Categories
Commentary

Daily Brief For September 23, 2021

Market Commentary

Equity index futures trade higher with yields. VIX and most commodities sideways to lower.

  • Buy-the-dip mantra slowly fading.
  • Fed is eyeing a taper, raise rates.
  • SPX to 4.7-5K at end of the year.
  • Positioning: Still at a key juncture.

What Happened: U.S. stock index futures auctioned higher alongside news the Federal Reserve held advanced talks on paring back its asset purchase program and raising rates. 

In other news, JPMorgan Chase & Co (NYSE: JPM) strategists suggest the buy-the-dip mantra is at risk.

Ahead is data on jobless claims (8:30 AM ET), Markit manufacturing and services PMI (9:45 AM ET), leading economic indicators (10:00 AM ET), as well as real household net worth and nonfinancial debt (12:00 PM ET).

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. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 may open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on strong intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by mostly sideways trade and higher value areas.

This is significant because sideways-to-higher trade and an intent to separate value (i.e., break from balance, higher) reflects a willingness to check and resolve some unfinished business (e.g, $4,425.00 untested point of control or VPOC).

We’re carrying forward the overhead supply; the 20- and 50-day simple moving averages, as well as the anchored volume-weighted average prices (VWAP), north of the $4,425.00 VPOC, are some key dynamic levels that must be taken to change the tone. 

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 a fraying in the buy-the-dip psychology, as well as a belief that companies will continue to do good into year-end. The implications of these themes on price are contradictory

On one hand, as discussed yesterday, JPMorgan Chase & Co’s Marko Kolanovic stated that despite “technical selling flows (CTAs and option hedgers) in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks,” the equity market would continue higher with the S&P 500 ending 2021 at 4,700, with the potential to break 5,000 next year.

On the other hand, strategists led by JPMorgan Chase & Co’s Nikolaos Panigirtzoglou wrote that the psychology of buying the dip is fraying; “Observing flows for signs that this change in behavior would prove more persistent is important over the coming days” as the S&P 500 continues to trade below its 50-day simple moving average alongside concerns over waning stimulus, inflation, the debt ceiling, and China’s debt crisis.

Adding, Goldman Sachs Group Inc’s (NYSE: GS) Peter Oppenheimer, alongside HSBC Holdings Plc (NYSE: HSBC) strategists, believes dip-buying is a go as “we’re still in the relatively early stages of this economic cycle.” 

In terms of positioning, SpotGamma data suggests the S&P 500 is still at an intersection (i.e., short gamma) that portends increased volatility, should the index continue lower.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,393.75 high volume area (HVNode) puts in play the $4,425.00 VPOC and balance area low (BAL). Initiative trade beyond the VPOC could reach as high as the $4,481.75 HVNode and $4,510.00 low volume area (LVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,393.75 HVNode puts in play the $4,365.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $4,294.00 regular trade low (RTH Low) and $4,233.00 VPOC, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

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

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

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.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

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

News And Analysis

U.S. default this fall would cost 6M jobs, wipe $15T.

Central banks aim to limit digital currency disruption.

New York faces more than water-related climate risk.

Fed signals the possibility of 6 to 7 rate hikes, taper. 

Building the future depends on building more homes.

Fed officials believe ‘transitory’ inflation lasts longer.

Platform backed by Fidelity, Goldman digitizes IPOs.

Slower car production hit the pricing of commodities.

Founder of volatility-hedging program eyeing a drop.

The Emerging Ecosystem: Digitalization of markets.

JPMorgan team says flows show buy-the-dip fading.

China pumped $17B, tells Evergrande to not default.

ARK Invest’s Wood to sell Tesla if it reached $3,000.

Goldman’s Oppenheimer said a 10% dip is buyable.

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 22, 2021

Market Commentary

Equity index futures trade sideways to higher with yields and the dollar. Volatility ebbs.

  • Despite risks, market in solid position.
  • Ahead: Existing homes sales, FOMC.
  • Value overlaps; a breakout is coming.

What Happened: U.S. stock index futures auctioned sideways as participants looked to position themselves for new information with respect to the Federal Reserve’s intent to make policy adjustments.

In other news, Wall Street analysts suggest China’s Evergrande debacle is not a Lehman moment. 

Ahead is data on existing home sales (8:30 AM ET), an FOMC statement (2 PM ET), as well as Fed Chair Jerome Powell’s news conference (2:30 PM ET).

