Tag: Shortened Holiday Trade

Daily Brief For April 6, 2023

Post author By Renato L. Capelj
Post date April 6, 2023
No Comments on Daily Brief For April 6, 2023

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Administrative Bulletin

Welcome to the Daily Brief by Physik Invest, a soon-to-launch research, consulting, trading, and asset management solutions provider. Learn about our origin story here, and consider subscribing for daily updates on the critical contexts that could lend to future market movement.

Tomorrow’s Good Friday, and some markets, including the US’s equity market, will be closed. The Treasury market will remain open, albeit for less time, and may enable traders to price the impacts of coming releases, including non-farm payrolls (NFP). The consensus is that the US added 235,000 jobs in March, with the unemployment rate expected to remain steady at 3.50%. Higher for longer, then? We shall see.

Moreover, the big news is that the trend in mortgage rates, followed closely in the US, continues to be down. US 30-year fixed mortgage rates fell for a fourth-straight week, though applications to buy and refinance a home declined for the first time in a month. However, borrowing costs remain generally high and housing inventory low, keeping a cap on homebuying activity.

Notwithstanding, as explained by Akash Kanojia, for the housing market to “clear” on today’s affordability, home prices need to fall by about 20.00%.

READ: HOW MUCH HOME PRICES MAY FALL

To explain, typically, banks use a debt-to-income ratio to determine how much they will lend to a borrower to buy a house. Adding, they could enforce a limit of 80% on the purchase price of the house, and the remaining 20.00% is paid in cash by the borrower as a down payment.

Mortgage rates comprise the short-term risk-free rate, term premium, the Treasury-MBS spread, the primary-secondary spread, and a credit spread based on the borrower’s creditworthiness. Any of these numbers changing can influence a borrower’s final payment to the lender.

*Graphic: Retrieved from Negative Convexity.*

An analysis starting with a home price in 2021 of $575,000.00 and a borrower whose income was $92,000.00, and adjusting all for inflation and movements in rates, the decrease in home values to boost affordability is 21.00%.

Graphic: Retrieved from Negative Convexity. “To do this analysis, I started with a home price in April 2021[1]($575,000) and figured out how much annual income a borrower would have needed at that time to buy the house (~$92,000). I then adjusted the annual income up by 8% for 2023, extrapolating from this, resulting in a person that would have earned ~$92,000 earning $99,205 today. Then I calculated how much house a person earning $99,205 can afford today at a mortgage rate of 6.70% ($452,000). Divide the two, and you get a decrease of 21%.”

A worst-case scenario is that the fed funds rate rises further to quell inflation. If the fed funds rate were to rise to 6.00-6.25%, matching the latest annualized CPI print, and “the market realizes the Fed is not going to cut, and the curve (e.g., 3m-7y UST) steepens to historical norms (~150 basis points long-term average), barring changes in the MBS spread, primary-secondary spread, and credit charges, this produces a ~40.00% decline in home prices.

Consequently, as the economy slows and layoffs increase, as we’re starting to see, it will negatively affect housing demand and affordability due to income stability and growth. On the bright side, inflation destroys the nominal value of debt, Kanojia says. Assuming wages keep up, buyers in hot markets may be spared if they can withhold from selling at market-clearing prices, Kanojia ends.

On a note about the doom and gloom (i.e., economy slowing and layoffs increasing, as well as yield curve steepening), JPMorgan Chase & Co’s (NYSE: JPM) Jamie Dimon says the following:

Today’s inverted yield curve implies that we are going into a recession. As someone once said, an inverted yield curve like this is ‘eight for eight’ in predicting a recession in the next 12 months. However, it may not be true this time because of the enormous effect of QT. As previously stated, longer-term rates are not necessarily controlled by central banks, and it is possible that the inversion we see today is still driven by prior QE and not the dramatic change in supply and demand that is going to take place in the future.

Dimon, the CEO of JPM, says that a graph showing the yields on bonds of different maturities is inverted, meaning that the yields on shorter-term bonds are higher than the yields on longer-term bonds. An inverted yield curve has often been a reliable indicator of an upcoming recession; it reflects investor demands for higher returns on short-term investments and expectations that short-term rates will fall in the future, which happens when the central bank cuts rates in response to a weak economy.

In other words, the conditions around the yield curve inversion are different this time.

Graphic: Retrieved from the Federal Reserve Bank of St. Louis. A normal yield curve is upward-sloping, meaning long-term interest rates are higher than short-term rates; investors demand a higher return for tying up their money for a longer period; the spread between the 10-year and 3-month treasury yield is positive.

Further, a peek at the bond market shows cuts priced within six months.

*Graphic: Retrieved from Bloomberg via @TheBondFreak.*

Same thing with the Secured Overnight Financing Rate (SOFR) market, developed by the Federal Reserve to replace LIBOR, which was phased out due to manipulation concerns, among other things, as a benchmark interest rate.

READ: WHAT IS SOFR?

Unlike LIBOR, which is based on unsecured lending transactions between banks, SOFR is based on actual transactions in the overnight repurchase agreement (repo) market, which makes it a more reliable benchmark. Consequently, the shift from the Eurodollar (FUTURE: /GE), used to intervene in support of the dollar and other currencies and allow lenders to lock in rates, to SOFR has accelerated, too.

As stated yesterday, options activity in the SOFR market was centered around the 95.00 strikes. To calculate the implied interest rate using the value of the 3-month SOFR future, we can use the following formula:

Implied interest rate = 100 – future price; the implied interest rate calculated using the 3-month SOFR future is an annualized rate.

