) could reach as low as the $4,663.00 untested point of control (VPOC) and $4,619.00 VPOC, or lower.

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

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Notice Monday’s “Cave-Fill” or the act of increasing the area deemed favorable to transact at by participants. This is most obvious by observing where the bulk of Monday’s distribution sits, relative to the pocket of low-volume left behind Friday’s trade. This is a positive development. *Learn about the profile*.

Charts To Watch

*Graphic: (NASDAQ: TSLA). (S~1108, R~1187 to 1195). S is for support. R is for resistance. Looking to buy/sell responsively.*

*Graphic: (NYSE: CMG). (S~1680, R~1820). S is for support. R is for resistance. Looking to buy/sell responsively.*

*Graphic: (NYSE: SPY). (S~456, R~471). S is for support. R is for resistance. Looking to buy responsively.*

*Graphic: (NASDAQ: QQQ). (S~382, R~403). S is for support. R is for resistance. Looking to buy responsively.*

What People Are Saying

How to use Anchored VWAP

This post has a list of all providers of AVWAP at the bottom

also see the videohttps://t.co/1Vs4eGq8UV
— Brian Shannon, CMT (@alphatrends) November 9, 2021

Definitions

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

About

Disclaimer

Commentary

Daily Brief For October 20, 2021

Post author By Renato L. Capelj
Post date October 20, 2021
No Comments on Daily Brief For October 20, 2021

Market Commentary

Mostly in sync with bonds and commodities, equity index futures were mixed. Volatility compressed, further.

Ahead: Fed speak and the Beige Book.
Monetary uncertainty. Earnings pick up.
Options positioning may support prices.

What Happened: The pace of markup in the equity indices slowed as participants await key earnings, as well as updates on monetary and fiscal policy.

Ahead is Fed-speak by Evans, Bullard, Bostic, Kashkari, and Quarles (12:00 and 1:00 PM ET), as well as a release of the Beige Book (2:00 PM ET). Tonight, also, Fed President Daly speaks (8:35 PM ET).

Graphic updated 6:45 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. 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 6:40 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Status Quo Is Balance: Rotational trade that denotes current prices offering favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break), coming into today’s session.

Adding, during the prior day’s regular trade, on supportive intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by initiative buying and separation of value.

Coupled with that dynamic, in carrying forward the narrative from days prior, is the sustained presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering).

Participants will likely look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes), later.

Graphic: Supportive delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of the initiative trade or markup in price.

Zooming out, we see the Nasdaq 100 trading strong, relative to its peers.

Given where the S&P 500’s price is in relation to the yellow anchored volume-weighted average price (VWAP), below, the average buyer, since the all-time high, holds a winning position; sideways-to-higher trade, above the upward sloping trendline, as well as the 50.00% and 61.8% retracements, likely puts in play a recovery of the all-time high.

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.

Further, the aforementioned trade is happening in the context of improving breadth amidst a seasonally bullish cycle of contributions, rebalancing, and earnings, as well as the risks associated with a taper in asset purchases and a hike in rates.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while the VIX futures term structure was unchanged; supply at the front end of the curve, alongside the long-gamma environment, signals a potential for near-term equity market stability.

With this decline in implied volatility (a dynamic that, at least in recent history, leads into increased call selling, more dealer hedging and liquidity, as well as further realized volatility suppression), the S&P 500 found itself marked up to the key $4,510.00 low volume area (LVNode).

The $4,510.00 figure is in the vicinity of what options modeling platform SpotGamma calls a Call Wall (i.e., the level at which positive options gamma, essentially delta sensitivity to the underlying price, is highest), which is a near term magnet (and resistance) given associated hedging and a failure to see increased interest and activity in higher options strikes.

As realized volatility falls from its peak around a year ago, more sold SPX options cluster at strikes nearer to spot. And as implied volatility falls with it, the gamma of those options increases.

More dealer long gamma means more liquidity. More liquidity means less movement. pic.twitter.com/712OAMq7iP
— SqueezeMetrics (@SqueezeMetrics) April 11, 2021

Moreover, we’re carrying forward yesterday’s price levels; 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 $4,495.75 high volume area (HVNode) puts in play the $4,510.00 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,526.25 HVNode and $4,550.00 overnight high (ONH), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,495.75 HVNode puts in play the $4,471.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,437.75 micro composite point of control (MCPOC) and $4,393.75 HVNode, or lower.

Click here to load today’s updated real-time key levels into the web-based TradingView charting platform. Please note that all levels are derived using the 65-minute timeframe.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:40 AM ET.

Definitions

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

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.

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

News And Analysis

A combination of lower growth, higher inflation isn’t good.

Sentiment in neutral territory, supporting high index price.

Cryptocurrency versus gold – debating on store of value.

Who could be the winners and losers of the energy crisis?

Feeling the strain of supply chain issues and high prices.

Global oil refiners cranking up output as margins recover.

Democrats are looking to break stalemate on Biden plan.

Bitcoin futures ETF starts as second-highest traded fund.

What People Are Saying

HEDGING VS. DIVERSIFICATION
Comparing the cost of hedging to the “cost” of diversification

by @pat_hennessy

– Exploiting OPEX seasonality
– The implicit “cost” of bondshttps://t.co/nVcrSEc6sS pic.twitter.com/pkSFWOKzO8
— Corey Hoffstein 🏴‍☠️ (@choffstein) October 19, 2021

https://twitter.com/VolQuant/status/1450656933250277379?s=20

Last year, @FuturesTrader71 tweeted a thread for what he believes to be the real Holy Grail process for #trading #Futures successfully. We'll give you a hint – it's not a "setup".

Check it out on our blog and see what else the CT community has to offer: https://t.co/PAJBDePKhW
— Convergent Trading (@ConvTrading) October 19, 2021

About

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

Commentary

Daily Brief For October 19, 2021

Post author By Renato L. Capelj
Post date October 19, 2021
No Comments on Daily Brief For October 19, 2021

Market Commentary

Out sync with bonds, equity index futures and commodities traded higher. Volatility compressed.