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. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

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

Adding, during the prior day’s regular trade, on lackluster intraday breadth and market liquidity metrics, the worst-case outcome occurred, evidenced by symmetrical, overlapping value areas.

This is significant because sideways trade (i.e., balance) marks acceptance, or a willingness to transact at lower prices, after an earlier liquidation. 

We’re carrying forward the overhead supply; the 20- and 50-day simple moving averages, as well as the anchored volume-weighted average prices (VWAP), north of the $4,425.00 untested point of control (VPOC), are some key dynamic levels that must be taken to change the tone. 

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, according to JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic, the aforementioned trade is happening in the context of “technical selling flows (CTAs and option hedgers) in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks.” 

Despite these conditions, Kolanovic anticipates a continued move higher in the equity market as the COVID-19 delta wave fades and companies beat third-quarter earnings expectations.

“We remain constructive on risk assets and last week upgraded our S&P 500 price target, given expectations of a reacceleration in activity as the delta wave fades and better than expected earnings,” Kolanovic added. “Risks are well-flagged and priced in, with stock multiples back at post-pandemic lows for many reopening/recovery exposures; we look for Cyclicals to resume leadership as delta inflects. We expect the S&P 500 to reach 4,700 by the end of 2021 and to surpass 5,000 next year.”

In terms of positioning, SpotGamma data suggests the S&P 500 is at an important junction ahead of the Federal Open Market Committee statement and news conference, later today; a directional move higher (lower) could set the index up for lower (higher) volatility.

Graphic: Based on an analysis of positioning in the options market, SpotGamma plots key levels to be aware of; presently, the S&P 500 is in short-gamma territory. Gamma is the sensitivity of an option to changes in the underlying price. Those that take the other side and warehouse these risks hedge their exposure 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.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,365.25 LVNode pivot puts in play the $4,393.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,425.00 untested point of control (VPOC) and $4,481.75 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,365.25 LVNode pivot puts in play the $4,346.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,294.00 regular trade low (RTH Low) and $4,233.00 VPOC, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

Definitions

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

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

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.

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.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

News And Analysis

A modest shift in retail spending amid variant uncertainty.

The gobal economic recovery is hitting some speed limits.

Areas of emerging markets present investor opportunities.

The Fed debate on tapering just became a lot more tricky.

House passes debt limit suspension, setting up standoffs.

Democrats pursue the debt move with emergency option.

Evergrande is not another Lehman. Here is the bad news.

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 21, 2021

Market Commentary

Equity index futures trade higher with commodities and yields. Volatility ebbs. 

  • Ahead is a 2-day FOMC meeting.
  • SPX below balance, 50-day SMA.
  • Conditions slowly start improving.

What Happened: End of day rally continued overnight with U.S. stock index futures negating much of yesterday’s liquidation. This comes alongside news questioning Evergrande’s ability to make good on its liabilities, as well as the Federal Reserve’s two-day policy meeting.

Ahead is data on building permits, housing starts, and the current account (8:30 AM ET).

Graphic updated 6:40 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:40 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting a higher potential for immediate directional opportunity.

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

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

During the prior day’s regular trade, on weak intraday breadth and divergent market liquidity metrics, the worst-case outcome occurred, evidenced by trade below yesterday’s pivot, the $4,365.25 low volume area (LVNode). 

This trade is significant because it was an acceptance of the overnight gap, a willingness to transact at lower prices. We’re carrying forward the presence of emotional, multiple distribution structures left behind the initiative trade. Also, though the selling covered a lot of ground, it was measured and the CBOE Volatility Index (INDEX: VIX) is now down 20% from Monday’s peak. 

To note, coming into Monday’s liquidation, according to SqueezeMetrics, “the current combination of weak put flows and large customer vanna exposure” was fragile; “Historically, this means SPX down, VIX up.”

Adding, according to SpotGamma, it’s likely Monday’s liquidation was a combination of equity de-risking, combined with short gamma from options positioning. See definition below.

Analysts at JPMorgan Chase & Co (NYSE: JPM) support that belief: “The market sell-off that escalated overnight we believe is primarily driven by technical selling flows in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks.”

Graphic: Tier1Alpha market research graphic via The Market Ear.

