The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 850+ that read this report daily, below!
Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Fundamental
Working on a detailed fundamental write-up this week. Report back, soon.
Positioning
As of 6:30 AM ET, Wednesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.38%. After the August monthly options expiration (OPEX) date, gamma exposures have trended (and continue to trend) lower which does more to take from market stability.
Graphic: Created by Physik Invest. Data by SqueezeMetrics.
Previously, based on our reads of realized (RVOL) and implied (IVOL) volatility, as well as skew, it was beneficial to be structurer of complex options structures like the Short Ratio Put Spread, down at S&P 500 prices between $3,700.00 and $3,500.00, to play contexts we (think we) have a solid read on.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
To quote the August 18 letter, “it is beneficial to be a buyer of options structures to protect against (potential) downside (e.g., S&P 500 [INDEX: SPX] +1 x -2 Short Ratio Put Spread | 200+ Points Wide | 15-30 DTE | @ $0.00 or better).”
Graphic: Retrieved from Cboe Global Markets Inc (BATS: CBOE).
Into the decline, those structures expanded and, now, the time has come to monetize. Though the decline (or increases in demand for options protection) may not be over, the trades are ripe for monetization (i.e., closing and converting a position to cash).
Graphic: Retrieved from The Market Ear. Via VIX Central. IVOL term structure. Expansion solicits bearish delta hedging flows with respect to changes in IVOL.
We buy (sell) when others are sellers (buyers), in short. Despite a bid in IVOL, personally, the concern is that the passage of time may do more to impact the trades negatively, all the while the trade’s exposure to changes in direction is very sensitive.
Graphic: Retrieved from Bloomberg. “The number of outstanding bearish options contracts on an exchange-traded fund that tracks the Nasdaq 100 spiked on Aug. 19 to the highest level since the aftermath of the dot-com bust,” while “recent weakness in equities has been broad based, with almost 70% of Nasdaq 100 components making new four-week lows.”
In other words, the trade has a lot to lose on a move higher while a lot of big and unrealistic things have to happen for the trade expand much further.
So now, it is beneficial to be a seller of those options structures to monetize downside (e.g., S&P 500 [INDEX: SPX] -1 x +2 Ratio Put Spread | 200+ Points Wide | 15-30 DTE).
Note: Trades Renato has personally taken will be unpacked in subsequent commentaries. Both the mistakes and successes, as well as what to do better.
Technical
As of 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower 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 $3,978.25 LVNode puts into play the $4,006.25 ONL. Initiative trade beyond the ONL could reach as high as the $4,064.00 RTH High and $4,107.00 VPOC, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $3,978.25 LVNode puts into play the $3,921.00 VPOC. Initiative trade beyond the $3,921.00 VPOC could reach as low as the $3,867.25 LVNode and $3,829.75 MCPOC, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
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.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
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.
The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 800+ that read this report daily, below!
Graphic updated 7:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Hey team – the Daily Briefwill bepaused until August 29, at least, due to Renato’s travel commitments.
Apologies and thank you for the support!
Positioning
As of 7:20 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.05%. Net Gamma exposures (generally) rising may promote tighter trading ranges.
Graphic: Via Physik Invest. Data retrieved from SqueezeMetrics.
As an aside, real quick, in a rising market, characterized by demand for call options, those who are on the other side of options trades, hedge in a manner that may bolster the upside (i.e., the naive theory is that if customers buy calls, then counterparties sell calls + buy stock to hedge).
That said, if IVOL drops, liquidity providers’ out-of-the-money (in-the-money) Delta exposures drop (rise) and, thus, they will sell (buy) underlying hedges which may pressure (support) the advance or play into pinning action, as seen over the past week or so at the $4,300.00 options strike, at which there is a lot of open interest and volume, in the S&P 500.
Read: The Implied Order Book by SqueezeMetrics for a sort-of detailed primer on this.
Graphic: Updated 8/15/2022. Retrieved from SqueezeMetrics.
Given realized (RVOL) and implied (IVOL) volatility measures, as well as skew, it is beneficial to be a buyer of options structures to protect against (potential) downside (e.g., S&P 500 [INDEX: SPX] +1 x -2 Short Ratio Put Spread | 200+ Points Wide | 15-30 DTE | @ $0.00 or better).
This is not to say that call options, which we said could “outperform” their Delta (i.e., exposure to direction) weeks ago, are out of favor (note: this is the case for something such as an SPX, not a Bed Bath & Beyond Inc [NASDAQ: BBBY]).
Graphic: Retrieved from Corey Hoffstein. Via Goldman Sachs Group Inc (NYSE: GS).
No! On the contrary, Goldman Sachs Group Inc (NYSE: GS) strategists say “call premiums are attractive.” This is “evidenced by [their] GS-EQMOVE model which estimates 33% probability of a 1-month 5% up-move versus only 13% implied by the options market.”
A quick check of implied volatility skew, which is a plot of the implied volatility levels for options across different strike prices, shows a smile in the shortest of tenors, rather than a usual smirk.
Graphic: Retrieved from Cboe Global Markets Inc (BATS: CBOE).
