Categories
Commentary

Daily Brief For September 20, 2021

Market Commentary

Equity index futures, commodities, and yields trade lower.

  • Concerns around the debt ceiling.
  • SPX below balance, 50-day SMA.
  • Ahead is a 2-day FOMC meeting.
  • Today we receive NAHB updates.

What Happened: U.S. stock index futures auctioned lower alongside commodities and yields as Treasury Secretary Janet Yellen seeks to raise or suspend the debt ceiling alongside Evergrande fears.

Ahead is data on the National Association of Home Builders Index (10:00 AM ET).

Graphic updated 7:15 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 7:15 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 high potential for immediate directional opportunity.

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

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

During the prior week’s trade, on weak breadth, the worst-case outcome occurred, evidenced by a balance-area breakout and separation of value below the S&P 500’s 50-day simple moving average (i.e., a visual level likely paid attention to by short-term, technically-driven market participants who generally are unable to defend retests).

Further, the aforementioned trade is happening in the context of a waning economic recovery, heightened valuations in the face of strong EPS expectations, the prospects of stimulus reduction, non-seasonally aligned flows, impactful options and equity market dynamics, divergent sentiment, as well as fears of a mid-cycle transition.

A key risk, as highlighted by Treasury Secretary Janet Yellen, is the debt ceiling which, if not resolved, some economists argue “that an announcement on tapering is likely to be delayed to December, and that Treasury yields could fall further as a result.”

We note that – as Goldman Sachs writes – “The upcoming debt limit deadline is beginning to look as risky as the 2011 debt limit showdown that led to Standard & Poor’s downgrade of the US sovereign rating and eventually to budget sequestration, or the 2013 deadline that overlapped with a government shutdown.”

Adding, as SpotGamma said, “over 50% of stocks [had] their largest gamma position” roll-off Friday. This suggests an increased potential for volatility heading into the September 21-22 FOMC event. SqueezeMetrics confirms.

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 $4,365.25 low volume area (LVNode) pivot puts in play the $4,393.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,425.00 untested point of control (VPOC) and $4,481.75 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,365.25 LVNode puts in play the $4,341.00 VPOC. Initiative trade beyond the VPOC could reach as low as $4,309.75 (the intersection of a minimal excess overnight low and poor structure in a prior day session), or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 7:15 AM ET.

Definitions

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

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

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

News And Analysis

Analyzing the nightmare scenario for China’s economy.

FOMC preview: How to make tapering data-dependent.

China’s property fear is spreading beyond Evergrande.

Goldman Sachs: Low-rate world favors quality growth.

Airbnb CEO Brian Chesky to herald a travel revolution.

Pfizer/BioNTech vaccine is safe and protective for kids.

Risks associated with rising government debt, inflation.

The global housing market is broken dividing countries.

Trudeau set for slimmer victory than hoped in election.

Yellen renews call to up debt limit to avoid catastrophe.

Solana blackout reveals the fragility of cryptocurrency.

FX Weekly: There’s a Lehman in China every 3 years.

What People Are Saying

About

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

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

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

Categories
Commentary

Weekly Brief For June 20, 2021

Too Lazy; Didn’t Read: As the market enters into a seasonally weak period, participants have noticed a divergence appear across the broader market. A breakdown in individual sectors – financials and transportation, for instance – and breadth, policy tightening concerns, outflows, elevated skew, put/call ratios, and degrossing on risk-taking (e.g., speculative activity in so-called meme stocks), in conjunction with the passage of Quadruple Witching, may portend increased volatility.

Market Commentary

Key Takeaways: Index futures diverge. Risk-off sentiment returns.

  • Fears over inflation and taper sparking movements.
  • Ahead: GDP, Home sales, PMI, Claims, Fed speak.
  • Indices sideways to lower; growth, tech stay strong.
Weekly price action graphic updated Sunday, June 20, 2021, at 12:00 PM ET.

What Happened: Last week, U.S. stock index futures diverged.

The Nasdaq 100 traded relatively strong, in comparison to the weaker S&P 500, Russell 2000, and Dow Jones Industrial Average. This action comes as the Federal Reserve signaled a faster-than-expected pace of policy tightening (learn more about the impact of policy tightening, here).

At the same time, in conjunction with the divergence in major indexes, participants saw sectoral breakdowns, a concern that may portend increased volatility after ‘Quadruple Witching’ Friday, or the rebalancing of benchmarks, as well as the expiration of stock index futures, stock index options, stock options, and single stock futures.