Coming into Tuesday’s regular trade, conditions have improved; now, the focus is the September 21-22 Federal Open Market Committee (FOMC) meeting ending Wednesday.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,365.25 LVNode pivot puts in play the $4,393.75 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,425.00 untested point of control (VPOC) and $4,481.75 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,365.25 LVNode puts in play the $4,346.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,294.00 regular trade low (RTH Low) and $4,233.00 VPOC, or lower.

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

Definitions

Gamma: To note, gamma is the sensitivity of an option to changes in the underlying price. Those that take the other side and warehouse these risks hedge their exposure 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.

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

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

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

News And Analysis

Megacap tech selloff hits $500B since Nasdaq 100 peak. 

Fintech SPACs pick up as revenue clarity allays concern.

J&J said a second COVID shot boosts protection to 94%.

Wall Street’s message on Evergrande: China has control.

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Weekly Brief For July 25, 2021

Market Commentary

Key Takeaways: After a short sell-off, volatility ebbs as equity index futures trade higher.

  • Unpacking factors lending to the volatility.
  • Jitters ahead of Federal Reserve meeting.
  • Earnings outlook up. Priced to perfection? 
  • COVID-19 resurgence to not limit mobility.
  • Analyzing tightening and the shift to fiscal.

What Happened: Last week’s violent trade came as inflation measures rose the largest since the Global Financial Crisis.

At and around the same time was a monthly options expiration (OPEX) which opened the window to fundamental dynamics (e.g., a shift in preferences from saving and investing to spending, monetary tightening, seasonality, COVID-19 resurgence) given a “reduction in large options positions, and the hedging associated with them,” according to SpotGamma, an authority in the space.

The subsequent sell-off then moved the market into short-gamma, an environment in which the opposing side of options trades hedge by buying into strength and selling into weakness, thereby exacerbating volatility.

To note, we’re discussing the implications of derivatives since option volumes are comparable to stock volumes and, as a result, related hedging flows can represent an increased share of volume in underlying stocks.

Further, the reversal caught many by surprise. Why? Downside risks were thought to have been compounded by equity, bond, and derivatives market positioning, among other factors.

For instance, some metrics implied froth with respect to the number of put options being sold to open, a potentially destabilizing force given associated hedging forces.

To note, put sales, which can be part of sophisticated volatility-based trading strategies, can imply confidence as market participants look to options for income, and not insurance.

Amidst the selling, though, some indicators suggested participants more so became interested in puts as downside protection.

Then, on July 19, the S&P 500 rebounded as near-term discovery reached a potential limit, based on market liquidity metrics and the inventory positioning of participants.

SpotGamma’s metrics confirmed; participants bought calls and sold puts suggesting confidence in the low.

In explaining the violent reversal and follow-through, it’s useful to point to three factors – the change in the underlying price (gamma), implied volatility (vanna), and time (charm) – known to impact an options exposure to directional risk or delta.

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on an underlying’s order book. 

In short, in selling a put, for instance, customers indirectly add liquidity and stabilize the market. 

How? The market maker long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

On the other hand, as the market reverses and continues rising, volatility compresses, and any puts that were bought quickly lose value, thereby lowering the opposing side’s directional risk.

As a result, short hedges are bought back, adding fuel to the price rise.

Considerations: The recession is over and the outlook for earnings is great.

That is reflected by heightened valuations, peak positioning, and S&P 500 price targets.

Also, in spite of extreme fear in the face of a COVID-19 resurgence, red states, where the risks of transmission are greater given lower vaccination rates, will likely not limit mobility while blue states are more so highly vaccinated and will remain mobile, according to Bloomberg

That brings us to the topic of monetary policy. 

The U.S. is in a different place from the rest of the world and is likely to eliminate its output gap this year which would call for a tightening in policy and dollar strengthening, helping douse inflation.

Graphic: Implications of high single-digit inflation on S&P 500 returns via Bloomberg.

On that note, Moody’s strategists comment: “The impressive growth in value across many asset classes is projected to taper off within the next couple of years as supportive policy is unwound. The 10-year Treasury yield will rise above 2% by 2022 and the fiscal tailwinds will also have faded by then.”

When liquidity is removed, as policymakers look to fiscal policy to address inequality, for instance, corporations may have to worry about making money, again. 

“That’s ultimately how we grow out of these valuations,” Kai Volatility’s Cem Karsan explained to me in an article Benzinga will release next week. “These cycles are a lot shorter than the monetary supply-side cycles but they tend to be very bad for multiples and great for economic growth.”