Given this, the options with strike prices above current market prices are seemingly more pricey than those that have more time to expiration. One could think about structuring something like a Short Ratio Call Spread or, even, a Long Call Calendar Spread at or above current prices.
In the latter, any sideways-to-higher movement would allow for that spread to expand for profit.
Graphic: Via Banco Santander SA (NYSE: SAN) research, the return profile, at expiry, of a classic 1×2 (long 1, short 2 further away) ratio spread.
Context: Participants’ proactive hedging of positive Delta equity exposure, via negative Delta put option exposures, as well as the monetization of those hedges into the decline, resulted in poor performance in IVOL metrics like the Cboe Volatility Index (INDEX: VIX).
Therefore, per the Cboe, it’s the case that “since the launch of the VIX Index, the past six-month period has been the weakest for volatility in 29 years, relative to similar [SPX] price moves.”
Accordingly, its structures we thought would work best, given the potential for measured selling, which others thought would carry a lot of risks, such as Short Ratio Put Spreads, that performed best, seen below.
Graphic: Via Pat Hennessy. “[T]he performance of short-dated 1×2 put ratios in SPX this year. Despite being short the tail, the grind lower has been well captured by this trade structure.”
Moreover, it’s the case that after a nearly 20% multi-month run, higher, markets are stretched.
To continue this pace would require, per JPMorgan Chase & Co (NYSE: JPM) strategists, a continued interest in demand for positive Delta exposure via equity or options, lower prints of consumer price data, as well as a dovish Federal Reserve (Fed) inflection.
The former we see now via call option volumes. The latter, not so much as the Federal Open Market Committee (FOMC) minutes “left the door open to another ‘unusually large’ increase at the next meeting in September,” in spite of a commitment to dial back if the data supported.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
Presently, retail sales are steady, and supply pressures, though starting to ease, remain, bolstering inflation which the Fed is ultimately trying to stop from becoming entrenched.
Though there are fundamental contexts we are leaving out (e.g., negative earnings revisions, Chinese retail, industrial output, and investment data missing which prompted an easing, the use of tools like Treasury buybacks to ease disruptions via Fed-action, as well as increasing recession odds), in short, the focus should be on the technicals which actually make us money.
Graphic: Retrieved from The Market Ear. Via Bank of America Corporation (NYSE: BAC).
And, presently, on the heels of macro- and volatility-type re-leveraging, per Deutsche Bank AG (NYSE: DB) the technical contexts are bullish.
Keith Lerner, the co-chief investment officer and chief market strategist at Truist Financial Corporation’s (NYSE: TFC) Advisory Services puts it all well:
“Even if the Fed does pivot, they are less likely to support the markets as quickly as they have in the past given the scar tissue left behind as a result of the inflation challenges of the past year… The market rally over the past four weeks has been nothing short of impressive. Such strong buying pressure following indiscriminate selling has historically been a very positive sign for the market, often following important market bottoms. This is a welcome sign. Still, other factors in our work are less supportive. Indeed, markets are not only fighting the Fed, but the most aggressive global monetary tightening cycle in decades.”
Graphic: Retrieved from Bloomberg. Via Truist Financial Corporation (NYSE: TFC).
Beyond this, from a volatility perspective, we’d look for the VIX to sink below 15 to increase our optimism over a “sustained [and] better-than-typical” rally, per Jefferies Financial Group Inc (NYSE: JEF). Look at this last remark through the lens of participation on the part of traders who employ volatility-targeting strategies, for instance.
Graphic: Retrieved from The Market Ear. Via Jefferies Financial Group Inc (NYSE: JEF).
Technical
As of 7:20 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher.
Any activity above the $4,273.00 VPOC puts into play the $4,294.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $4,337.00 VPOC and $4,393.75 HVNode, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,273.00 VPOC puts into play the $4,253.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,231.00 VPOC and $4,202.75 RTH Low, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active.
Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
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.
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
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.
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.
The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 800+ that read this report daily, below!
Graphic updated 7:00 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Fundamental
Working through some in-depth coverage for this fundamental section. Report back, soon.
Positioning
As of 7:00 AM ET, Wednesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.07%. Tighter ranges, as a result of a sticky, long-gamma environment (in which the participants, who are on the other side of customer trades, hedge in a manner that takes from volatility) are likely to remain.
The potential for trading ranges to expand increases after large options expiries this week.
Further, given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of options structures. It is weeks prior to this near-vertical price rise that we mulled rotating into dynamic (options) bets and structures lined up against some key resistances.
Graphic: Retrieved from Bloomberg. Drawn on by Physik Invest.
Moreover, where are we, right now?
As well explained in the Daily Brief for July 21, 2022, heading into the 2022 decline, institutions repositioned and hedged, even allocating to “commodity trend following,” per our Daily Brief for July 15, 2022, which worked well the first two quarters.
The monetization and counterparty hedging of existing customer hedges, as well as the sale of short-dated volatility, particularly in some of the single names where there was “rich” volatility, into the fall, lent to lackluster performance in equity IVOL and index mean reversion.
This trend came to an end as entities were squeezed out of trades not working (i.e., participants rotated out of volatility and commodities). This, alongside a re-leveraging on inflation cooling and better-than-expected earnings, bolstered a historic near-vertical price rise in equity markets.