Monetary uncertainty. Earnings pick up.
Options positioning may support prices.
Ahead: Building permits, housing starts.

What Happened: U.S. stock index futures auctioned sideways to higher overnight as participants sought to price in robust earnings against the backdrop of monetary uncertainty and increased pricing pressures.

“The world is watching interest rates more closely than it has for some time — and rightly so, the moves have been emphatic, especially in the short-term maturities,” Chris Weston, head of research at Pepperstone Financial Pty, said. He added it’s “impressive how resilient and calm markets are in the face of the rates repricing.”

Ahead is data on building permits and housing starts (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. 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, Tuesday’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 non participatory intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by a response at the $4,437.75 micro composite point of control (MCPOC), which carried into initiative buying, past the $4,469.75 overnight high (ONH).

Coupled with that dynamic is the sustained presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering); as a result, participants will likely look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes).

Graphic: Mostly supportive delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings support this recent leg of initiative trade.

Zooming out, we see the Nasdaq 100 trading relatively strong.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was lower, while the VIX futures term structure remained in contango; supply at the front end of the curve, alongside the long-gamma environment, signals a potential for near-term equity market stability.

According to SpotGamma analyses, participants were likely selling puts into yesterday’s price rise; this dynamic may support sideways to higher trade.

In a barebones overview of some of the dynamics at play, here, if implied volatility were to rise, the counterparty to the aforementioned trade would purchase stock (long delta) to hedge their rising long put (short delta) exposure. If implied volatility were to decline, the counterparty would likely sell stock (short delta) as their long put (short delta) exposure declines.

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

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

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 6:20 AM ET.

Definitions

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

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

Short Covering: The profile shape suggests participants were “too” short and had poor location.

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

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

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.

News And Analysis

Nordea: Is permanent inflation now an alarming consensus?

Evergrande unit has remit funds to pay yuan bond coupon.

China’s central bank should cut RRR, one adviser suggests.

World facing fiscal problems much worse than from COVID.

Investing prosperously in light of China’s common prosperity.

Bitcoin pushes toward record before debut of ETF products.

What People Are Saying

Tomorrow, at 10:30 AM ET, @spotgamma and I unpack the SEC's conclusion that #options were not a major catalyst to the early 2021 meme stock price rise.

Tune in below.https://t.co/5IV3mq8Vdd
— Renato Leonard Capelj (@renatolcapelj) October 19, 2021

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Daily Brief For October 18, 2021

Post author By Renato L. Capelj
Post date October 18, 2021
No Comments on Daily Brief For October 18, 2021

Market Commentary

In sync with bonds, equity index futures were sideways to lower, overnight. Commodities were mixed. Volatility expanded.

More support for an EOY run-up.
Ahead is a light day for releases.
Positioned for sideways balance.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside conflicting narratives.

Ahead is data on industrial production and capacity utilization (9:15 AM ET), as well as the National Association of Home Builders Index (10:00 AM ET).

Graphic updated 6:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. Sentiment Risk-On if expected /ES open is above the prior day’s range. 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. 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 6:00 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by an expansion of range above the $4,437.75 micro composite point of control (MCPOC), to a new overnight high (ONH) at $4,469.75.

Coupled with that dynamic is the presence of numerous gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering); participants will likely look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes).

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

Zooming out, we saw the Nasdaq 100 firming, relative to its peers, last week, a significant change in tone.

Given where the S&P 500’s price is in relation to the yellow anchored volume-weighted average price (VWAP), the average buyer, since the all-time high, holds a winning position; sideways-to-higher trade, above the upward sloping trendline, as well as the 50.00% and 61.8% retracements, likely puts in play a recovery of the all-time high.

Graphic: S&P 500 seasonality via @topdowncharts.

According to a TS Lombard note featured by The Market Ear, the odds are that a tightening in monetary policy should not douse the bullish narrative:

“Tightening monetary policy cycles have historically been positive for stocks. The exceptions were in the 1970s, when inflation was counter-cyclical and the Fed tightened despite slowing growth. In ‘regular’ cycles the Fed raises rates only when the economy (and corporate earnings) warrants a tighter policy stance. What is interesting is that positive returns happen despite falling P/E multiples. Higher rates tend to lead to falling valuations, but earnings growth is typically strong enough to compensate for the derating. Since multiples are still much higher than normal, favouring Growth (faster EPS growth) over Value (slower EPS growth) is a good strategy at this stage.”

Graphic: TS Lombard’s analysis of tightening cycles, via The Market Ear.

In terms of positioning, the CBOE Volatility Index (INDEX: VIX) was higher, overnight, while the VIX futures term structure was in contango; supply at the front end of the curve, alongside the long-gamma environment, signals a potential for near-term equity market stability.

To note, according to SpotGamma models, last week’s near-vertical price rise was responsively sold as dealers looked to hedge their increasing positive directional market exposure; going forward, hedging pressures may dampen volatility, potentially setting the market up for balance (i.e., sideways trade) as participants muster the conviction to initiate the next leg.

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 $4,437.75 MCPOC puts in play the $4,463.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,481.75 high volume area (HVNode) and $4,510.00 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,437.75 MCPOC puts in play the $4,425.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as low as the $4,393.75 HVNode and $4,349.00 VPOC, 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 5:15 AM ET.

Definitions

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

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

Inversion Of VIX Futures Term Structure: Longer-dated VIX expiries are less expensive; is a warning of elevated near-term risks for equity market stability.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive). In conjunction with the rapid recovery, lower rates may solicit hawkish commentary as policymakers look to inhibit inflation.

News And Analysis

Forbearances declining faster, plans drop by 10%.

Morgan Stanley CEO is calling for Fed rate hiking.