What To Expect: Ahead of the upcoming Federal Reserve meeting, participants will want to temper their expectations on future volatility and focus their attention on where the S&P 500 trades in relation to the $4,384.50 low volume area (LVNode) pivot, a prior all-time high (ATH).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,384.50 LVNode puts in play the $4,407.75 ATH. Initiative trade beyond the ATH could reach as high as the $4,428.25 and $4,470.75 Fibonacci-derived price extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,384.50 LVNode puts in play the $4,357.75 LVNode. Initiative trade beyond the $4,357.75 LVNode could reach as low as the $4,341.75 micro-composite Point of Control (MCPOC) and $4,325.75 LVNode.

Note also that the last key level corresponds with two key Volume Weighted Average Price (VWAP) levels, 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.

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.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. Note, flow in the S&P 500 may denote the trade of box spreads.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

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

Categories
Commentary

Daily Brief For July 19, 2021

Market Commentary

Equity index futures, commodities, and yields are all lower.

  • COVID resurgence, geopolitical tensions.
  • Ahead: Light day with only earnings data.
  • Stock indices are lower; RUT leads move.

What Happened: U.S. stock index futures auctioned lower overnight alongside news of COVID-19 resurgence and escalating tensions between China and NATO allies. 

This trade comes ahead of a relatively light day in terms of releases. Today, participants will only get data on company earnings.

Graphic updated 6:45 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

What To Expect: As of 6:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting an increased potential for directional opportunity.

Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area.

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

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

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by a spike from value.

Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

This comes as Morgan Stanley (NYSE: MS) believes downside risks are compounded by equity and bond positioning, low short interest, and the involvement of systemic strategies which could intensify a sell-off.

Add to that last week’s monthly options expiry (OPEX), participants could be in for a volatile day as the market enters into so-called a short-gamma environment; in such a case, the opposing side of options trades hedge exposure by buying into strength and selling into weakness, exacerbating volatility.

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

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,285.75 micro-composite POC puts in play the $4,297.00 HVNode. Initiative trade beyond the $4,297.00 HVNode could reach as high as the $4,314.75 HVNode and $4,334.25 spike base.

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.

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.

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.

In the worst case, the S&P 500 trades lower; activity below $4,285.75 puts in play the $4,273.25 HVNode. Trade beyond the $4,273.25 HVNode could reach as low as the $4,256.75 and $4,239.25 HVNode.

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

News And Analysis

Robinhood aims for up to $35B valuation in a U.S. IPO. (REU)

The CPI has not altered the Fed’s narrative on inflation. (Moody’s)

OPEC+ agrees oil supply boost after new compromise. (REU)

U.S., U.K. allies blame Chinese government for a hack. (BBG)

Infrastructure bill drops tax enforcement, Senator says. (BBG)

Florida leads U.S. in COVID cases amid variant surge. (Axios)

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

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

Categories
Commentary

Weekly Brief For May 31, 2021

Market Commentary

Key Takeaways: Index futures in balance.

  • Best to assume the taper tantrum happened.
  • Ahead: Fed speak and data on employment.
  • Indices traded sideways-to-higher last week.

What Happened: Coming into the large May monthly options expiration (OPEX) and extended holiday weekend, U.S. stock index futures pinned, trading sideways-to-higher.

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

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

Gamma 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.

Furthermore, looking back, the movement in price was both volatile and mechanical.

After a short covering-like rally toward $4,200.00, the S&P 500 was responsively bought and sold at key visual references, suggesting a dominance by short-term participants.

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

The technically-driven trade denotes a lack of interest by institutional participants, at record highs; supply chain uncertainties and rising inflation, fiscal and monetary tightening, COVID-19 concerns, political risks, and the like, are some of the emerging concerns larger participants are looking to price in.

Of all the above risks, inflation remains the hottest topic.

Generally speaking, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive). With the rapid recovery, though, market participants fear that rates will rise to protect the economy from overheating.

Higher rates have the potential to reduce the present value of future earnings, making stocks, especially those that are high growth, less attractive. 

To note, however, rates remain range-bound; rates on the 10 Year T-Note sit below their March high and are likely to continue higher, which the market may absorb

How may the market absorb a rise in rates? During the so-called Taper Tantrum, in the early 2010s, rates settled in a wide range, and equities rallied big. Adding, some strategists, like Kit Juckes of Societe Generale SA (OTC: SCGLY) suggest it may be best to assume a tantrum has already happened.