Graphic: Retrieved from The Market Ear. Via Goldman Sachs Group Inc.
Continuing to bolster the near-vertical price rise is a rotation into bets on upside (call options). It is the hedging of this exposure, by counterparties, that can add to the follow-on buying (i.e., in selling a call option, the liquidity provider will, all else equal, buy underlying stock).
Graphic: Updated 8/15/2022. Retrieved from SqueezeMetrics.
Accordingly, participants have been squeezed out of their (put) volatility hedges, “on the equity side,” and are now “less and less hedged,” as Kai Volatility’s Cem Karsan explains.
Given this, the “market can really begin to respond to the core macro factors.”
It is the case that when the macro re-leveraging ceases, and the present supportive volatility conditions ease, “the incremental effects” of liquidity (i.e., quantitative easing and tightening) may set the stage for a rollover.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
If during this rollover, some shock was to surface, then the demand for hedges may assist in an “untethering” in IVOL, “one of the most supportive things into the decline,” Karsan explained.
Graphic: Retrieved from SqueezeMetrics. Learn the implications of volatility, direction, and moneyness.
So, what’s the takeaway?
The near-vertical price rise (alongside reports of better-than-expected earnings and the potential that inflation is beginning to cool) is sputtering. Follow-on support from a desire by participants to participate in upside synthetically and continued re-leveraging may ease in the next weeks.
Technical
As of 7:00 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher.
Any activity above the $4,271.00 VPOC puts into play the $4,294.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,337.00 VPOC and $4,393.75 HVNode, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,271.00 VPOC puts into play the $4,253.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,231.00 VPOC and $4,202.75 RTH Low, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active.
Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
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.
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.
The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 750+ that read this report daily, below!
Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Fundamental
We’ll skip the fundamentals section, today, and do an in-depth review, sometime next week.
Positioning
As of 7:00 AM ET, Friday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.06%. Net gamma exposures generally rising may promote tighter trading ranges.
Graphic: Via Physik Invest. Data retrieved from SqueezeMetrics.
As stated yesterday, it may be beneficial for traders to shift their focus to dynamic structures. In other words, be a buyer of options structures (i.e., replace static directional exposures or Delta with those that are dynamic).
This is (1) due to where realized (RVOL) and implied (IVOL) volatility measures, and skew.
Graphic: Retrieved from Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.
As well as (2) increased average stock correlation and lower return dispersion which, per Societe Generale SA (OTC: SCGLY) research, make stock picking hard(er).
It can be the case that Delta hedging becomes easier, too, as one asset, in a more correlated environment, can better offset the first-order sensitivities elsewhere.
Graphic: Retrieved from Bloomberg. Via Societe Generale.
The reason why?
In regards to the correlation and dispersion remark, that’s more to do with the risk-off sentiment and the impact of tightening liquidity affecting all risk assets, basically.
Graphic: Via PhysikInvest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
Regarding the volatility issue (RVOL, IVOL, and skew), that’s more to do with hedging trends.
Essentially, the monetization and counterparty hedging of existing customer hedges, as well as the sale of short-dated volatility, particularly in some of the single names where there was “rich” volatility, into the fall, lent to lackluster performance in IVOL and index mean reversion.
Accordingly, “if commodities are not performing … as a hedge, that opens the door,” to markets falling and traders demand equity volatility hedges, per The Ambrus Group’s Kris Sidial.
Learn about options dealer flows, inflation, and investing in a changing world with Cem Karsan.
Graphic: Retrieved by Physik Invest from TradingView. S&P Goldman Sachs Commodity Index.
Adding, per to SpotGamma, “a lot of the boost from volatility compression has played out. With IVOL at a lower bound, it may be opportune to replace static Delta bets for those that are dynamic (i.e., long option exposures) and have less to lose in this lower volatility environment.”
Graphic: Retrieved from Vix Central. The term structure of IVOL.
“In a case where market participants see the Fed keeping its commitment to aggressive monetary policy action, negative Delta options exposures may outperform static short equity (bets on the downside).”
Graphic: Retrieved from Bloomberg. “Thursday’s message was that on mature reflection, the progress on the economy didn’t justify taking the stock market any higher than it was at the start of the day.”
If bullish, sample structures to consider, given a smiley skew, include low- or zero-cost bullish call ratio spreads, against the trend resistances in products like the S&P 500 (INDEX: SPX).
Graphic: Retrieved from Bloomberg. Drawn on by Physik Invest.
Technical
As of 7:00 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a nearly balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher.
Any activity above the $4,227.75 HVNode puts into play the $4,253.25 HVNode. Initiative trade beyond the latter could reach as high as the $4,275.75 LVNode and $4,303.00 Weak High, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,227.75 HVNode puts into play the $4,202.75 RTH Low. Initiative trade beyond the RTH Low could reach as low as the $4,189.25 LVNode and $4,153.25 HVNode, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
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.
The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 750+ that read this report daily, below!
Graphic updated 7:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Fundamental
Equity market rally spurred by cooler a Consumer Price Index (CPI).
Expected was an 8.7% rise year-over-year (YoY) and 0.2% month-over-month (MoM). Core CPI (which excludes food and energy) was to rise by 6.1% YoY and 0.5% MoM, respectively.