Analysts warn that 60/40 portfolio will be battered.

Moody’s: Fundamental siding with Fed on inflation.

S&P Global: Data on job gains has come up short.

Global energy turning to fossil fuels amid demand.

How the asset management industry got disrupted.

What People Are Saying

If you're still waiting for a correction, it must be because you're looking at charts with your eyes closed. Half the nasdaq stocks fell over 20% this year. And over 20% of nasdaq stocks got cut in half. Is that what happens in a bubble? lol What bubble? https://t.co/uD8rywpDnA pic.twitter.com/LDQ2fwPWNC
— J.C. Parets (@allstarcharts) October 17, 2021

When price tells you to buy, then buy.

Don't wait for volume. Volume will often follow price as the emerging trend motivates more participants to act.

Only Price Pays!
— Brian Shannon, CMT (@alphatrends) October 16, 2021

https://twitter.com/PArchambeau/status/1449064615946510338?s=20

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Commentary

Daily Brief For October 14, 2021

Post author By Renato L. Capelj
Post date October 14, 2021
No Comments on 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.

The current combination of DIX and GEX historically yields average 1-month returns of +2.00%.

Solidly supportive.

Data free to download at https://t.co/qEdl59REbi. pic.twitter.com/T7KMg7O38w
— SqueezeMetrics (@SqueezeMetrics) October 13, 2021

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).

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

This is really such a big factor that nobody else talks about. When I explain to investors there are only 4 real liquidity providers in the space, they think I’m a madman.

This is one of the biggest changes in this market. https://t.co/XwHByUgBhD
— Kris Sidial🇺🇸 (@Ksidiii) October 13, 2021

Having spent two decades in the coatings industry, I can tell you that zinc price inflation is a serious issue. Many coatings used for the protection of steel contain up to 90% zinc (!). The price volatility is enormous but end consumers will feel the pain in 2022-2023 onward. pic.twitter.com/XS5g3LpTaP
— Joey (@birdseye88) October 14, 2021

https://twitter.com/lebas_janney/status/1448598501357719557?s=20

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Daily Brief For October 11, 2021

Post author By Renato L. Capelj
Post date October 11, 2021
No Comments on Daily Brief For October 11, 2021

Editor’s Note: The newsletter schedule has changed.

From now on, you can expect to see Daily Briefs only – Monday through Friday – posted shortly before 8:00 AM ET. The Weekly Trade Idea will be packaged into Monday’s commentary, also.

Thanks again for your continued support. I strive to simplify and add value, as best I can.

Market Commentary

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

October bottom; a rip up into EOY?
Ahead: No economic reports today.

What Happened: Ahead of a busy start to the third-quarter earnings season, this week, U.S. stock index futures auctioned sideways to lower overnight alongside some mixed narratives.

Last night, it was revealed that Goldman Sachs Group (NYSE: GS) cut its U.S. growth forecast on consumption and a fiscal slowdown. Not even a day later, there is news that Goldman, alongside JPMorgan Chase & Co (NYSE: JPM) strategists, suggests the recent dip is a buy.

Given the Columbus Day holiday, today, no economic reports are scheduled.

*Graphic updated 6:20 AM ET. Sentiment* ***Risk-Off*** if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences *available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility.* *SHIFT* data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:20 AM ET, Monday’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.

Further, during the prior week’s trade, on mostly strong intraday breadth and divergent market liquidity metrics, equity index futures established a rounded bottom and minimal excess low.

Then, a swift recovery ensued; initiative sellers lacked the wherewithal to take prices lower, beyond the S&P 500’s $4,363.25-$4,278.00 balance area. Initiative buyers were then emboldened, expanding range and value the opposite way.

During this recovery process, the S&P 500 – as evidenced by p-shaped emotional, multiple-distribution profile structures – established a minimal excess high before momentum from covering shorts was overpowered by responsive selling at key areas of resting liquidity, at and around /ES $4,410.25 (SPY $441.00), the site of a key anchored volume-weighted average price (VWAP) level.

Note: Liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Friday’s session succumbed to divergences in buying and selling power as calculated by the difference in volume traded at the bid and offer, resolving some of the aforementioned emotional structures through what’s called the “cave-fill” process.

During this process, participants revisited, repaired, and strengthened – building out areas of high volume (HVNodes), or value – areas low volume (LVNodes).

Note: The cave-fill process widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

Moreover, September’s seasonally-aligned weakness saw the Nasdaq 100 lead lower. Last week – alongside improvement amongst some positioning metrics – the tone shifted with the cash-settled Nasdaq 100 (INDEX: NDX) rising 4.35% versus the S&P 500 (INDEX: SPX) rising 3.25%.

That comes as October traditionally marks an end to weakness amidst a cycle of rebalancing and earnings; according to LPL Financial Research, “Stocks rise 3.8% on average during the fourth quarter, but the past seven times the S&P 500 was up 15% year-to-date heading into the home stretch of the year, the fourth quarter was higher every single time, up a very impressive 5.8%.”

“Earnings for the third quarter should again be strong and mostly outpace expectations,” Leuthold Group chief investment strategist Jim Paulsen adds. “Hours worked in the third quarter rose by about 5% suggesting real GDP for the quarter may be close to 7%. With most companies reporting strong pricing power, solid real GDP growth should result in another surprisingly strong corporate earnings season.”

*Graphic: LPL Financial Research* *unpacks* *S&P 500 seasonality.*

Notwithstanding, some risks to be aware of include the Federal Reserve’s tapering initiatives and the prospects of a rise in the Fed funds rate, amidst hot sentiment, a decline in top-of-book depth, as well as back and forth entry (exit) into (from) short-gamma.

“What we see in the equity space is a lot of sensitivity to higher real yields,” Joseph Little, chief global strategist at HSBC Holdings Plc (NYSE: HSBC) Asset Management, said. “We are seeing policy normalization everywhere. That creates a little bit of a challenge for [the] equity market because it does change the drivers of equity performance.”

