Categories
Commentary

Daily Brief For July 19, 2022

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

Graphic updated 6:50 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

After the release of data on consumer prices, earlier this month, the belief was that a de-rate, on inflation, was, potentially, nearing an end, although it was likely to remain at a “higher level than we’ve seen historically,” per the likes of Chevron Corporation’s (NYSE: CVX) CEO Mike Wirth.

Read: National Association of Homebuilders (NAHB) Housing Market Index (HMI) sees record decline. Rental markets cooling. Foreign buying jumps. Food to be the ultimate weapon in the 21st century.

Graphic: Retrieved from Randy Woodward. “Bloomberg commodities index vs. headline CPI.”

Now comes an even deeper compression on earnings?

Graphic: Retrieved from Callum Thomas. “Clear downward momentum in earnings revisions, only 33% of analyst earnings estimates have been revised upward (i.e. the rest downward) — matches the worsening macro.”

Well, maybe. Based on executives’ perspectives, we’re probably “talking ourselves into a recession,” precisely what the likes of Robert Shiller have expressed worry on.

Accordingly, participants are now pricing in shaky earnings, selling the stock of Goldman Sachs Group Inc (NYSE: GS), Apple Inc (NASDAQ: AAPL), and beyond, on those firms’ preparations for an increased potential for an economic downturn.

Up until this week, the Nasdaq 100 (INDEX: NDX) was doing better, consolidating for a potential break above a key response area, like the S&P 500 (INDEX: SPX), highlighted in a section further below.

It failed after the release of earnings from some index heavyweights.

Graphic: Retrieved from Bloomberg. “The Nasdaq 100, down 27% for the year so far, had briefly managed to get above its 50-day moving average on Monday, suggesting that the relentless downward trend was over — but the index failed to stay there, thanks in large part to Apple.”

Pessimism is incredibly strong among investors, however, a sort-of contrarian signal.

In spite of some Bank of America Corporation (NYSE: BAC) indicators pointing to poor fundamentals, sentiment is suggestive of a looming “stocks/credit rally in coming weeks.”

Graphic: Retrieved from Bloomberg. “Investors slashed their exposure to risk assets to levels not seen even during the global financial crisis in a sign of full capitulation amid a “dire” economic outlook, according to Bank of America Corp.’s monthly fund manager survey.”

Positioning

Though we’re far more than halfway through a dot-com type collapse that’s happened “underneath the surface of the indices,” per Simplify Asset Management’s Mike Green, still-strong passive flows continue to support the largest stocks within the indexes.

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

At the same time, options volumes show traders concentrating less on bullish strategies in the single stocks, while the index flows remain steady.

Graphic: Via Deutsche Bank AG (NYSE: DB).

Looking at skew on something like the tech- and growth-heavy Nasdaq 100 (INDEX: NDX), our comments in prior letters (regarding volatility supply from the re-hedging of defensive structures on the put side and volatility demand on the call side from the positioning for a reversal) appear still valid.

Read: Daily Brief for July 15, 2022.

Therefore, spread opportunities still exist and remain attractive.

Graphic: Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim. Skew resembles more of a smile, rather than a smirk.

Read: Trading Volatility, Correlation, Term Structure and Skew by Colin Bennett.

Technical

As of 6:45 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $3,867.25 LVNode puts into play the $3,895.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $3,909.25 MCPOC and $3,943.25 HVNode, or higher.

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

Any activity below the $3,867.25 LVNode puts into play the $3,829.75 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $3,800.75 LVNode and $3,770.75 HVNode, or lower.

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

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

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

Definitions

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

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 2, 2021

Market Commentary

Equity index futures, bonds, commodities sideways to higher. Yields, dollar lower.

  • Narratives collide; side with fear or greed?
  • Ahead is data on claims, trade, and more.
  • Indexes positioned for directional resolve.

What Happened: U.S. stock index futures auctioned sideways overnight ahead of Friday’s key nonfarm payrolls release. 

Ahead is data on jobless claims, trade balance, productivity, core capital goods orders, and unit labor costs (8:30 AM ET), as well as factory orders (10:00 AM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. 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 approximation. 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 inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on positive, albeit middling intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by sideways trade just shy of the $4,542.25 overnight all-time high (ONH).

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.
Graphic: Divergent delta (i.e., non-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 or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit).

This is significant because it marked balance and acceptance, or a willingness to transact at higher prices. We’re carrying forward, though, the presence of poor structure.

Balance (Two-Timeframe Or Bracket) Is The Status Quo: 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).

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, as well as some of the dynamics unpacked in-depth Tuesday (e.g., non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition). 

Though some of the implications of these themes on price are contradictory (e.g., inflows and declining sentiment), participants aren’t rushing to protect against short-term risks. This is most obvious via a shift lower in shorter-dated VIX expiries, a dynamic more so positive for near-term equity market stability.

Graphic: VIX term structure shifts lower with the biggest move happening at the short end of the curve, via VIX Central, from The Market Ear.

That said, context is above all; walls of worry – inadvertently – push markets higher. Given that seasonality norms are breaking (as evidenced by non-seasonally aligned inflows), among other things, there may be more waiting before that long-awaited pullback comes to fruition. 

As Robert Shiller once said: “Part of the reason we had the Great Depression is people were aware of crowd psychology. Every day, they were watching the stock price index as a barometer of the health of the economy, and that made it more volatile.” So, how much fear has to come into the market for things to turn?

Fears of a top have been called too many times. Nonetheless, we watch upcoming releases such as Friday’s data on nonfarm payrolls for clues.

Graphic: Last time August put in similar all-time high counts was in 1929 and 1987, says The Market Ear; “On both occasions, market decided crashing in October. Current melt-up is playing out well and vols are in implosion mode again. Ideally, protection becomes dirt cheap and we can start tilting the book into some serious long premium plays/hedges/downside speculation. After all, October tends to be volatile.”

Moreover, for today, given an increased potential for middling volatility and responsive trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,526.25 high volume area (HVNode) puts in play the $4,542.25 overnight high (ONH). Initiative trade beyond the ONH puts in play the $4,556.25 and $4,592.25 Fibonacci extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,526.25 HVNode puts in play the $4,510.00 level, a regular trade high (RTH High), and gap. Initiative trade beyond the RTH High and gap puts in play the $4,481.75 HVNode and $4,454.25 LVNode.

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

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

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.

Responsive Buying (Selling): Buying (selling) in response to prices below (above) an area of recent price acceptance.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

News And Analysis

Hurricane Ida to boost oil and gas companies’ margins.

OPEC sticks with its supply hike as demand improves.

China warns climate cooperation is at risk over tension.

Bank buybacks hit record helping push stocks to highs.

Non-fungible tokens (NFTs) from a trader’s perspective.

U.S. lodging recovery trajectory is on track despite delta.

Bill Gross said yields make bond investment garbage.

The ECB will likely slow down the pace of bond buying.

U.S. STB rejected voting trust for CN’s KCS acquisition.

New York City declares a state of emergency over rain.

Hurricane Ida losses short of Katrina totals, to hit $25B.

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.