Officially, the headline number rose to 8.5%. The core CPI rose 5.9% YoY and 0.3% MoM, meaning the March peak remains (6.5% YoY, then).
Participants responded positively to the number, as expected could happen in a case where the CPI printed lower.
As I talked about in yesterday’s morning letter and in a SpotGamma note, with easing inflation:
(1) investors may command a lower rate of return for their purchasing power and (2) lower rates (if policymakers were to become less aggressive) do less to negatively impact discounted cash flows and the ability to finance future growth.
It is the case that immediately after the release of the CPI, traders dramatically shifted their bets on monetary action.
Previously, it was thought a 75 to 100 basis point hike would follow the report. Now, there are higher odds, as priced by the market, that there is a 25 to 50 basis point hike.
Graphic: Retrieved from CME Group Inc (NASDAQ: CME).
“I think the market is a bit overly giddy on this CPI number and it’s probably unlikely that the [Federal Reserve] (Fed) will start to ease up and take a less hawkish stance,” The Ambrus Group’s Kris Sidial put forth.
“The increase in risk assets somewhat gives the Fed the green light to be able to move more swiftly with a hawkish tone.”
Accordingly, the Fed’s Mary Daly said it is too early to declare victory in the inflation fight (and rightfully so), signaling, however, that she may support a slower pace of hikes.
This is as home buyers and renters, in some areas, are seeing large hikes in prices. For instance, per one Bloomberg article, a Miami native saw their rent increase “by $650 to $2,400.00 a month,” forcing them to search for new places to live.
The Ambrus Group’s Sidial adds:
“Inflation is one of those things that is difficult to control when it’s out [of] the bag (historically). I think the Fed understands this and if they have the opportunity to tame it, while not completely obliterating risk assets, it seems like a perfect scenario.”
Ultimately, farther out in time, some metrics, which have incredible success in forecasting pivots, show the Fed likely to cut in 2023, shortly following the aggressive hiking cycle.
Graphic: Retrieved from Alfonso Peccatiello of The Macro Compass.
On the topic of (eventual) declines and slowing in the risk assets (like housing), “in most cases today, a borrower with 60 points of equity in their property, even facing moderate declines in their current home price, are not a big default risk,” explains Dan Ivascyn of PIMCO.
“A lot of what we like in the market today is seasoned-type risk that benefits from the multi-years of home price appreciation, and therefore is much less sensitive to what goes on from this point forward.”
From an S&P 500 (INDEX: SPX) perspective, the index has basically recouped half its losses for the year. This often came after the bear lows were in.
Graphic: Retrieved from Bloomberg.
Notwithstanding, here’s our updated liquidity tracker that is monitoring the “preeminent driver of markets during the post-crisis decade.”
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
Positioning
As of 7:15 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.04%. Net gamma exposures increasing may promote tighter trading ranges.
Given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of options structures (i.e., replacing static directional exposures or delta with those that are dynamic) tied to the broader measures we follow like the S&P 500 (given increased average stock correlation and lower return dispersion).
The reason why?
Per SpotGamma: “From an options perspective, a lot of the boost from volatility compression has played out. With implied volatility at a lower bound, it may be opportune to replace static delta bets for those that are dynamic (i.e., long option exposures) and have less to lose in this lower volatility environment.”
“In a case where market participants see the Fed keeping its commitment to aggressive monetary policy action, negative delta options exposures may outperform static short equity (bets on the downside).”
Technical
As of 7:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher.
Any activity above the $4,227.75 HVNode puts into play the $4,253.25 HVNode. Initiative trade beyond the latter could reach as high as the $4,275.75 LVNode and $4,303.00 Weak High, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,227.75 HVNode puts into play the $4,203.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,189.25 LVNode and $4,153.25 HVNode, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
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.
The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 750+ that read this report daily, below!
Graphic updated 7:45 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Fundamental
In a non-farm payroll update, it was shown that the US added more than two times the jobs many economists thought it would.
“Some of this is driven by a reduced participation rate – a smaller portion of the population seeking work and showing up in unemployment data,” Bloomberg’s John Authers explained.
Graphic: Retrieved from Bloomberg.
“It now becomes much easier for the Federal Reserve (Fed) to [continue] rais[ing] rates. If the employment market is still strengthening, while inflation remains its highest in decades, it’s hard to see why it shouldn’t.”
Accordingly, market participants are pricing a greater than 50% chance of the target Fed Funds rate increasing by 75 to 100 basis points to a target range of 300 and 325 basis points, up from 225 and 250 right now.
Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch tool.
Therefore, in addition to this (projected tax increases, the expected high coupon issuance/QT doubling in September and Q4, and the like), the “knee jerk re-leveraging flow [is likely to] not survive,” per Damped Spring’s Andy Constan.
Additionally, Morgan Stanley (NYSE: MS) and Goldman Sachs Group Inc’s (NYSE: GS) strategists, both express an outlook at odds with the recent market rally on the back of “better-than-feared second-quarter earnings.”
Per MS’s Michael Wilson, the expectation profit margins will continue to expand into 2023 is “unrealistic due to sticky cost pressures and receding demand.”