For example, if the current value of the 3-month SOFR future is 95.00, the implied interest rate would be 100.00 – 95.00 = 5.00%.

*Graphic: Via Charles Schwab Corporation’s (NYSE: SCHW) thinkorswim platform. The three-month SOFR (FUTURE: /SR3) curve implies a 4.86% terminal rate today, followed by easing into year-end.*

The S&P 500 (INDEX: SPX) has not bottomed based on these conditions. 3Fourteen Research concludes that the SPX has never bottomed during a Fed hike cycle, which one is still ongoing; typically, forward earnings stabilize and turn higher 3-6 months after a market bottom, which hasn’t happened; the 2-10 yield curve has never remained inverted six months after a major bear market bottom.

*Graphic: Retrieved from Bloomberg via @MichaelMOTTCM.*

Notwithstanding all the doom and gloom, we explained in past letters that markets would likely remain strong through month-end March.

*Graphic: Retrieved from Damped Spring Advisors’ Andy Constan. “6 of the last 6 quarters, the quarter end flow has resulted in a spike or dip and a subsequent 8%+ reversal.”*

Accordingly, it made a lot of sense to own low- or no-cost call options structures in products like the Nasdaq 100 (INDEX: NDX), where many participants were caught offsides and bidding call volatility in response to the dramatic reversal; the reach for the right tail reduced the cost of ratio call spreads, making them the go-to structures.

It may make sense to re-load in similar call structures on pullbacks while using any proceeds or profits from those structures to reduce the cost of owning fixed-risk and less costly put structures (e.g., vertical) that may enable us to participate in equity market downside, as well as bet on lower rates in the future using call options structures on the /SR3 to express that opinion.

*Graphic: Retrieved from TradingView via Physik Invest.*

Disclaimer

Don’t use this free letter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. At this time, Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements. Separately, you may view this letter’s content calendar at this link.

Tags /GE - Eurodollar Futures, /SR3 - Three-Month SOFR, Akash Kanojia, Andy Constan, CPI - Consumer Price Index, Damped Spring Advisors, Jamie Dimon, JPM - JPMorgan Chase & Co, MBS - Mortgage-Backed Securities, NDX - Cash Nasdaq 100 Index, NFP - Non Farm Payroll Report, Shortened Holiday Trade, SOFR - Secured Overnight Financing Rate, SPX - Cash S&P 500 Index, UST - U.S. Treasuries

Commentary

Daily Brief For December 23, 2021

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

What Happened

Led by the Russell 2000, overnight, equity index futures continued higher while commodities were mixed and bonds were a touch lower. Friday, December 24, markets are closed.

Pursuant to comments made earlier this week, volatility was sold aggressively; the CBOE Volatility Index (INDEX: VIX) dropped ~9.00. This coincides with a compression in the VIX’s term structure, and that has so-called bullish/supportive implications.

Ahead is data on jobless claims, personal income, consumer spending, inflation, disposable income, goods orders (8:30 AM ET), as well as new home sales, University of Michigan sentiment, and five-year inflation expectations (10:00 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. Levels may have changed since initially quoted;* *click here* *for the latest levels. SqueezeMetrics* *Dark Pool* *Index (DIX) and* *Gamma* *(GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences* *available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility.* *Learn* *the implications of volatility, direction, and moneyness.* *SHIFT* data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On lackluster intraday breadth and divergent market liquidity metrics, the best case outcome occurred, via the S&P 500’s spike close higher, away from intraday value, the levels at which participants found it most favorable to transact.

This activity, which marks the continuation of an earlier trend change, is built on poor structure.

That, ultimately, adds to technical instability.

Why? If you haven’t noticed, the levels quoted daily in this particular commentary seem to be holding to the tick. Given the persistence of mechanical responses to key technical levels, visually-driven, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent price discovery.

Via volume profile analysis, we see a plethora of low-volume pockets – voids, if you will – that likely hold virgin tests. As stated, yesterday, successful penetration portends follow-through given the participants that were most active at those technical levels. Caution is warranted.

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

Context: According to Ryan Detrick of LPL Financial, the “official Santa Claus Rally starts this Monday (last 5 days of the year and the first two of the following year).”

The 7 days (after this Monday) are up nearly 79% of the time.

However, in the past 5 occurrences, “Jan was also in the red and Q1 been weak as well.”

*Graphic: LPL Financial on the so-called Santa Claus rally.*

This activity comes after last week’s weighty “quad-witching” and ahead of the December “Quarterlys” expiry.

The exposure that rolled (and is to roll) off was “put-heavy.”

Participants’ commitment to capital at strikes lower in price and out in time – in the face of weak breadth and bearish fundamental developments – in single stocks, fed into the indices, also.

According to SpotGamma, the December 17 expiration cleared quite a bit of negative delta (e.g., the ARK Innovation ETF [NYSE: ARKK] had $1.5 billion in notional put delta expire).

This opened a window of strength and realized volatility, wherein positive fundamental forces and dealers’ covering of hedges could bolster any recovery.

Its often positioning – particularly around OPEX that drives price.

Narratives are assigned later.https://t.co/ZtaelFm3NW
— SpotGamma (@spotgamma) December 22, 2021

So, it is this week’s collapse in implied volatility (and associated collapse in term structure), coupled with the pending management of large S&P positions, and relentless, seasonally-aligned “passive buying support,” which brought positive flows bolstering this “Santa Claus rally.”