“U.S. 10-year yields rose from a low of 1.4% in 2012 to 3% during their tantrum. In this cycle, the rise has been from 0.5% to a high just below 1.8%. That’s comparable in relative terms. The eventual peak in U.S. yields in 2018 was 3.25%. Can’t we accept that the taper tantrum has already happened? The important difference is that in the tantrum cycle, core CPI never got above 2 ½%. A bet on further bond weakness is a bet on inflation proving to be stickier than the Fed can cope with.”

Adding, research by JPMorgan Chase & Co (NYSE: JPM), as well as Goldman Sachs Group Inc (NYSE: GS), suggests equities may be getting cheap with reflationary themes being the go-to play. This sentiment would help explain the increased interest in S&P 500 and Nasdaq 100 call options.

Graphic: Equity valuations at their cheapest, relative to the macro in March 2009 and in the depth of the 1982 recession, according to Goldman Sachs Group Inc (NYSE: GS), via The Market Ear.
Graphic: SHIFT search suggests participants were becoming more interested in call strikes at and above current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week prior. Activity in the options market was primarily concentrated in short-dated tenors, in strikes at and above $425.

Outlier risks remain, though; aside from the seasonally weak period, S&P 500 skew – a measure of perceived tail risk and the chances of a black swan event – rose dramatically over the past few weeks. At the same time, sentiment cooled considerably, while individual stock volatility increased the potential for a repeat of the GameStop Corporation (NYSE: GME) de-risking event.

Graphic: Goldman Sachs Group Inc (NYSE: GS) unpacks outlier risks based on the implied volatility of S&P 500 out-of-the-money options, via The Market Ear.

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the $4,197.25 high volume area (HVNode).

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

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

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above $4,197.25 has the potential to reach the $4,227.00 point of control (POC). Initiative trade beyond the POC could reach as high as first the $4,238.00 overnight all-time high (ONH) and then, the $4,294.75 Fibonacci-derived price extension, a typical recovery target. 

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

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

In the worst case, the index trades lower; activity below the $4,177.25 HVNode puts in play the $4,153.25 HVNode, first. Thereafter, if lower, the $4,122.25 HVNode and $4,071.00 POC come into play. 

On a cross through the $4,050.75 low volume area (LVNode), long-biased traders should beware of a rapid liquidation, as low as first the $4,015.00 and $4,001.00 POCs. In such a liquidation, odds favor a test of ~$3,970.00 50.00% retracement, as well as the $3,918.00 61.80% retracement and HVNode.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). Nasdaq is primed for upside and has the potential to pull the S&P with it. 

News And Analysis

Trade | One of the world’s top ports expects delays on an outbreak. (BBG)

Markets | PBOC raises reserve ratio for foreign exchange holdings. (BBG)

Economy | Recovery solidifies in U.S., Europe, while EM faces risks. (Moody’s)

Markets | China bars banks from selling commodity-linked products. (REU)

Economy | Fed security purchases draw fire in hot U.S. housing market. (S&P)

Energy | Global oil demand is seen eclipsing India, Iran’s uncertainty. (S&P)

Economy | U.S. won’t experience stagflation over next few years. (Moody’s)

Economy | Non-government loans seeing a jump in forbearances. (MND)

Economy | U.S. speculative-grade corporate default rate to fall to 4%. (S&P)

Markets | Inflation, higher oil, stronger yuan point in same direction. (BBG)

Economy | U.S. retailers face headwinds from slowing sales, inflation. (S&P)

Markets | Everyone with bonds to liquidate had ample time to do so. (BBG)

What People Are Saying

Innovation And Emerging Trends

Markets | How recent growth in leveraged finance affects investors. (BZ)

Politics | Tech growth overshadowed by regulatory risks, challenges. (S&P)

Markets | Chamath: SPACs need more oversight and regulation. (BBG)

Politics | China moves to a three-child policy to boost its birthrate. (BBG)

Markets | Shakeout stirs debate over ether’s long-term potential. (BBG)

FinTech | Which banks are positioned for low rates, digital adoption. (S&P)

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For April 21, 2021

Market Commentary

Index futures auction within prior range, position for directional resolve.

  • Virus surges, earnings accelerate.
  • Calendar light. ECB rate decision.
  • Buyers responded to lower prices.