“While prices to the end consumer are still rising at a rapid clip, prices for producers are rising at double the pace.”
GS’s David Kostin concurs and expects net margins to drop ~25 basis points in every sector led by energy, health care, and materials, Bloomberg summarizes.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
On the topic of geopolitical conflict, which we talked a lot about in the August 3 letter, the US’s Nancy Pelosi visited Taiwan last week prompting Chinese military exercises in the region.
Overall, it is likely not in China’s best interest to press the conflict much further,” Authers puts forth. “Taiwan’s role in the world’s electronics industry means that the global economic impact of any conflict could dwarf the disruptions of the last two years sparked by the pandemic.”
These disruptions would pain the world, including China.
Positioning
As of 6:40 AM ET, Monday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.13%. Net gamma exposures decreasing may help with an expansion of range.
Given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of complex options structures (e.g., back spread).
For concision, we quote SpotGamma: “It’s the case when the fuel from a drop in option implied volatility is spent, as well as the sticky open interest at current prices rolls off, that options-related hedging does less to keep markets pinned.”
Technical
As of 6:40 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher.
Any activity above the $4,153.25 HVNode puts into play the $4,189.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,227.75 HVNode and $4,259.75 LVNode, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,153.25 HVNode puts into play the $4,117.75 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $4,073.00 VPOC and $4,040.75 HVNode, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active.
Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
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.
The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 750+ that read this report daily, below!
Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Fundamental
Shortened fundamentals section, today.
It’s the case that from mid-2020 to late-2021, as well explained by Damped Spring’s Andy Constan, the decline in risk premiums boosted assets, across the board.
Then, when “the drumbeats of quantitative tightening (QT) sounded on December 29,” the expansion in risk premiums bolstered a rotation out of risk.
Per Constan, conditions are unchanged.
The “knee jerk re-leveraging flow [] will not survive the high coupon issuance/QT doubling of the September and Q4. Fade the [fear of missing out] until Turkey day when Santa comes to town.”
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
Positioning
As of 7:00 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.14%. Net gamma exposures are increasing which may promote tighter ranges.
Further, given where realized (RVOL) and implied (IVOL) volatility are, as well as skew, it is beneficial to be a buyer of options structures (e.g., put back spread and/or call ratio spread).
Here is some context.
Per past letters, such as the Daily Brief for August 2, the monetization and counterparty hedging of existing customer volatility (i.e., options) hedges, as well as the sale of short-dated volatility, particularly in some single stocks where there was “rich” volatility into the fall, lent to lackluster performance in IVOL and index mean reversion.
Graphic: RVOL (orange) versus IVOL (white) on the S&P 500 (INDEX: SPX).
These forces have only grown and are, presently, adding to the stickiness of the move higher.
Well – though naive – if we take participants as trading similar to the way they do historically (i.e., buying stocks and hedging by selling calls and buying puts), the counterparty is left with a bullish trade (i.e., short put, long call).
Depending on (A) where the market is in relation to this exposure, as well as (B) where this exposure is more concentrated, the call or put side may solicit increased hedging activities.
Today, with markets trading higher and participants becoming increasingly active on the call side, the counterparties have a trade that is (becoming increasingly) bullish; positive delta (i.e., exposure to direction) and gamma (i.e., rate of change of exposure to direction) are growing.
Further, knowing that participants are concentrating their bets on options close to current market prices, which are very short-dated (and with little time to expiration), the counterparty’s exposure is way more sensitive to changes in direction because options can go from having a lot of value to very little in a small window (of time and movement).
In other words, it is a fact that an option that is at the money can go from having a near 50% chance of expiring in the money to 0%. However, if the time to expiry is shorter, then the speed at which these options may go from a near 50% chance of expiring in the money to 0% rises.
That’s probably one of the simplest ways one could explain put it.
Therefore (with activity becoming more concentrated at options strikes near current price, all the while IVOL continues to fall), into weakness, counterparties lean toward buying (selling) dips (rips).
Adding:
If you (like a counterparty) own a call option and want no exposure to the positive payoff when the market moves higher, you sell the underlying asset (e.g., stock, future).
If the market is sideways and slightly lower, while volatility is generally trending lower, as it is recently, and your option declines in value, then you must rebalance your hedge. So, you would buy (cover) some of your existing short stock and futures position to rebalance your deltas.
Moreover, the trends above may be coming to an end as entities are squeezed out of trades that aren’t working (i.e., participants continue to rotate out of poor-performing volatility and commodities).
Accordingly, Kai Volatility’s Cem Karsan explains that markets can, now, as that suppressive options activity fades, potentially, “really begin to respond to the core macro factors.”
Here’s why.
Should markets experience a shock (e.g., China and U.S. tensions escalate), the new demand for hedges may result in an “untethering” in IVOL, which was “one of the most supportive things into the decline,” Karsan explained.
That means that now is the best time to rotate into call options that are outperforming “their delta to the upside.”
Graphic: Via Banco Santander SA (NYSE: SAN) research, the return profile, at expiry, of a classic 1×2 (long 1, short 2 further away) ratio spread.
You may ask: what’s bolstering some of the market’s strength, in the shorter term?