*Graphic:* *Shift Search* *data suggests participants are likely initiating* *box spreads* *and rolling their call exposure out in time (as much as 6 months).*

Notwithstanding, as mentioned, yesterday, Goldman Sachs Group (NYSE: GS) saw “options selling strategies as attractive in the near term,” estimating “a 12% probability of a 1-month 5% down-move in the SPX in this economic environment based on [the] GS-EQMOVE model.”

“Options are pricing a 22% probability of that size move indicating that puts are overvalued.”

As noted Tuesday, the commitment of capital on lower volatility results in counterparties taking on more exposure to positive gamma. The growth in positive gamma (as the data is showing) will be offset through the dealers’ supply of liquidity, pressuring the price discovery process.

Note: As a position’s delta rises with stock or index price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta.

This is while many products are in lower liquidity and short-gamma (wherein an options delta decreases with stock prices rises and increases when stock prices drop) in which moves are more erratic.

Therefore, coming into weighty options expirations, correlations may be off (as that is the only reconciliation in an environment where, at the index level, hedging pressures are sticky, whereas elsewhere they aren’t).

Thereafter, participants ought to monitor the sides and levels capital is committed for clues as to where we go next. Continued compression of volatility, as well as a commitment to options higher in prices and further out in time, supports upward price discovery.

Graphic: Via The Market Ear, “There have been five prior years since 1953 (when we went to the 5-day trading week) that have seen December as the most volatile month: 1973, 1978, 1985, 1995, and 2018. The January following these five prior years was BIG positive four out of five times, with January 2019 seeing the biggest gain.”

Weakness (alongside a commitment to strikes lower in price and out in time) likely sets the market up for another round of instability, as realized in late November and early December.

*Graphic: A compression in the VIX term structure would provide markets with a boost.*

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

Spike Rules In Play: 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). 

The spike base is $4,678.50. Below bearish (change in tone). Above bullish (status quo).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,690.75 micro composite point of control (MCPOC) puts in play the $4,709.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,732.50 high volume area (HVNode) and $4,743.00 regular trade high (RTH High), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,690.25 MCPOC puts in play the $4,673.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,647.25 HVNode and $4,623.00 POC, 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.* *Learn about the profile*.

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.

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.

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).

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, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

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

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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.

Commentary

Daily Brief For November 29, 2021

Post author By Renato L. Capelj
Post date November 29, 2021
No Comments on Daily Brief For November 29, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher as participants looked to take back nearly all of Friday’s shortened holiday trading range.

According to some metrics, the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, experienced one of its most illiquid days, Friday.

At the same time, the CBOE Volatility Index (INDEX: VIX) closed up nearly 50% while the VIX futures term structure settled in backwardation amidst a re-pricing of tail-risk, so to speak.

Moreover, ahead is data on Pending Home Sales (10:00 AM ET).

Graphic updated 5:50 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. 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

Despite the lackluster intraday breadth and divergent market liquidity metrics, the worst-case outcome occurred, Friday, evidenced by downside expansion of range and separation of value.

Coming into the session, the experiences associated with ‘Volmageddon’ came to mind; the VIX was up nearly 40.00%, a concern given the exuberance of past weeks and options positioning, as well as a decline in correlations, and unsupportive breadth.

Tempering the fall were divergences; the Russell 2000 was down nearly 4.00% before Friday’s U.S. open while the S&P 500 was off about 2.00% or so, buoyed by the Nasdaq 100 which was only down about 1.00% amidst an 8% dip in the ten-year yield.

The divergence persisted with the S&P 500 closing firmly below its 20-day simple moving average, a visual level often acted on by short-term, technically-driven participants who generally are unable to defend retests.

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index.

Context: A resurgence in the COVID-19 coronavirus as an improvement in macroeconomic conditions prompts a hawkish shift from the Federal Reserve (Fed).

“Many risky asset tailwinds in 2021 are turning into at least mild headwinds in 2022,” Nordea says. “Economic growth should decelerate, liquidity conditions are deteriorating, profit margins should be under pressure from rising costs and question marks regarding the Fed/ECB put will arise due to elevated inflation indicators. To us, this spells higher volatility.”

Moreover, for the past two years, almost, equities rallied amidst an acceleration in growth, which is typically correlated with equity outperformance over bonds.

Graphic: Accelerating growth correlates with equity outperformance over bonds.

At the same time, there’s been an insatiable appetite for stocks, according to Bloomberg, with investors pouring “almost $900 billion into equity exchange-traded and long-only funds in 2021 — exceeding the combined total from the past 19 years.”

This appetite for risk fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA) with customers, at least in the past weeks, opting to aggressively sell puts and buy calls heading into the November monthly options expiration (OPEX).

Graphic: Per The Market Ear, participants were hating on downside protection for weeks.

Unfortunately, (1) after OPEX, the absence of sticky and supportive hedging flows freed the broader market for directional resolve, and (2) according to SpotGamma, in light of recent exuberance, “participants [were] underexposed to downside put protection.”

Graphic: Customers took on significant leverage in their purchase and sale of options, via SpotGamma.

What this meant was that after OPEX’s unpinning and increase in correlation, fundamental contexts were to matter more.

Therefore, the Fed’s “increased openness to accelerat[e] the taper pace” and hike rates, alongside fresh travel restrictions on a new COVID-19 variant, as well as holiday illiquidity, resulted in a rough re-pricing of tail risk as participants sought after those highly “convex” options which had counterparties exacerbating underlying price movement.

Graphic: According to Bloomberg, markets price “a full quarter-point rate hike into the June Fed meeting with a second by September and a third by December.”