*Graphic: A “gentle reminder of the fact* ***tapering matters****,” via* *The Market Ear*.

*Graphic: Sentiment* *elevated, “generating a 96% historical probability of down markets in the next 12 months at current levels.”*

In addition, to balance some of our Q4 bullishness, in a quote highlighted by The Market Ear, Bank of America Corporation (NYSE: BAC) explained: September 30 “was the 24th time since 1928 that the S&P experienced two or more 3-sigma shocks in 10 trading days, … [and] only in 3 of 23 episodes (and 1 in the last 50yrs) did the S&P surpass the prior month’s peak in the month following the second shock.”

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,363.25 high volume area (HVNode) puts in play the $4,393.00 untested point of control (VPOC). Initiative trade beyond the $4,393.00 VPOC 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 $4,363.25 HVNode puts in play the $4,346.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,332.25 low volume area (LVNode) and $4,299.00 VPOC, or lower.

*Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:20 AM ET.*

Definitions

News And Analysis

Banks bought epic amounts of safe assets; forget inflation.

The Fed is likely to side with growth and keep policy easy.

Merck seeks emergency use authorization for COVID pills.

Europe Economic Snapshot: Faster-than-expected restart.

Latin America settles into new post-pandemic slow growth.

S&P talking stock-flow confusion again – QE and tapering.

What People Are Saying

2 Index Options takeaways from last week:
> Calls were sold to open
> Long puts were closed, and there was a bit of put shorting but not material

Specifically these charts show:
Top Chart: Index options bought to open – sold to open
Bottom: Index bought to open – sold to close pic.twitter.com/Hxqayqp2Y2
— SpotGamma (@spotgamma) October 10, 2021

To answer many questions:

This is my long-term view.

Before $BTC moves to new all-time high, I would like to volatility to drop even further. Maybe a few more back and forth below 65.6K. pic.twitter.com/aJTw4D2yKP
— Aksel Kibar, CMT (@TechCharts) October 9, 2021

W/payrolls crapping out past two months, the Fed WILL taper anyway. They've backed themselves into a narrow corner where if they don't they think it will be harmful to acknowledge weakness.

Acknowledge or not, they're tapering into an ongoing disaster.https://t.co/BWqXKrmfq9 pic.twitter.com/JpZWkBR3ny
— Jeffrey P. Snider (@JeffSnider_EDU) October 9, 2021

Weekly Trade Idea

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Daily Brief For May 24, 2021

Post author By Renato L. Capelj
Post date May 24, 2021
No Comments on Daily Brief For May 24, 2021

Quick Note: From May 25 to May 28, the daily newsletter will be off as I will be on a trip. It would not be fair for me to provide lackluster content since I won’t have all the tools at my disposal.

Market Commentary

Index futures in balance.

The U.S. may be facing deflation.
Ahead is CFNAI data, Fed speak.
Stock indexes sideways to higher.

What Happened: U.S. stock index futures auctioned higher overnight alongside renewed political tensions, cryptocurrency volatility, as well as a crackdown by China on commodity speculation.

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

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.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by the responsive selling that surfaced at and above the $4,177.25 high volume area (HVNode). This is not all too significant given the large monthly options expiration. Still, according to SpotGamma, “[w]hile roughly 1/3 of total QQQ gamma rolled off on Friday, … [the] QQQ remains under the control of put options,” a source of potential volatility in the Nasdaq 100.

Responsive Selling: Selling in response to prices above area of recent price acceptance.

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.

Options: If an option buyer was short (long) stock, he or she would buy a call (put) to hedge upside (downside) exposure. Option buyers can also use options as an efficient way to gain directional exposure.

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.

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.

As stated in Sunday’s weekly note, equities are in a seasonally weak period. At the same time, inflation and uninspiring economic data are major worries investors are attempting to price in. That said, however, during the May 19 reversal, in the S&P 500 and Nasdaq 100, participants increased exposure to the upside with relatively cheap, longer-dated calls.

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

In the best case, the S&P 500 trades sideways or higher; activity above $4,177.25 puts in play the $4,227.00 point of control (POC). Initiative trade beyond the POC could reach as high as the $4,238.00 overnight all-time high.

POCs: POCs (like HVNodes described above) 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: Buying within or above the previous day’s value area.

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

In the worst case, the S&P 500 trades lower; activity below $4,177.25 puts in play the $4,122.25 HVNode. Thereafter, if lower, key references include the $4,071.00 POC and $4,050.75 low volume area (LVNode). Long-biased traders are cautioned on trade below the LVNode.

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

Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). The Nasdaq is regaining relative strength. A rotation would be bullish, or supportive of a new leg higher (if one were to happen).

*Graphic: Physik Invest maps out the purchase of call and put options in the* ***SPDR S&P 500 ETF Trust*** (NYSE: SPY), for last week. Though activity in the options market was primarily concentrated in short-dated tenors, increased trade in farther-dated call-side strikes is observed as a commitment to higher prices.

*Graphic: SHIFT* *search* *suggests participants were most interested in put strikes at and below current prices in the cash-settled* ***S&P 500 Index*** *(INDEX: SPX) and* ***Nasdaq 100 Index*** *(INDEX: NDX), last week. To note, however, participants began paying up for longer-dated upside exposure (evidenced by call activity).*

News And Analysis

Economy | Cathie Wood: U.S. “setting up for a massive period deflation.” (BBG)

Economy | European labor market’s capacity to absorb shocks varies. (Moody’s)

Markets | How a global minimum corporate tax could impact markets. (WSJ)

Markets | Goldman sees oil hitting $80/bbl despite likely supply return. (REU)

Security | Three disasters show gaps in the $1.7T infrastructure plan. (BBG)

Markets | Mainstream markets shrug volatile $1T crypto flash crash. (BBG)

Trade | Sea change: global freight sails out of the digital dark ages. (REU)