In spite of negative macro narratives, as IVOL continues to decline and options, in general, are less sought after per their poor performance, what’s providing an added boost is the “cohort of quantitative-based investment strategies [buying] equities when volatility is lower,” according to statements by the Wall Street Journal.
“This year, these so-called systematic strategies have exited the market to historically low levels, meaning they have plenty of buying power.”
Much more next week! Talk soon.
Technical
As of 7:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, just inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher.
Any activity above the $4,153.25 HVNode puts into play the $4,189.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,227.75 HVNode and $4,259.75 LVNode, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,153.25 HVNode puts into play the $4,117.75 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $4,073.00 VPOC and $4,040.75 HVNode, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active.
Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
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.
The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 750+ that read this report daily, below!
Graphic updated 7:10 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Fundamental
A heavy week content-wise.
Monday, we talked about some of the big narratives participants are seeking to price. Tuesday and Wednesday we elaborated, providing information on the calculation of net liquidity and its relationship with equity index prices, as well as the probable paths the economy may traverse.
Today, we’ll add context with respect to some of the big headlines heading into today’s trade.
At the top of the list is geopolitical tension. US House Speaker Nancy Pelosi traveled to Taiwan.
It’s the case that “China views Taiwan as a breakaway island” subject to mainland rules. The visit by Pelosi, who, per NPR, “has long been a critic of China and an advocate for Taiwan’s democracy,” China viewed as a provocation.
Accordingly, China responded with trade boycotts and military exercises such as the firing of 11 missiles into the sea around Taiwan.
White House officials, per Bloomberg, were said to be “fuming” at Pelosi. In response, the Biden administration was seeking to put brakes on friendlier US and Taiwan policies.
In other news, an ISM Services reading climbed unexpectedly, easing the concern of economic slowing while other data showed material and commodity prices falling.
Graphic: Retrieved from S&P Global Inc’s (NYSE: SPGI) commodity insights.
Still, more firms, from the likes of Credit Suisse Group AG (NYSE: CS) to Robinhood Markets Inc (NASDAQ: HOOD), are seeking to cut thousands of jobs and restructure.
And, though equity markets are enjoying some relief, profit forecasts continue to be cut, and broad measures of the supply of money are falling.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
Additionally, many maintain that conditions are set to get tighter with the Bank of England raising rates the most since 1995 and a Fed funds rate of 5-6% not out of the realm of possibilities.
Graphic: Retrieved from @ConvexityMaven. “Home buyers don’t panic, retail Mortgage rates should soon be under 4.90%. MBS (mortgage bonds) usually trade ~75bp above the 10yr swap rate (~85bp above the UST10yr rate). The retail Home loan rate should be ~100bp above MBS rate (chart). Mortgage brokers will be begging soon.
Positioning
As of 7:10 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.14%. Net gamma exposures increasing may promote tighter ranges at higher price levels.
Context: Customers concentrate bets at and above current S&P 500 (INDEX: SPX) prices. Taking the naive view and assuming this activity is, indeed, aligned with historical trends (i.e., customers sell calls and use those proceeds to finance protection, down below), then counterparts are likely taking on exposure to more long call positions, which they hedge by selling underlying. Into strength, some more underlying will be sold. Into weakness, some underlying will be bought. This activity can promote mean-reversion at higher prices.
Graphic: Retrieved from SpotGamma. Changes in call open interest.
As well put in our August 3 letter, given where realized (RVOL) and implied (IVOL) volatility are, as well as skew, it is beneficial to be a buyer of options structures (e.g., put back spread).
Graphic: Updated 8/3/2022. Time-lapse skew on the S&P 500 (INDEX: SPX) for Tuesday, Monday, and one week ago. Retrieved from Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.
According to SpotGamma, “data suggests markets have entered into a period of normalization” and “IVOL likely reached a lower bound (see the bid skew).”
Graphic: Retrieved from Bloomberg. “The CBOE VIX index shows price swings usually rise in the summer and early autumn, and the S&P 500 is now entering its period of the worst historical returns over the past 25 years.”
“To maintain a risk-on (rally) environment, traders would need to position themselves into call options, now, further up in price, farther out in time, which they seem to be doing, albeit in not overly significant quantities.”
Notwithstanding, as SpotGamma adds, “with participants getting rid of commodity inflation and long volatility hedges that performed poorly, [this] (1) leaves equity markets more susceptible to the whims of potentially negative underlying macro forces and (2) leaves volatility markets more prone to jumps.”
Thus far, it’s the case that we’re far more than halfway through a dot-com type collapse that’s happened “underneath the surface of the indices,” per Simplify Asset Management’s Mike Green. Should those strong passive flows falter, that likely takes from some of the support in the largest of index constituents.
Graphic: Retrieved from The Market Ear. Via Barclays PLC (NYSE: BCS).
Were the latter to happen, you’d want protection in the form of structures that would enable you to monetize on some sort-of non-linear repricing in volatility (e.g., butterflies and back spreads), should participants seek protection in a way they haven’t this year.
If nothing were to happen, the bid in skew would, at least, assist those structures in maintaining their value better, essentially.
Technical
As of 7:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, just inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher.