To elaborate, in short, was volatility to pick up, those participants (who were once exuberant) were likely to reach for protection forcing dealers to reflexively hedge in a destabilizing manner.

Dealers is the term used to describe those participants that take the other side and warehouse customer options risk, at least in the case where orders can’t be matched between customers.

With that, as volatility rose and customers demanded protection, counterparties hedged by selling into weakness. The conditions worsened when much of the activity was concentrated in shorter-dated tenors where the sensitivity of options to direction is higher if we will.

Graphic: VIX term structure. Backwardation signals an entry into an unstable environment.

Once that short-dated protection rolls off the table (and/or is monetized), dealers will reverse and support the market, buying to close their existing stock/futures hedges.

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant, and the positive effects of pro-cyclical inflation and economic growth, improvements in global trade, and continuity at the Fed, among other dynamics, play out.

We see participants opportunistically buying the dip, already, via metrics like DIX that’s derived from liquidity provision on the market-making side.

DIX 46.3%

They bought the dip. pic.twitter.com/EpjYe250cG
— SqueezeMetrics (@SqueezeMetrics) November 26, 2021

Expectations: As of 6:00 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle 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 sideways or higher; activity above the $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter HVNode could reach as high as the $4,674.25 micro composite point of control (MCPOC) and $4,691.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, or lower.

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

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

Charts To Watch

Graphic: (NYSE: SPY). (S~$460 and $453). S is for support.

Graphic: (NASDAQ: QQQ). (S~$389 and $381). S is for support.

Graphic: (NYSE: IWM). (S~$222 and $216). S is for support.

What People Are Saying

On Friday the SPY had a fire lit underneath it, it was the most illiquid day in a very long time. 332 of the 504 the S&P500 components printed 200 day Illiquidity Ranks above 90%. So what does it mean. pic.twitter.com/KB94QiIPGB
— QuartersPower (@HalfersPower) November 28, 2021

My life changed upon realizing this. pic.twitter.com/P8cxdHIhHM
— Jawad Mian (@jsmian) November 27, 2021

Definitions

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

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.

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

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

About

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

Disclaimer

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

Commentary

Daily Brief For Black Friday 2021

Post author By Renato L. Capelj
Post date November 26, 2021
No Comments on Daily Brief For Black Friday 2021

What Happened

Ahead of a shortened holiday session, equity index futures auctioned lower alongside the narrative of a resurgence in the COVID-19 coronavirus.

Most affected appears the Russell 2000 which was down nearly 4.00%, at the time of this writing. The S&P 500 was off about 2.00% or so, buoyed by the innovation- and tech-heavy Nasdaq 100 which was only down about 1.00%.

This shift in relative strength comes as the ten-year yield sits lower about 8.00%. The CBOE Volatility Index (INDEX: VIX) was up over 40.00% and the implications of this are staggering, given the underhedged market I talked about over the past sessions.

Moreover, there are no scheduled economic releases, today.

*Graphic updated 6:00 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.* *SHIFT* data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On Wednesday’s lackluster breadth and market liquidity metrics, the best case occurred.

The S&P 500 recovered its $4,697.50 spike base, below which selling activity appeared to be the result of weaker-handed participants liquidating as a result of poor location and news.

Overnight, however, the tone shifted. The S&P 500 initiated back through its $4,647.25 high volume area (HVNode) which had corresponded with the 20-day simple moving average.

The 20-day presented participants with a clear way to measure risk, given the mechanical responses in prior trade. As explained, Wednesday, should participants manage to break past the 20-day, then conditions have changed and follow-through was likely.

Reason being? Those visual levels are acted on by short-term, technically-driven participants who generally are unable to defend retests.

Context: The aforementioned trade is happening in the context of an “insatiable appetite for stocks this year,” as Bloomberg explains.

“Investors have poured almost $900 billion into equity exchange-traded and long-only funds in 2021 — exceeding the combined total from the past 19 years.”

This appetite fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA) with customers opting to aggressively sell puts and buy calls heading into the November monthly options expiration (OPEX).

*Graphic: Customers took on significant leverage in their purchase and sale of options, via* *SpotGamma*.

The implications of the latter are staggering.

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

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

Graphic: The CBOE Volatility Index (INDEX: VIX) was higher, while demand came in most predominantly across the entire area of the VIX futures term structure. That, alongside the market’s entry into short-gamma, suggests participants’ hedging has destabilizing implications.

Note that I said short-dated.

Once that exposure rolls off the table (and/or is monetized), dealers/counterparties will reverse and support the market, buying-to-close their existing stock/futures hedges to negative gamma positions.

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas.

As stated on November 23, 2021: “This last part is educated conjecture. It’s what I also feel as though would frustrate the most amount of participants. Basically, a quick wash (or sideways to lower), followed by a move higher into year-end. Be nimble and responsive!”

Expectations: As of 6:00 AM ET, Friday’s regular session (9:30 AM – 1:00 PM ET), in the S&P 500, will likely open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios Are 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.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,596.75 overnight low (ONL) and $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, or lower.

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

Charts To Watch

*Graphic: (ETF: IWM). (Key VWAP support at ~$223)*

*Graphic: (ETF: SPY). (Key VWAP support at ~$460)*

*Graphic: (ETF: QQQ). (Key VWAP support at ~$388)*

What People Are Saying

The media seems to attribute the current sell-off to new Covid variant.