Politics | EU weighs sanctions over so-called ‘hijacking’ of Ryanair jet. (BBG)

What People Are Saying

'If it prints there, it will trade there'
Taught this early in my career, it just means that even the craziest print or move on your chart has a high probability to be back tested with volume, the Flash Crash is a great example. BTC sniffing the concept. pic.twitter.com/si5X0ySMO1
— James Jude (@Jimmyjude13) May 23, 2021

Details here (it is a long read)https://t.co/zjpa5vtpxf

Adding this to the SICO phenomenon, it should be apparent why RRP is bullish for risk assets, because RRP reduces reserve footprint of big banks, allowing them to give leverage to hedge fund clients.
— BɅRTON (@Barton_options) May 21, 2021

$BTC Update: Re-test possibly completed. Dust is settling. Trading range boundaries 30K-42.5K. https://t.co/T21j2KIjks pic.twitter.com/yEZ0LJXyEG
— Aksel Kibar, CMT (@TechCharts) May 24, 2021

https://twitter.com/AnalystDC/status/1396693050429214732?s=20

Innovation And Emerging Trends

FinTech | HSBC CEO says bitcoin, cryptocurrencies are not for them. (REU)

FinTech | Robinhood to allow users to buy into IPOs ahead of debut. (REU)

FinTech | VCs are predicting new areas of consumer fintech disruption. (BI)

Environment | Unpacking the problems with reinforced concrete. (Convo)

Markets | First warning sign in global commodity boom flashes in China. (BBG)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing 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, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

Disclaimer

Tags Gamma, HVN - High Volume Node, NDX - Cash Nasdaq 100 Index, ONH - Overnight High, OPEX, POC - Point Of Control, QQQ - Invesco QQQ Trust Series 1, SpotGamma, SPX - Cash S&P 500 Index, VPOC - Virgin Point Of Control

Commentary

Weekly Brief For May 2, 2021

Post author By Renato L. Capelj
Post date May 2, 2021
No Comments on Weekly Brief For May 2, 2021

Happy Sunday! Markets were choppy, ending the week flat-to-down. This came after President Joe Biden’s joint session of Congress, Fed Chair Jerome Powell’s assessment of the economy, and blowout earnings by heavily weighted index constituents.

The following commentary on U.S. broad market equity indices will discuss what happened, why it matters, what to expect, and how participants can position themselves for the coming week.

Market Commentary

What Happened: U.S. broad market indices closed the week out flat-to-down after a failed attempt to break higher on Thursday, April 29. Last week’s action suggests participants are looking for information to initiate a directional move.

Policy leaders, creators: Inflation pockets transitory.
Ahead: Data on labor, manufacturing, and earnings.
Markets balancing, positions for directional resolve.

Why It Matters: The sideways action during last week’s trade came after a lengthy run, higher.

The S&P 500, in particular, from its March 2020 low, is up over 90%.

That said, as investors enter into a new month, popular news outlets are beating the drum of an old adage: “Sell in May and go away.”

Is there any truth to this statement? It depends on perspective.

Historically speaking, the period spanning May to October is generally weak. On average, the S&P 500 is up as high as +2% during this six-month period.

“Stocks are up more than 87% from the March lows, suggesting a well-deserved pullback during these troublesome months is quite possible,” LPL Financial Chief Market Strategist Ryan Detrick said in a recent blog post. “But with an accommodative Fed, fiscal and monetary policy, along with an economy that is opening faster than nearly anyone expected, we’d use any weakness as an opportunity to add to positions.”

Adding, trends are changing, though; stocks have been higher during these so-called weak months 8 out of the past 10 years, according to LPL Research.

*Graphic* *by LPL Research. Data from FactSet.*

So, with that, in maintaining objectivity, we zoom out and ask a few questions.

Where are we in relation to the prior week’s range? Overlapping.
Is the market’s attempt to go in a certain direction supported? No. After a failed balance-area breakout, participants rotated and accepted prices back in the prior range, as evidenced by unchanged value-area placement, the area where 70% of prior trade (i.e., 1 standard deviation) is conducted.
Is the technical and fundamental narrative supportive of current prices? Technically, the market is in an extended uptrend. However, despite value-area placement suggesting a validation of higher prices, market liquidity metrics point to distribution, the opposite of accumulation.

Now, we analyze other factors in play.

Real Yields: Alongside April’s FOMC — at which the Federal Reserve left rates unchanged and asset purchases steady — 10-year real yields are on track for their biggest drop since last summer. Low real rates may catalyze risk assets as the present value of their future earnings become more attractive.
Capital Gains Tax (CGT): The White House expressed its desire to raise the federal CGT rate to 43.4% for wealthy individuals. However, as Goldman Sachs Group (NYSE: GS) sees it, Congress is likely to settle on a more modest increase. Adding, weak S&P 500 returns, historically, going into CGT hikes are short-lived.
Low Rates, Debt Expansion: Such dynamics incent market participants to take risks, causing destabilizing factors to brew. As Ambrus Group’s Kris Sidial says, “The growth of structured products, passive investing, the regulatory standpoint that’s been implemented with Dodd-Frank and dealers needing to hedge off their risk more frequently than not” are all part of a regime change that’s affected the stability of markets.
Positioning: According to Nomura data presented by The Market Ear, CTAs have taken their positions too far on the long side, reaching levels last seen prior to the 2018 Volmageddon. Additionally, the (1) SPDR S&P 500 ETF Trust (NYSE: SPY) and the (2) Invesco QQQ Trust Series 1 (NASDAQ: QQQ) funds saw some of their biggest outflows. At the same time, certain breadth metrics are diverging from current prices while the SPDR S&P 500 ETF, cash-settled S&P 500 Index, and Invesco QQQ saw sizable call-side bets trade, Friday.
Earnings Reaction: Last week, heavily weighted index constituents reported blowout earnings. The reaction was muted, leaving broad market indices flat-to-down. One explanation is that the expectations, going into the events, were too high. Another is that the equity market is priced to perfection, at this stage of the recovery, and further advances will be supported by the rotation into cyclical parts of the market — financials, energy, and value.
Option 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. According to SpotGamma, a provider of actionable options insights, on Friday, up to 30% of the S&P 500 and Nasdaq 100’s gamma rolled off which may allow the indices an opportunity to directionally resolve.