Any activity above the $4,153.25 HVNode puts into play the $4,189.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,227.75 HVNode and $4,259.75 LVNode, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,153.25 HVNode puts into play the $4,117.75 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $4,073.00 VPOC and $4,040.75 HVNode, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active.
Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
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.
The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 700+ that read this report daily, below!
Graphic updated 9:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
Fundamental
Our August 1 letter assessed, mainly, the impacts of a burgeoning economic war that is hot as well put by a recent note authored by Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar.
Read: Dr. Pippa Malmgren’s “A Hot War In Cold Places,” which was quoted by Credit Suisse’s Pozsar. Additionally, check out our archives for more analysis of Malmgren’s perspectives.
“Great powers are waging hot wars involving the flow of technologies, goods, and commodities,” the big “contributors to inflation,” a longer-lasting structural issue, Pozar puts forth.
Further, it is the case that “the pillars of the low inflation world are changing,” and geopolitics are the factors bolstering longer-lasting uncertainty and risk premia.
What was the case, before?
Previously, central bankers were waging wars “against deflationary impulses coming from the globalization of cheap resources (labor, goods, and commodities),” which we covered before.
Now, central bankers have a more difficult task stemming inflationary impulses coming from a complex and non-linear economic war between the U.S., China, and Russia that will do more, long-term, to “weaken the pillars of the globalized, low inflation world.”
So:
Deflation, on globalization (and outward supply shifts), was fought with asset price inflation.
Inflation, on de-globalization (and inward supply shifts), is fought with asset price deflation.
Exacerbating the de-globalization pulse on popular sovereignty, which I had the honor of talking on with Andy Constan, recently, are “wealth gains sapping labor force participation” and trends such as ESG, among other things.
“It’s a mess: it’s easier to deal with the politics of wage setting than it is to ‘grow’ people – even in The Matrix, that’s possible only over time. Until then, we are stuck with a labor shortage, and President Biden’s top labor lawyer is the anti-Reagan: she’s encouraging the unionization of workers from Amazon to Starbucks…as opposed to firing them,” Pozsar explains.
For context, among the factors that helped Chairman Volcker stem inflation were new energy investment and the weakening of unions.
Accordingly, in a move from “generating demand structurally to soak up an excess supply of cheap stuff, to curbing demand structurally to adjust to shortages,” the prevailing tightening effort is not cyclical, as in corresponding to a business cycle. It’s structural.
It requires the sharp, “inward shift of supply curves across multiple fronts (labor, goods, and commodities),” putting the economy on an “L”-shaped path (i.e., a vertical drop in activity via recession, and flatline for a period of time as rates remain higher for longer to prevent a sharp rise in inflation, again).
Market participants, because of this, should be thinking about how deep (i.e., long-lasting) a recession is needed to curb inflation (rather than if a recession will happen at all); necessary is the purge of the “Super Size Me” mentality, Pozsar explains, and slow “interest-rate sensitive parts of the economy (housing and durables),” as well as reduce “demand for labor in services, … a function of the level of wealth across a range of assets (housing, stocks, as well as crypto).
“[W]hat the Fed is telling us when it flat-out dismisses two-quarters of negative GDP growth is that it isn’t focusing as much on the rate-sensitive parts of the economy as it did in the past,” Pozsar well summarizes, adding that 5-6% rates are not out of the realm of possibilities.
“Instead, it is focusing much more on the services economy and the labor market, which still remain strong. And therein lies the cautionary tale for the market.”
Looking out further in time, after inflation has been stemmed, the question is how the economy accelerates, again, and achieves stable growth. That depends on the West developing its own supply of things so “that ‘L’ becomes ‘L/’ and … that recovery [will be driven by] fiscally funded industrial policy.”
Graphic: Retrieved from Bloomberg. “Interest rates may be kept high for a while to ensure that rate cuts won’t cause an economic rebound (an ‘L’ and not a ‘V’), which might trigger a renewed bout of inflation,” Pozsar wrote in his note. “The risks are such that Powell will try his very best to curb inflation, even at the cost of a ‘depression’ and not getting reappointed.”
Positioning
Regarding the topic of liquidity – money available for circulation – which was discussed in-depth Tuesday, August 2, below is an updated chart of our Liquidity Tracker. Conditions are mostly unchanged.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
Moreover, in terms of options-related positioning, as of 8:50 AM ET, Wednesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.21%. Net gamma exposures increasing may promote tighter ranges.
Given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of complex options structures (e.g., put back spread).
The reason why?
Well, as discussed in-depth Tuesday, prevailing policy narratives are likely to bolster risk premia “everywhere else,” and that does more to support our recent positioning analyses and the case for an “untethering” in equity implied volatility (IVOL), “one of the most supportive things into the decline,” per statements by Kai Volatility’s Cem Karsan.
Basically, given the macro risk, IVOL is likely at a lower bound (as validated by the S&P 500 trading higher and downside skew holding a bid) and, per The Ambrus Group’s Kris Sidial, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”
Through downside protection (e.g., butterfly and back spreads) you can position yourself to monetize on the sort-of non-linear repricing in volatility we’re alluding there is potential for. The bid in skew is helping those structures maintain their value better, essentially.
Graphic: Time-lapse skew on the S&P 500 (INDEX: SPX) for Tuesday, Monday, and one week ago. Retrieved from Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.