However, I'm curious how much of the sell-off is actually due to Covid and how much is due to a less dovish Fed, as there were news that Fed might double its tapering and raise rates quicker than expected.
— Sergei Perfiliev (@perfiliev) November 26, 2021

S&P500, $SPY short-term (10-day) Sector Correlations are ultra low closing at .06. In 2021 this condition has preceded sell-offs. pic.twitter.com/KB1H7vITqR
— QuartersPower (@HalfersPower) November 23, 2021

Definitions

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

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

About

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

Disclaimer

Commentary

Daily Brief For September 7, 2021

Post author By Renato L. Capelj
Post date September 7, 2021
No Comments on Daily Brief For September 7, 2021

Market Commentary

Equity index futures traded sideways to lower, in line with most commodities and bonds. Yields, the dollar, and VIX were higher.

Goldman revised down growth forecasts.
Ahead: Light calendar to base decisions.
Positioning risks mount case for volatility.

What Happened: U.S. stock index futures traded sideways to lower coming into this shortened week.

Ahead is no data of interest.

*Graphic updated 6:15 AM ET. Sentiment* ***Neutral*** if expected /ES open is inside of the prior day’s range. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences *available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility.* *SHIFT* data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:15 AM ET, Tuesday’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 Friday’s regular trade, on lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by sideways trade above $4,527.75, a prominent high volume area.

This is significant because sideways to higher trade (i.e., balance) marks acceptance, or a willingness to transact at higher prices after a v-pattern recovery, above the key 50-day simple moving average.

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).

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.

Graphic: S&P 500 maintaining prices above the 50-day simple moving average. This moving average can be looked at as a key dynamic level on any move lower. Losing that particular level likely changes the tone.

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

*Graphic:* ***Bank of America Corporation*** *(NYSE: BAC) graphic via* *The Market Ear. All-time highs in the equity markets alongside all-time high equity allocations.*

The implications of these themes on price are contradictory.

That’s according to Goldman Sachs Group Inc (NYSE: GS) economists who revised lower their forecast for growth in the U.S. economy citing the COVID-19 delta variant, fading fiscal support, supply chain disruptions, and a switch in demand to services.

“The hurdle for strong consumption growth going forward appears much higher: the Delta variant is already weighing on Q3 growth, and fading fiscal stimulus and a slower service-sector recovery will both be headwinds in the medium term,” said Goldman Sachs’ Ronnie Walker.

Among other risks include fragility with respect to “the current combination of weak put flows and large customer vanna exposure” which, according to SqueezeMetrics, puts us “a hair’s breadth away from some of the most consistently bearish and volatile behavior in the S&P 500.”

In simpler terms, as SqueezeMetrics summarizes, “[p]eople pretty much stopped buying S&P 500 puts [last] week. At the same time, people are overexposed to changes in VIX, and will be hurt more than usual if VIX starts moving up. Historically, this means SPX down, VIX up.”

pic.twitter.com/AanOoZcEXJ
— SqueezeMetrics (@SqueezeMetrics) September 4, 2021

I also encourage a read of the Weekly Brief for Saturday, September 4, which covered some market risks ahead.

Given the big picture context (i.e., status quo – higher prices – in the face of volatility risks) participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,527.75 high volume area (HVNode) pivot puts in play the $4,550.00 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the Fibonacci extensions at $4,556.25 and $4,592.25.

In the worst case, the S&P 500 trades lower; activity below the $4,527.75 HVNode puts in play the $4,510.00 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as low as the $4,495.00 and $4,481.75 HVNodes.

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 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.

*Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:15 AM ET.*

News And Analysis

Soros calls BlackRock China investment a tragic mistake.

GM reshuffling production plans as chip shortage persists.

London taking aim at New York with 5-year financial plan.

TP ICAP slams work from home as it hampers risk-taking.

Global growth rebound solidifies while risks broaden away.

Deutsche Telekom grows bet on U.S. with SoftBank deal.

Bitcoin facing big test as El Salvador makes it legal tender.

Facebook admits “trust deficit” as it looks to launch wallet.

Without help for oil producers, net-zero is a distant dream.

What People Are Saying

Drake has been aggressively investing in tech, real estate & gaming over the last few years. Examples:

– 100 Thieves
– Wealthsimple
– Overtime
– Daring Foods

In new album, he says "f**k a valuation, show me personal funds."

The merging of culture and investing has just begun. pic.twitter.com/9KbxcqcZD2
— Pomp 🌪 (@APompliano) September 3, 2021

This is my long-term view on $BTCUSD. Monthly scale price chart. "IF" April-June period was a pullback and it is over. The rebound that is taking place since July should not stall here.

In other words, bulls need to be more aggressive pushing the September candle to all-time. pic.twitter.com/s0PrsOKLRX
— Aksel Kibar, CMT (@TechCharts) September 4, 2021

How To Execute when Trading (Thread)
— TraderLion (@TraderLion_) September 2, 2021

🚘 What do windshields have to do with #trading?@FuturesTrader71 explains "your goal as a trader, is to recognize when the windshield is too dirty to see what's in front of you – to see what the market is saying"

Listen to the full analogy here: https://t.co/T6wsE0e88g $ES_F pic.twitter.com/yRPEiE0Cdm
— Convergent Trading (@ConvTrading) September 3, 2021

Recently talked to a very good poker player. He said raising or folding was almost always better than calling.