What Happened: U.S. stock index futures auctioned sideways, overnight, after strong downside discovery the day prior.

ING Group Strategists“Markets remain very much caught between the rock of improving macroeconomic conditions and the treacherous waters of geopolitical risks and alarming Covid-19 case growth in some corners of the world.”

What To Expect: Wednesday’s regular session (9:30 AM – 4:00 PM EST) 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, the worst-case outcome occurred, evidenced by initiative trade beyond the $4,142.00 regular trade low, down to the $4,122.75 HVNode, which is significant because denotes an area of prior two-sided trade.

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.

Further, in a nutshell, the market explored higher prices and is now probing into pockets of old value to drum up increased participation. The market is doing what it is supposed to — move to the area where participants want to do business. Given the remaining price targets at $4,200.00 and minimal excess (i.e., flat high) left behind last Friday’s price discovery, odds are participants lacked conviction and the market was unable to advertise higher prices.

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

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

This is generally a bullish dynamic. Why? Think of there being unfinished business at the all-time high. As stated earlier, a market moves to where there is business to be conducted.

Moving on, the two-day liquidation has pushed the S&P 500 down into short-gamma territory. This is not good. Why? Short-gamma is opposite to the forces that crush volatility and promote lengthy bursts of momentum.

Liquidation Breaks: The profile shape suggests participants were “too” long and had poor location.

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.
Graphic: SPDR S&P 500 ETF Trust (NYSE: SPY) in short-gamma territory, via SpotGamma.

Due to occurrences discussed in the weekend commentary, such as increased put selling during market strength, volatility expansion and a rise in delta (i.e., exposure to the underlying asset) will force put-side option sellers to sell into weakness, to hedge off their risk, thereby exacerbating volatility.

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

In the event that some exogenous event (e.g., COVID-19 resurgence, tax-hike) was to surface, odds favor increased volatility and potential for downside.

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

In the best case, the S&P 500 trades higher; activity higher than the $4,142.00 regular trade low targets the $4,155 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,171 VPOC. In the worst case, the S&P 500 trades lower; activity below $4,122.75 targets the $4,104.00 low volume area (LVNode). Initiative trade beyond that figure puts in play the $4,082.75 and $4,069.25 HVNodes.

POCs: POCs (like HVNodes described above) are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for April 20. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $381, which corresponds with $3,810 in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: SHIFT search suggests participants lack directional conviction in the SPDR S&P 500 ETF Trust (NYSE: SPY).

News And Analysis

Science | Man-made lakes in U.S. West and Mexico to shrink to historical lows. (AP)

Markets | Mortgage rates come down as the bond market regains strength. (MND)

Markets | Federal Reserve will limit any overshoot of inflation target, Powell says. (REU)

Travel | Washington says travel warnings will cover 80% of the world’s nations. (BBG)

Policy | On the verge of a realignment of politics, economic policy, and living. (Ritholtz)

Markets | MIAX expanding futures division with new hires from Cboe and Citi. (TT)

Markets | U.K. scaps MiFID II requirements in ambitious capital markets reform. (TT)

Economy | While lumber prices are soaring, actual logs remain very dirt cheap. (BBG)

What People Are Saying

Innovation And Emerging Trends

Innovation | Lessons from Jeff Bezos’ annual letters to Amazon shareholders. (CB)

Markets | How Robinhood made trading easy and maybe even too hard to resist. (BBG)

Space | International crew, recycled capsule: SpaceX is preparing to launch. (AMN)

Venture | A look at Stripe, the most highly valued venture-backed private company. (CN)

FinTech | Fintech IPOs: Four foundational keys to success, preparing for IPO. (FM)

FinTech | U.K. creates a new fintech sandbox for distributed ledger technology. (S&P

FinTech | Venture capital interest in Latin America swells as fintech takes flight. (PB)

FinTech | Insurtech startups are leveraging rapid growth to raise big money. (TC)

FinTech | China’s central bank plans to build out a fintech cloud infrastructure. (SCMP)

 About

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

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

 Disclaimer

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

Categories
Commentary

Market Commentary For 3/9/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures rotated higher, overnight, as bond yields declined and European stocks posted their best gains in months of trade.

What Does It Mean: U.S. stock index futures ended lower, Monday, after responsive sellers stepped in and resolved a morning consolidation.

The volatile price action is happening in the context of rising bond yields — a correlation that has a knack for disappearing, suddenly — and the short-gamma environment.