Technical
As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher.
Any activity above the $4,117.75 MCPOC puts into play the $4,149.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,164.25 RTH High and $4,189.25 LVNode, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,117.75 MCPOC puts into play the $4,073.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,040.75 and $4,015.25 HVNodes, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
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.
The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 700+ that read this report daily, below!
Graphic updated 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. 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
The U.S. Treasury upped its borrowing estimate by $262 billion as federal revenue projections shifted.
Here’s why this matters.
Per Damped Spring’s Andy Constan, on an “overwhelming high issuance in Q1,” markets sold, and on “light issuance, once QT start[ed], plus some crazy tax receipts in Q3,” markets rallied.
With the Treasury’s debt managers seeking to borrow more than $400 billion through September, compared to the original estimate of $180 billion or so, anticipated is added borrowing through new marketable debt issuances.
“This is the reason I dumped my long equities after 3:00 when the news hit,” Constan added.
Overall, this news is important because it has an impact on the money available for circulation.
To explain, after the Federal Reserve (Fed) bean upping the size of its balance sheet (BS) in an unprecedented way in 2020, the deployment of this money – liquidity – boosted risk-asset prices and the cost of living.
We can measure the availability of this liquidity, as well showcased by Max Anderson, online.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
So, what’s going on, now?
To rein inflation, and undo some of its intervention, the Treasury issued fewer short-dated T-bills, and the Fed raised rates on Reverso Repo (RRP), “the next best low-duration-risk alternative.”
This has sucked over $2 trillion out of the economy, “six times more than ever done before.”
That said, unlike in the past, however, “relative changes in [the] Treasury General Account (TGA) and RRP” are way bigger than changes in the size of the BS.
As a result, the game changes.
The “changes in TGA and RRP have taken over as the primary drivers [of] Net Liquidity,” the money available to circulate in the economy. “[S]ince 2020, the Treasury and Reverse Repo [control] that. Not the size of Fed’s balance sheet.”
That’s per the tight correlation between Net Liquidity and the S&P 500. Offsetting the two by two weeks (i.e., using the path of Net Liquidity to forecast the path of the S&P 500 by two weeks in advance) reveals a tight correlation.
As Anderson puts it, “when there’s a change in Liquidity, it takes two weeks to propagate out into the economy and impact asset prices. And that change in Liquidity predicts next two week’s change in asset prices with 95% correlation.”
See a file containing the data and charts, here. We’ll work to improve the charts in subsequent letters.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
Positioning
As of 6:30 AM ET, Tuesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.29%. Net gamma exposures increasing may promote tighter ranges.
Given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of complex options structures (e.g., back spreads).
The reason why?
Pursuant to our comments on monetary policymakers ditching forward guidance, which, per the Macro Compass’ Alfonso Peccatiello leaves “no anchor for bond markets, … and higher volatility,” bolsters risk premia “everywhere else.”
As stated Monday, this does more to support our recent positioning analyses and the case for an “untethering” in equity IVOL, “one of the most supportive things into the decline,” per statements by Kai Volatility’s Cem Karsan.
Here’s some context.
As well explained in the Daily Brief for July 21, 2022, heading into the 2022 decline, institutions repositioned and hedged, even allocating to “commodity trend following,” per our Daily Brief for July 15, 2022, which worked well the first two quarters.
The monetization and counterparty hedging of existing customer hedges, as well as the sale of short-dated volatility, particularly in some of the single names where there was “rich” volatility, into the fall, lent to lackluster performance in IVOL and index mean reversion.
This trend is coming to an end as entities are squeezed out of trades that aren’t working (i.e., participants rotate out of volatility and commodities).
Per Karsan, as “volatility itself, on the equity side, becomes less and less hedged on the customer level, … [the] market can really begin to respond to the core macro factors.”
Should markets experience a shock (e.g., China and U.S. tensions escalate), the new demand for hedges may result in an “untethering” in IVOL, which was “one of the most supportive things into the decline,” Karsan said, adding that now is the best time to rotate into call options which are outperforming “their delta to the upside.”
Latest footage circulating on Chinese social media WeChat shows armoured vehicles on the move in the southern Chinese city of Xiamen, as US Speaker Pelosi is reportedly heading to Taipei. pic.twitter.com/ePpJsO2VyM
Accordingly, given the macro risk, IVOL is likely at a lower bound (as validated by the S&P 500 trading higher and downside skew holding a bid) and, per The Ambrus Group’s Kris Sidial, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”
Through downside protection (e.g., butterfly and back spreads) you can position yourself to monetize on the sort-of non-linear repricing in volatility we’re alluding there is potential for. The bid in skew is helping those structures maintain their value better, essentially.
Graphic: Time-lapse skew on the S&P 500 (INDEX: SPX) for Monday, Friday, and one week ago. Retrieved from Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.
Technical
As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher.
Any activity above the $4,117.75 MCPOC puts into play the $4,149.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,164.25 RTH High and $4,189.25 LVNode, or higher.
In the worst case, the S&P 500 trades lower.
Any activity below the $4,117.75 MCPOC puts into play the $4,073.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,040.75 and $4,015.25 HVNodes, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
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.