I think the trading analog is that it is very rarely correct to just hold a position. Almost always better to add or reduce.
— Euan Sinclair (@SinclairEuan) September 3, 2021

About

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

Disclaimer

Tags 50-Day Simple Moving Average, BAC - Bank of America Corp, Fibonacci, GS - Goldman Sachs Group Inc, HVN - High Volume Node, LVN - Low Volume Node, ONH - Overnight High, Shortened Holiday Trade, SPX - Cash S&P 500 Index, SqueezeMetrics, V-Pattern Recovery, VIX - CBOE Volatility Index

Commentary

Weekly Brief For September 4, 2021

Post author By Renato L. Capelj
Post date September 4, 2021
No Comments on Weekly Brief For September 4, 2021

Editor’s Note: Before getting into today’s commentary, we take a moment to reflect on the following quote taken from page 123 of The Disciplined Trader by Mark Douglas.

“For years, many people in the academic community believed that the markets were random; this is a perfect example of their general lack of understanding of human nature. People act as a force on prices in perfectly logical ways, when you understand the logic of their fears.”

Also, given Labor Day, markets are closed Monday, September 6. As a result, Daily Briefs will resume Tuesday, September 7. Thank you and have a great extended weekend!

Market Commentary

Equity index futures traded sideways to higher last week.

Reality throwing a wrench in seasonality.
Ahead: Light calendar to base decisions.
Equity indices rising; SPX above 50-day.
Positioning risks mount case for volatility.
A couple trade ideas for the week ahead.

What Happened: U.S. stock index futures auctioned mostly sideways to higher, into Friday’s nonfarm payrolls miss.

Next week participants have a light calendar to base decisions around.

*Graphic updated 10:30 AM ET 9/4/2021. Sentiment* ***Neutral*** if expected /ES open is inside of the prior day’s range. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences *available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility.* *SHIFT* data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: During the prior week’s trade, on mostly lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by new all-time highs in the S&P 500 and Nasdaq 100.

This is significant because the sideways to higher trade marks acceptance, or a willingness to transact at higher prices after a v-pattern recovery, above the key 50-day simple moving average.

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.

The implications of these themes on price are contradictory.

To elaborate, August, over the past 25 years, has historically been the largest month for equity outflows. According to Goldman Sachs Group Inc’s (NYSE: GS) Scott Rubner, “We have seen none of these outflows and it has been buying the dip (TINA).”

Given this divergence from the norm, advances are not “welcomed and may lead to a quick right tail hedging … [as] option volume notional is 120% of stock volume notional.”

To put it simply, an increased share of options being traded expires within two weeks. The hedging of these directionally sensitive options can represent an increased share of volume in underlying stocks.

As a result, option flows impact the underlying’s price, markedly.

We couple this so-called right-tail hedging with the structural positioning – the so-called wall of worry – that can drive the market through three factors – change in the underlying price (gamma), implied volatility (vanna), and time (charm) – that are well known to impact an options exposure to directional risk or delta.

“Charm is a major driver for support in the markets,” said Cem Karsan of Kai Volatility Advisors. “All of that support is leading up to and accelerating into that Monday-Wednesday window” ahead of options expiration (OPEX). “And then the window really opens for lack of support. It’s not like there’s a bunch of selling all of a sudden. It’s a window of non-strength; a lack of these supportive flows that have been there prior.”

*Graphic: @pat_hennessy* *breaks down* returns for the S&P 500, categorized by the week relative to OPEX. Based on his analysis, Pat sees that the “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish.”

With the August monthly OPEX behind us, the focus shifts now to September. At and around the same time, Morgan Stanley’s (NYSE: MS) Michael Wilson expects a formal signal (which would align with Karsan’s window of non-strength) on the taper of asset purchases, that could lead to a mid-cycle transition and possibly an S&P 500 correction.

“Assuming a stable equity risk premium at 345bp, P/Es would fall to 19x, or 10% lower.”

*Graphic: @pat_hennessy* *breaks down* *S&P 500 OPEX returns. Pat sees that “OPEX week returns peaked in 2016 and have trended lower since.”*

Adding, the eventual reduction in the Federal Reserve’s balance sheet – a removal of liquidity – may exacerbate any sort of risk-off scenario in which participants try to get ahead of whatever cascading reaction may come with a taper.

As Karsan explains: “It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

SpotGamma – in a September 2, 2021 note – echoed the possibility of volatility; “markets are fast approaching a window of volatility which could produce some pretty sharp volatility: 9/15 VIX expiration, 9/17 Quarterly OPEX and the 9/22 FOMC. This lineup is particularly interesting as we believe that expiration leads to a pickup in volatility – however, traders may hold the pause button on selling that volatility due to the FOMC. This could catch less sophisticated vol sellers off guard and lead to some exacerbated volatility.”

Others, like SqueezeMetrics – which sees “the current combination of weak put flows and large customer vanna exposure” as fragile – suggest that volatility risks have risen, too.

The missing piece is Net Put Delta (NPD). pic.twitter.com/VBYTDQsLRa
— SqueezeMetrics (@SqueezeMetrics) September 2, 2021

Given the big picture context (i.e., status quo – higher prices – in the face of volatility risks) participants may make use of the following frameworks.

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 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.

*Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 10:30 AM ET 9/4/2021.*

Weekly Trade Ideas

Please Note: In no way is the below a trade recommendation. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Options offer an efficient way to gain directional exposure.

If an option buyer was short (long) stock, he or she could buy a call (put) to hedge upside (downside) exposure. Additionally, one can spread, or buy (+) and sell (-) options together, strategically.

Commonly discussed spreads include credit, debit, ratio, back, and calendar.

Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.
Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.
Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money.
Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.
Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

Typically, if bullish (bearish), sell at-the-money put (call) credit spread and/or buy a call (put) debit/ratio spread structured around target price. Alternatively, if the expected directional move is great (small), opt for a back spread (calendar spread). Also, if credit spread, capture 50-75% of the premium collected. If debit spread, capture 2-300% of the premium paid.