As realized volatility falls from its peak around a year ago, more sold SPX options cluster at strikes nearer to spot. And as implied volatility falls with it, the gamma of those options increases.

More dealer long gamma means more liquidity. More liquidity means less movement. pic.twitter.com/712OAMq7iP
— SqueezeMetrics (@SqueezeMetrics) April 11, 2021

So, in summarizing this section, technically, the market is bullish, supported by the prospects of a healthy rotation. In the coming week, given increased clarity on policy and a sizable derivatives expiry, participants may see directional resolve.

What To Expect: An increased potential to resolve directionally.

In addition, metrics, like price movement, market liquidity, and speculative derivatives activity, confirm participants’ bullishness and opportunistic hedging in light of an acceleration in the global restart and a turn in flows, the result of an apparent shift in consumer preferences, from saving and investing to spending.

*Graphic: Physik Invest maps out the purchase of call and put options in the* ***SPDR S&P 500 ETF Trust*** (NYSE: SPY), for the week ending April 30. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $400.000, which corresponds with $4,000.00 in the cash-settled ***S&P 500 Index*** *(INDEX: SPX).*

What To Do: In the coming sessions, participants will want to pay attention to where the S&P 500 trades in relation to its $4,186.75-$4,110.50 balance area.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Any activity above (below) the balance-area high suggests participants are interested in discovering higher (lower) prices. Any activity within the balance area suggests participants are looking for more information to base their next move; in such case, responsive buying and selling is the course of action. 

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

Initiative trade below the balance-area low suggests an inclination by participants to revert to the mean and repair some of the poor structure left behind prior discovery. Initiative trade above the balance area puts in play the $4,210.75 minimal excess rally-high, and the cluster of price extensions at and above $4,200.00, typical price targets based on Fibonacci principles.

Initiative Buying (Selling): Buying (selling) within or above (below) previous price acceptance.

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.

So, in the best case, the S&P 500 makes an attempt to balance or discover prices as high as $4,300.00. In the worst case, participants look to auction the S&P 500 into prior poor structures and low-volume areas (LVNodes) that ought to offer little-to-no support.

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

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

News And Analysis

Markets | U.S. builders produced record share of homes with hot market. (BBG)

Economy | Consumer spending, labor cost data suggests inflation warming up. (REU)

Trade | Baltic Dry Index breaks 3,000 points in more than a decade on prices. (TW)

Wealth | Rich Americans fleeing tax hikes may turbocharge the shift to ETFs. (BBG)

Markets | Fed’s Robert Kaplan warns on ‘imbalances,’ wants to talk taper. (REU)

Markets | A volatility quant nets $540 million as momentum trades boom. (BBG)

Lending | States are investigating predatory subprime auto lenders. (Jalopnik)

Markets | Record metals prices catapulted mining profits beyond big oil. (BBG)

Medicine | Biden’s ARPA-H agency to ‘end cancer’ modeled after Darpa. (TC)

Markets | Bond market’s inflation bulls get Powell’s go-ahead to double down. (BBG)

Markets | Bridgewater Co-CIO sees ‘fair amount’ of stock market in bubble. (BBG)

Markets | Retail investors could counter the much-anticipated correction. (SA)

Economy | Warren Buffett denounces SPACs and Robinhood at meeting. (Axios)

Markets | Crypto’s shadow currency surges past deposits of most U.S. banks. (BBG)

Technology | Roku says it may lose YouTube app after Google’s demands. (Axios)

Economy | Ex-Treasury Secretary Summers on scarcity of workers, inflation. (BBG)

Markets | Parametric fund earns ‘Gamma Hammer’ moniker with its bets. (FT)

What People Are Saying

On the bright side, we’re going to inflate our way out of student, housing, and pension debt…

Call it The National Bailout.
— Naval (@naval) May 2, 2021

1/ 🧵 I spent the last week looking into the BTC futures basis trade (on the unregulated exchanges).

I thought I'd share some thoughts as to my findings…

👇👇👇
(Did I do that right?)
— Corey Hoffstein 🏴‍☠️ (@choffstein) May 1, 2021

Development economics deserves its own @xkcd meme: pic.twitter.com/YqInJsjPXs
— Pamela Jakiela (@PJakiela) May 1, 2021

Tail hedging for degenerates. pic.twitter.com/ePHn7kHUeW
— Robot James 🤖🏖 (@therobotjames) April 30, 2021

Following up on equity flow, traces of real distribution across equities have amplified from my note detecting it earlier this week –– note how the baskets I mentioned have traded since. Yuge offer imbalances popping up across single names too, which @Ksidiii has also been noting https://t.co/kBXTkAqgN5 pic.twitter.com/126b4aV8p3
— Stretching Spreads (@FadingRallies) April 30, 2021

THREAD: My 20s were full of ups and downs

I lost millions, made millions and helped build some billion dollar startups

My biggest lessons learned:
— GREG ISENBERG (@gregisenberg) May 1, 2021

Innovation And Emerging Trends

FinTech | Apex Fintech has blow-out earnings ahead of NYSE listing. (BZ)

FinTech | How to attract large investors to your direct investing platform? (TC)

FinTech | New fintech groups form as industry scrutiny is ramping up. (S&P)

FinTech | Cryptocurrency bank wins OCC approval to form de novo. (S&P)

Markets | CME eyes wider customer base with micro bitcoin futures. (TB)

FinTech | Coinbase plans to acquire data and analytics platform Skew. (TB)

FinTech | How U.K.-based Lendable is powering fintechs across EMs. (TC)

FinTech | Amid the IPO gold rush, how should we value fintech startups? (TC)

FinTech | 10 fintech headhunters you need to know for recruiting to talent. (BI)

FinTech | U.K. banks speed up plans to ax branches, switch to digital focus. (S&P)

Medicine | Kevin O’Leary-backed MindMed has uplisted on the Nasdaq. (BZ)

Media | Creators are making lots of money selling Google spreadsheets. (Mashable)

Media | As newsletter advertising grows, advertisers opting for quality. (ADWK)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing leaders such as John Chambers, founder, and CEO, JC2 Ventures, Kevin O’Leary, Canadian businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others, afforded him the perspective and know-how very few come by.