In light of the event, participants found it very difficult to discover prices. That’s according to Matt Tuttle, the CEO at Tuttle Capital Managment LLC. 

“When you get one of these events, you get noises around share movements,” Tuttle said by phone. “It messes up the information that we’re seeing.”

Adding, this Quadruple Witching Friday may throw a wrench into the recent bullishness.

Much of the advance, since the election, came in light of a historically bullish period for markets, amid increased mobility and reflation, supportive structural flows, as well as the pricing in of positive earnings expectations.

Now that the reaction to earnings was lackluster, in addition to the passage of a large derivative expiration and move into a seasonally weak period, the odds of volatility are substantially higher. 

Why? Most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection. 

As a result of this activity, options dealers are long upside and short downside protection. 

This exposure must be hedged; dealers will sell into strength as their call (put) positions gain (lose) value and buy into weakness as their call (put) positions lose (gain) value. 

Now, unlike theory suggests, dealers will hedge call losses (gains) quicker (slower). This leads to “long-gamma,” a dynamic that crushes volatility and promotes momentum, observed by lengthy sprints — like the one the market is currently in — followed by rapid de-risking events as the market transitions into “short-gamma.” 

“‘Equities stable on hawkish Fed guidance’ is the wrong read here,” Nomura’s Charlie McElligott notes. “Equities are stable for the same reason they’ve been chopping for weeks: markets continue choking on an oversupply of gamma from vol sellers!”

The implications of this volatility supply can be summed up with the below graphic.

Given that OPEX will lead to a drop in gamma exposures, the market will, in the simplest way, be subject to more movement in its attempt to price in changing financial conditions.

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.

“The extremely low SPX realized volatility is consistent with the possibility that 18-Jun has left ‘the street’ long index gamma, in which case realized volatility could pick up once positions are cleaner,” Rocky Fishman of Goldman Sachs said.

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the $4,153.25 high volume area (HVNode).

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.

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above $4,153.25 puts in play the HVNodes at $4,177.25 and $4,199.25. Initiative trade beyond $4,199.25 could reach as high as the $4,227.75 HVNode, $4,235.00 Point Of Control (POC), and $4,258.00 overnight high (ONH). 

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

Overnight 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 index trades lower; activity below $4,153.25 puts in play the $4,122.25 HVNode. Thereafter, if lower, participants should look for responses at the $4,069.25 HVNode and $4,050.75 low volume area (LVNode).

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants, based on dollars committed, were most interested in call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside.

News And Analysis

Economy | Big shift in the so-called “dot-plot” that tracks rate projections. (Moody’s)

Economy | Housing boom moderates on lower building permit authorizations. (S&P)

Economy | Capital gains – a century-old tax break gets a rush of attention. (WSJ)

Economy | Supply crunch risks are extending into 2022, stocking inflation. (WSJ)

Economy | New Chinese regulation requires recovery, resolution plans. (Moody’s)

Markets | Troubled companies take pages from AMC playbook, selling stock. (WSJ)

Markets | Brace for huge oil volatility one U.S. trading group suggests. (REU)

Economy | U.S. bank loan-to-deposit ratios fall and pressure margins. (S&P)

Economy | U.S. economic recovery doesn’t have to follow herd immunity. (Moody’s)

Economy | The U.S. distress ratio continued its downward trend last month. (S&P)

Economy | Global structured finance – charting the recovery from COVID-19. (S&P)

Economy | The MBA is predicting another decline in new home sales. (MND)

Markets | Bond market in midst of repricing, but not the kind we’re used to. (MND)

What People Are Saying

Innovation And Emerging Trends

FinTech | Owning the paycheck is the key to financial technology success. (TC)

FinTech | Mark Cuban says ‘banks should be scared’ of crypto-based DeFi. (CNBC)

FinTech | Outlook: How the API economy is reinventing financial services. (CBI)

FinTech | Analysis: Big differences between a digital dollar and a CBDC. (BBG)

FinTech | Cryptocurrency lode of $100B stirs worries over hidden danger. (BBG)

FinTech | Axis-Z is working hard to bring virtual reality (VR) tech to trading. (BZ)

FinTech | OVTLYR’s platform helps investors take advantage of volatility. (BZ)

FinTech | Liti Capital allows investors tokenized access to litigation finance. (BZ)

Disclaimer

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