Be cognizant of risk exposure to direction (delta), time (theta), and volatility (vega).

Negative (positive) delta = synthetic short (long).
Negative (positive) theta = time decay hurts (helps).
Negative (positive) vega = volatility hurts (helps).

Trade Idea 1: SELL -1 1/2 BACKRATIO GOOGL 100 17 SEP 21 2770/2670 PUT @.15 LMT

I’m neutral on Alphabet Inc and I think the stock may travel sideways to lower over the next couple of weeks, toward $2,770.00, or the volume-weighted average price anchored from the July 28 gap. I will structure a spread below the current stock price, expiring in 2 weeks. I will buy the 2770 put option once (+1) and sell the 2670 put option twice (-2) for a $0.15 credit. Should the stock not move to my target, I keep the $15 credit. Should it move to $2,670.00 I could make $10,015.00 at expiry. Should the stock move past $2,570.00 or so, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the stock moves lower.

If necessary, I will hedge the position by either (A) selling stock, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

Trade Idea 2: SELL -1 1/2 BACKRATIO SPX 100 (Weeklys) 10 SEP 21 4480/4430 PUT @.25 LMT

I’m neutral on the S&P 500 and I think the index may travel sideways to lower over the next week, toward its key moving averages. I will structure a spread below the current index price, expiring in 2 weeks. I will buy the 4480 put option once (+1) and sell the 4430 put option twice (-2) for a $0.25 credit. Should the index not move to my target, I keep the $25 credit. Should it move to $4,430.00, past the 20-day simple moving average, I could make $5,025.00 at expiry. Should the index move past $4,380.00 or so, beyond the 50-day simple moving average, I may incur unlimited losses. My goal, with this spread, is to capture the initial credit and close for additional credit if the index moves lower.

If necessary, I will hedge the position by either (A) selling futures, (B) widening strikes, (C) buying a far out-of-the-money put option to cap downside in case of an unpredictable move lower, or (D) roll strikes down in price and out in time.

News And Analysis

Moody’s Weekly Market Outlook on Ida, gas, and inflation.

Reinventing tail risk: a fresh look at market crash protection.

Kansas City Southern mulls $27B CP Rail bid after ruling.

ARK Invest on commodities, innovation, economic signals.

Taliban relies on financing from China following withdrawal.

Hedge Funds cut exposure to stocks that count on China.

Three hours a week: China has put limits on video gaming.

Global gas prices threatening to dent economic recovery.

Are Treasuries in a cautious stance as debt story unfolds?

Could the macro theme/picture be an edge for day traders?

George Soros: Investors in China face a rude awakening.

400,000 homeowners enter the final month in forbearance.

Let’s Hang Out

Los Angeles, CA September 10-12

Salt Lake City, UT September 28-30

About

Disclaimer

Tags Cem Karsan, FOMC - Federal Open Market Committee Event, GOOGL - Alphabet Inc Class A, GS - Goldman Sachs Group Inc, HVN - High Volume Node, Kai Volatility, LVN - Low Volume Node, MS - Morgan Stanley, NDX - Cash Nasdaq 100 Index, ONH - Overnight High, OPEX, Ratio Spread, RTH High - Regular Trade High, Shortened Holiday Trade, SpotGamma, SPX - Cash S&P 500 Index, SqueezeMetrics, The Disciplined Trader By Mark Douglas, V-Pattern Recovery

Commentary

Daily Brief For September 3, 2021

Post author By Renato L. Capelj
Post date September 3, 2021
No Comments on Daily Brief For September 3, 2021

Market Commentary

Equity indexes were sideways to higher with most commodities, yields, and the dollar.

Ahead: NFP, unemployment, and more.
Participants await context on Fed taper.
Indexes positioned for directional move.
Market is closed Monday, September 6.

What Happened: U.S. stock index futures auctioned higher overnight ahead of Friday’s jobs report which may provide market participants context with respect to the Federal Reserve’s intent to de-stimulate.

Ahead is data on nonfarm payrolls, unemployment rate, and average hourly earnings (8:30 AM ET), as well as Markit services PMI (9:45 AM ET) and ISM services index (10:00 AM ET).

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

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

Adding, during the prior day’s regular trade, on positive intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by trade sideways above the $4,526.25 level, a prominent high volume area (HVNode).

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

This is significant because of acceptance, or a willingness to transact at higher prices. We’re carrying forward the presence of poor structure left behind prior trade.

Gap Scenarios Likely 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.

Further, the aforementioned trade is happening in the context of Friday’s jobs report. This report may have strong implications on the equity market; to elaborate, the data release will provide market participants color with respect to the Federal Reserve’s intent to wind down stimulus.

Forecasted is the addition of 725,000 jobs in August, according to Bloomberg, a moderate pace in comparison to months prior.

A strong report would suggest a success, on the part of businesses, to hire after months of crunched labor supply. On the other hand, “The softening in employment activity would be consistent with other economic data that have weakened since the surge in Covid case counts due to the delta variant,” Bank of America Corporation (NYSE: BAC) economists said.

Bloomberg’s Katie Greifeld adds: “[R]ates are more likely to push higher on the heels of an unexpectedly strong jobs print than they are to fall in the wake of a weak one. With that dynamic in mind, bet against bonds.”