Disclaimer

Tags Balance, CGT - Capital Gains Tax, Earnings Season, FOMC - Federal Open Market Committee Event, GS - Goldman Sachs Group Inc, Kris Sidial, OPEX, QQQ - Invesco QQQ Trust Series 1, Sell In May And Go Away, SPX - Cash S&P 500 Index, SPY - SPDR S&P 500 Trust ETF, The Ambrus Group, Volmageddon

Commentary

Weekly Brief For April 25, 2021

Post author By Renato L. Capelj
Post date April 25, 2021
No Comments on Weekly Brief For April 25, 2021

Happy Sunday! Markets were choppy, ending the week unchanged. This came alongside talk of central bank tapering and an evolution in fiscal policy.

The following commentary on U.S. broad market equity indices will discuss what happened, why it matters, what to expect, and how participants can position themselves for the coming week.

But first, here’s a quote from Adam Funds CEO, Mark E. Stoeckle:

“To try to guess that this is the right time to be out of the market, you may as well go to Las Vegas.”

Market Commentary

What Happened: The S&P 500, Nasdaq 100, Russell 2000, and Dow Jones Industrial Average closed the week out basing, pricing in new information for the next directional move.

All talk and no action from policy leaders, creators.
Ahead: Fed meeting, GDP and Sentiment, earnings.
Markets balancing, position for directional resolve.

Why It Matters: The sideways action during last week’s trade came after a lengthy run, higher.

The S&P 500, in particular, from its March 4 low, is up nearly 13%.

Moreover, just because something is high, doesn’t mean it must come crashing down. To put this into perspective, here’s a quote from Jeff deGraaf, co-founder at Renaissance Macro Research: “Overbought/oversold conditions are useless without first defining the underlying trend of the market.”

So, with that, in maintaining objectivity, we zoom out and ask a few questions:

Where are we in relation to the prior week’s range? Overlapping, but slightly higher.
Is the market’s attempt to go in a certain direction supported? Yes, value, defined by the area where 70% of prior trade (i.e., 1 standard deviation) is conducted, is following price.
Is the technical and fundamental narrative supportive of current prices? Technically, the market is in an extended uptrend, but recent activity suggests a validation of higher prices. Fundamentally, the topics of monetary and fiscal tightening have investors worried.

Now, in determining whether to change equity market exposure, we zoom closer in and analyze the risks at hand.

The Bank of Canada, ahead of other central banks, in light of increased growth and inflation forecasts, cut its bond-purchase target and suggested an increased potential to hike rates earlier than expected.

This is an interesting development. The Federal Reserve, too, last week announced the U.S. economy would see higher inflation, but Chair Jerome Powell expressed the institution’s commitment to limiting any overshoot.

Why the change in tone? Here’s Janus Henderson’s portfolio manager Jay Sivapalan’s take.

“We’ve got inflated asset prices in equities, house prices, and infrastructure, how do you normalize that? You need revenue growth and you need inflation … [b]ut at some point in the future, growth may need to be traded off for financial stability.”

In simpler terms, with prolonged periods of low interest rates and debt expansion, market participants are incentivized to take risks. This is how destabilizing factors begin to brew.

“The growth of structured products, passive investing, the regulatory standpoint that’s been implemented with Dodd-Frank and dealers needing to hedge off their risk more frequently than not” are all part of a regime change that’s affected the stability of markets, said Sidial Kris Sidial, a former institutional trader and the co-chief investment officer of The Ambrus Group, a volatility arbitrage fund that looks to exploit changing market structure dynamics.

Here’s an image to help visualize some of what Sidial is referring to.

*Pictured: Newfound Research unpacks market drivers, implications of liquidity.*

Also, this week, the White House expressed its desire to raise the federal capital gains tax (CGT) rate to 43.4% for wealthy individuals. Despite the market selling on the news, all losses were recouped prior to the end of the week. Why? As Goldman Sachs Group (NYSE: GS) sees it, Congress is likely to settle on a more modest increase, less than 30%.

Adding, as Bloomberg’s John Authers notes: “The way the market handled the last major CGT increase, at the end of 2012, is instructive. As it grew clear that higher capital gains taxes were coming, the S&P 500 languished and went sideways for the last few months of the year, closing roughly where it had been in March. Then 2013 turned out to be a great year; stocks started their rally at the beginning of January and never really stopped.”

So, if a CGT hike is already being discounted by the market, given Friday’s rapid recovery — which also has something to do with how participants are positioned, but that conversation is beyond the scope of this commentary — then why are some of the largest exchange-traded funds seeing outflows?

In particular, the Invesco QQQ Trust Series 1 (NASDAQ: QQQ) bled nearly $6 billion over the last week, the worst exodus since the dot-com era of 2000.

Graphic: The advance/decline line (A/D), an indicator of breadth, is diverging from Nasdaq-100 prices, via MarketInOut. This dynamic has not presented itself in other broad market indices this commentary covers.

One explanation: “With earning season starting to heat up, especially for the tech sector next week, it is likely that the expectations for technology companies may be too high,” said James Pillow, managing director at Moors & Cabot Inc. “It’s early still, but just look where the earnings surprises are coming from: materials, energy, and financials, all about 80% or higher. Money will follow performance — and the performance is coming from those sectors.”