More On 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.

Furthermore, the economy is poised to take off. Why? Record amounts of stimulus and a country-wide re-opening. Adding, the recent pricing in of rising debt and inflation fears, as a result, is likely nearing an end, based on market liquidity metrics and the inventory positioning of participants.

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM ET) will likely open on a small gap, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

During Monday’s trade, the best case outcome occurred, evidenced by rotational trade between the $3,861.25 low-volume area (LVNode) and $3,762.25 high-volume area (HVNode).

More On 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.

For today, participants can trade from the following frameworks.

In the best case, the S&P 500 resolves a multi-session consolidation to the upside, evidenced by initiative trade that finds increased participation (e.g., higher volumes and range expansion) above the $3,861.26 LVNode.

In the worst case, the S&P 500 resolves lower, evidenced by initiative trade that finds increased participation below the $3,839.25 HVNode, a volume-area that ought to offer initiative sellers (responsive buyers) favorable entry (exit).

In case of upside (downside) resolve, participants may target the $3,892.75 HVNode ($3,801.25 LVNode).

Levels Of Interest: $3,861.25 LVNode (Upside Go/No-Go Level).

Categories
Commentary

Market Commentary For The Week Ahead: ‘Fast Moves’

Key Takeaways:

  • U.S. Senate passes a $1.9T relief package.
  • COVID vaccination timeline is sped up.
  • Equities are recipients of $12B in inflows.
  • Treasury yields aren’t at worrisome levels.
  • VIX term structure suggests no real panic.
  • Real GDP growth to be over 6% this year.

What Happened: U.S. stock index futures ended the week mixed.

This came after U.S. non-farm payrolls grew by 379,000, versus a consensus of ~180,000, improvement in sales and manufacturing data, as well as news that COVID-19 coronavirus vaccinations were accelerating.

Dynamics Unpacked: On a relative basis, the Nasdaq-100 is weaker, while the S&P 500, Russell 2000, and Dow Jones Industrial Average are stronger. This push-pull dynamic, in prior sessions, made it hard for participants to resolve directionally, evidenced by volatility.

On Friday, after an attempt by market participants to resolve lower, via a break of consolidation, stock indexes made a vicious rebound.

Why did stock indexes make a sudden reversal? Well, despite indexes being best positioned for sideways or lower trade, technically, near-term downside discovery reached its limit, based on market liquidity metrics and the inventory positioning of participants.

As stated in Friday’s morning commentary, according to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggested there was more risk to the upside than downside.

More On 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.
Graphic 1: SqueezeMetrics data suggested a near-term turnaround after Thursday’s violent liquidation.

Adding, also, coming into Friday’s session, market liquidity suggested (1) buying pressure was increasing and/or (2) sellers were absorbing resting liquidity (opportunistic buying or short covering into weakness), while speculative options activity was concentrated on the call-side.

In simple terms, one could argue, based on the aforementioned dynamics (e.g., speculative derivatives activity), that participants bought last week’s dip.

Graphic 2: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending February 26, 2021. Noting activity in short- and long-dated tenors, near the $380, a strike that corresponds with $3,800.00 in the cash-settled S&P 500 Index (INDEX: SPX).

Important to note, though, is the S&P 500’s long-term trend break, prior to Friday’s dramatic reversal and higher close, as well as Friday’s divergent volume delta in ETFs that track the S&P 500, Nasdaq-100, and Russell 2000.

Graphic 3: Long-term uptrend in the cash-settled S&P 500 Index (INDEX: SPX) was broken.
More On Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

What To Expect: Directional resolve and volatility, given news that the U.S. Senate, on Saturday, passed President Joe Biden’s $1.9 trillion COVID-19 coronavirus relief plan, as well as the (2) short-gamma (Graphic 4) environment (i.e, volatility is exacerbated due to dealer hedging requirements), as mentioned in the prior section.

Graphic 4: SpotGamma data suggests Nasdaq-100, the weakest index discussed in this commentary, is below the “Short-Gamma” juncture.

What To Do: In the coming sessions, participants will want to pay attention to the VWAP anchored from the $3,959.25 peak, the $3,720.50 minimal excess low, as well as the $3,837.75 high-volume area (HVNode).

Volume-Weighted Average Prices (VWAPs): Metrics 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.