So, in summarizing this section, technically, the market is bullish, supported by a healthy rotation.

Fundamentally, though, clouds are forming. Participants are adding shifts in tone, by policymakers, into their narrative. Should fundamental conditions change markedly, odds of a technical breakdown in momentum increase substantially.

Till then, the market is flashing green lights. Any correction may offer participants favorable entry.

What To Expect: An increased potential to correct in time, rather than price.

In addition, metrics, like market liquidity and speculative derivatives activity, confirm participants’ bullishness and opportunistic hedging ahead of an acceleration in the global restart and a turn in flows, the result of an increasingly apparent shift in consumer preferences, from saving and investing to spending.

*Graphic: SHIFT search suggests participants are still not as inclined to add call-side exposure, through the month of May, in the cash-settled **S&P 500 Index** (INDEX: SPX).*

What To Do: In the coming sessions, participants will want to pay attention to where the S&P 500 trades in relation to its $4,186.75-$4,110.50 balance area.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

Any activity above (below) the balance-area high suggests participants are interested in discovering higher (lower) prices. Any activity within the balance area suggests participants are looking for more information to base their next move; in such case, responsive buying and selling is the course of action.

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

Initiative trade below the balance-area low suggests an inclination by participants to revert to the mean and repair some of the poor structure left behind prior discovery. Initiative trade above the balance area puts in play the cluster of price extensions at and above $4,200.00, typical price targets based on Fibonacci principles.

Initiative Buying (Selling): Buying (selling) within or above (below) previous price acceptance.

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

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

*Graphic: 1-day candlestick chart of the cash-settled **S&P 500 Index** (INDEX: SPX). See Micro E-mini S&P 500 Futures profile chart here.*

News And Analysis

Politics | Joe Biden will deliver a ‘joint session of Congress’ this week. (ABC)

Market | The Rise of Carry returns; stock buybacks are kicking into gear. (Axios)

Recovery | The end of U.S. mass vaccination coming sooner than later. (BBG)

Commodities | OPEC says NOPEC bill could put U.S. overseas assets at risk. (REU)

Markets | SPAC deals are far below peaks but are still generously valued. (CB)

Economy | The MBA is forecasting record purchase volume this year. (MND)

Banking | Goldman, JPM talk with the U.K. over business travel corridor. (FN)

Climate | Leaking landfill contributes to world’s mystery methane hotspot. (BBG)

Trade | Beijing hopes U.S. companies will push to scrap China tariffs. (BBG)

Economy | Existing home sales suffer second straight monthly decline. (CNBC)

Markets | Taxes and inflation key themes for markets in the week ahead. (CNBC)

What People Are Saying

ICYMI: The Ambrus Group Co-Chief Investment Officer @Ksidiii joins @JillMalandrino on @Nasdaq #TradeTalks to discuss how the volatility picture is playing out in the tech space with $VOLQ lower heading into options expiration. $QQQ $NDX https://t.co/q89Z0NfEyq
— TradeTalks (@TradeTalks) April 25, 2021

Next obvious shock coming: removal of policy support.
— econ_quant_vol (@QuantVol) April 24, 2021

In his final Amazon shareholder letter, Jeff Bezos shared a powerful mental model on maintaining your distinctiveness.

A thread on the fight against normalcy (in your career, startup, writing, or life): pic.twitter.com/9p7cwFphDG
— Sahil Bloom (@SahilBloom) April 24, 2021

🎧 Mutiny Investing Podcast !!

New pod w/ @jam_croissant from Kai Volatility Advisors!

Topics:

⚓ 30 Day skew, Dispersion, and VVIX
⚓ How dealer hedging can affect Vanna and Charmhttps://t.co/PZ74KUaCHp https://t.co/87ox3LH0TV
— Mutiny Funds (@MutinyFunds) April 23, 2021

'twas a good thing SPX drifted north today.

~1.5% drop and SPX would have faced much more liquidity demand, causing instability below 4100. Of course, heading into OPEX after a long gamma week usually results in positive mean returns… so the scare was unlikely. pic.twitter.com/j0WyLoH8Ji
— Hau Volatility (@HauVolatility) April 23, 2021

Ok this #CapitalGainsTax stuff warrants a thread because we're wading into what people misconstrue as "politics", but what I think of as "economic incentives"

As always, the reality is more nuanced than the narrative. I'll address the basics, feedback, & practical takeaways👇
— Justin Oh (@acouplecents) April 22, 2021

Finally let's test the reflexes: https://t.co/zuWJxv2vqn

I know a prop firm that used this game to test traders in the interview.

Over 22 seconds is phenomenal.
— Tom Dante (@Trader_Dante) April 25, 2021

Innovation And Emerging Trends

FinTech | On blockchain- and smart contract-based financial markets. (FED)

FinTech | U.K. banks speed plans to ax branches, switch to digital focus. (S&P)

Health | What are all those constant video calls doing to your brain? (TC)

FinTech | Participants identify key operational areas for improvement. (TM)

FinTech | Alpaca intros Broker API that lets you build own Robinhood. (BZ)

FinTech | Public.com app connects users with public company leaders. (BZ)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing leaders such as John Chambers, founder, and CEO, JC2 Ventures, Kevin O’Leary, Canadian businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others, afforded him the perspective and know-how very few come by.

Disclaimer

Cover photo by sklei from Pexels

Tags Adam Funds, DJI - Dow Jones Industrial Average, GS - Goldman Sachs Group Inc, Kris Sidial, Mark E. Stoeckle, NDX - Cash Nasdaq 100 Index, QQQ - Invesco QQQ Trust Series 1, RUT - Cash Russell 2000 Index, SPX - Cash S&P 500 Index, SPY - SPDR S&P 500 Trust ETF, The Ambrus Group