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

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

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

In the best case, the S&P 500 opens and remains above the $3,837.75 volume area. Auctioning above the VWAP anchored from the $3,959.25 peak would suggest buyers, on average, are in control and winning since the February 15 rally high.

In such a case, participants can look to the $3,892.75 HVNode for favorable entry and exit, the $3,934.25 profile ledge, and $3,959.25 overnight rally-high.

More On Ledges: Flattened area on the profile which suggests responsive participants are in control, or initiative participants lack confidence to continue the discovery process. The ledge will either hold and force participants to liquidate (cover) their positions, or crack and offer support (resistance).

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

Any activity below the VWAP anchored from the $3,959.25 peak may leave the $3,837.75 HVNode as an area of supply — offering initiative sellers favorable entry and responsive buyers favorable exit.

In such a case, participants can look to other areas of high-volume (i.e., $3,795.75 and $3,727.75) for favorable entry and exit, as well as the repair of the $3,720.50 minimal excess low.

Graphic 5: Profile overlays on a 65-minute candlestick chart of the Micro E-mini S&P 500 Futures.
Graphic 6: 4-hour chart of the Micro E-mini S&P 500 Futures.

Conclusions: The go/no-go level for next week’s trade is $3,837.75.

Any activity at this level suggests market participants are looking for more information to base their next move. Anything above (below) this level increases the potential for higher (lower). 

Levels Of Interest: $3,837.75 HVNode.

Cover photo by Chris Peeters from Pexels.

Categories
Commentary

Market Commentary For 3/5/2021

Notice: To view this week’s big picture outlook, click here.

What Happened: U.S. stock index futures rebounded overnight, ahead of releases that would shed light on the economic recovery.

What Does It Mean: Broad market indices sold heavy, Thursday, with volatility picking up after Federal Reserve Chair Jerome Powell failed to soothe investor concerns.

CNBC: Fed chair Jerome Powell – inflation is set to increase, but likely temporary.

As stated yesterday, on a relative basis, the Nasdaq-100 is weaker, while the S&P 500 and Russell 2000 are stronger. This push-pull dynamic, in prior sessions, made it hard for participants to resolve directionally, evidenced by volatility.

On Thursday, the Russell 2000 and S&P 500 broke their consolidations, resolving lower.

Adding, despite indexes being best positioned for sideways or lower trade, in the longer-term, near-term downside discovery may have reached as a limit, based on market liquidity metrics and the inventory positioning of participants.

According to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggests that there’s more risk to the upside, than downside, at the S&P 500’s present juncture.

More On Gamma: Gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option 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.
Graphic 1: SqueezeMetrics data suggests near-term turnaround after Thursday’s violent liquidation.

Given the market’s transition into short-gamma (Graphic 2), however, volatility is a given. That’s due to dealer hedging requirements, as discussed above.

Graphic 2: SpotGamma data suggests Nasdaq-100 at or below “Short-Gamma” juncture.

Similar to yesterday, market liquidity, suggests (1) buying pressure is increasing or (2) sellers are absorbing resting liquidity (which could be opportunistic buying or short covering into weakness).

Graphic 3: Market liquidity for the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index.

What To Expect: Friday’s regular session (9:30 AM – 4:00 PM ET) will likely open just inside of prior-range, suggesting a limited potential for immediate directional opportunity.

During Thursday’s trade, the worst case outcome occurred: the S&P 500 broke from balance, and auctioned past the $3,777.75 regular trade low (RTH Low). Thereafter, lower prices solicited responsive buying near the $3,727.75 HVNode.

Participants did not establish definitive excess at the lows.

More On Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).
Important to mention is overnight discovery, which established clear excess on the composite profile.

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

More On 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.

Given the aforementioned dynamics, participants can trade from the following frameworks.

In the best case, the S&P 500 either (1) remains rotational, trading responsively between the $3,785.00 low-volume area (LVNode) and $3,720.50 minimal excess low.

Thereafter, if higher, attention shifts to whether the S&P 500 can get past the $3,785.00 (LVNode). Doing so suggests the most recent downside probe was an auction failure (i.e, participants rejected lower prices, sparking a rapid recovery).

In the worst case, participants auction past the $3,720.50 minimal excess low. In such a case participants may target the $3,689.50 HVNode.

Graphics 4 and 5: Profile overlays on the Micro E-mini S&P 500 Futures.

Levels Of Interest: $3,785.00 LVNode.