*Graphic:* ***Wells Fargo & Co*** *(NYSE: WFC) data* *plotted* *by Bloomberg.*

To note, a softer report may pause any talk of taper to asset purchases. A reduction in the Federal Reserve’s balance sheet – a removal of liquidity – could prompt a sort of risk-off scenario in which participants try to get ahead of whatever cascading reactions may come with the taper.

In other words, as Kai Volatility’s Cem Karsan explained to me: “It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,526.25 high volume area (HVNode) puts in play the $4,545.75 overnight high (ONH). Initiative trade beyond the ONH puts in play the $4,556.25 and $4,592.25 Fibonacci extensions.

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

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 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.

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

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

News And Analysis

Moody’s Weekly Market Outlook on Ida, gas, and inflation expectations.

Short bets rise against consumer discretionary stocks as stimulus fades.

Traders set to test Powell’s push to delink hikes from bond-buying taper.

Three doses could become a standard COVID regimen, Dr. Fauci says.

The Western U.S. drought is forecasted to continue through fall at least.

U.S. structured finance issuance totaled $57B in August, rising 65% YoY.

What People Are Saying

Some traders are doubling down on the idea that Treasuries are poised for a selloff. BlackRock's $13.7 billion 7-10 year Treasury ETF had almost a billion dollars of outflows yesterday, its biggest one-day withdrawal since last November. pic.twitter.com/agJ33ILWvl
— Lisa Abramowicz (@lisaabramowicz1) September 2, 2021

Auto sales in the US have dropped nearly 30% from 18.5 million at an annual rate in February to 13.1 million in August. While the auto manufacturers are blaming chip shortages – which are real – I believe that auto buyers are abandoning gas powered vehicles in favor of electric. https://t.co/o1kHpyYa2C
— Cathie Wood (@CathieDWood) September 2, 2021

I truly believe there is no other market like this and if you are thinking about statistical outliers based on positioning in the equity space, you can set yourself up for a large payday that will eventually come, as long as you are in something that can sustain the bleed.
— Kris Sidial (@Ksidiii) September 2, 2021

We talked a lot about the Vanna-Gamma Ratio (VGR) yesterday, and how it tells us about the fragility of customer positioning in SPX.

But it didn't show us the whole picture.

Today, let's add the last piece to our discussion of "non-dealer gamma." https://t.co/7Q6OiDUb8z
— SqueezeMetrics (@SqueezeMetrics) September 2, 2021

About

Disclaimer

Tags BAC - Bank of America Corp, Cem Karsan, Divergent Delta, Gap, HVN - High Volume Node, Interest Rates, Kai Volatility, LVN - Low Volume Node, Minimal Excess, NFP - Non Farm Payroll Report, ONH - Overnight High, RTH High - Regular Trade High, Shortened Holiday Trade, US10Y - US Government Bonds 10 Yr Yield

Commentary

Weekly Brief For May 31, 2021

Post author By Renato L. Capelj
Post date May 31, 2021
No Comments on 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.

Happy 420 (4200).

Per our metrics pre-market today, significant gravity helping things stay 1) muted and 2) around the open of 4200.

I mean, does it get any better? pic.twitter.com/GnHQdevnHx
— Hau Volatility (@HauVolatility) May 28, 2021

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

Take the risk. If you win, you will be happy. If you lose, you will be wise. Not sure who said this, but if you find yourself hesitating, I've found the best thing to do is take the plunge and see what happens.
— John F. Carter (@johnfcarter) May 30, 2021

Gamma squeezing was held to meme stocks last week, and it was only retail playing along.

The two charts here that show "retail" buying premium (top) vs "professional" (bottom). The blue line are equity calls. pic.twitter.com/anplthIDjG
— spotgamma (@spotgamma) May 30, 2021

The lack of vol sellers leads to faster spikeability in the front of the term structure….yet it also leads to faster deflation in vol as the trade is completely one sided with no follow through.

Hence why VIX goes to 25, you turn your head and its at 16. https://t.co/7uerpJZVuH
— Kris Sidial (@Ksidiii) May 28, 2021

$SPY Algo only Liquidity showing early buying, then flattened. DP's very heavy sellers in comparison if you compare both Algo/DP Accumulators to the FULL FEED (all).
Low program activity, only 12 so far, 3 buys and 9 sells…sells have been dominating on all up days this week. pic.twitter.com/X0VTwwmdgm
— HFTAlert (@HFTAlert) May 28, 2021

Tell me we’re in a bubble without telling me we’re in a bubble pic.twitter.com/SGlVhWU6o1
— leveredlloyd (@leveredlloyd) May 28, 2021

maybe it's a gamma squeeze, not a short squeeze

2 million $AMC calls traded yesterday pic.twitter.com/jQDLJla5mI
— Katie Greifeld (@kgreifeld) May 28, 2021

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

Commentary

Market Commentary For The Week Ahead: ‘Up, Up And Away’

Post author By Renato L. Capelj
Post date April 4, 2021
No Comments on Market Commentary For The Week Ahead: ‘Up, Up And Away’

Key Takeaways:

March dips prior to bullish April.
World GDP forecasts revised up.
Manufacturing sentiment soars.
Risk appetite elevated, but lower.
Historical Perspective: Economy.
$1.1T in student debt still paused.
Consumers spend 40% stimulus.
Delinquency rates are near highs.
Financial conditions tighten up.
Retail tempered its bullishness.
$2T infrastructure plan unveiled.
1970s-like inflation very unlikely.
Hedge funds not that levered up.

What Happened: U.S. stock index futures closed higher, last week.

What Does It Mean: The S&P 500 closed above $4,000.00 for the first time.

This comes as investors shifted their focus from the risks of rapidly rising inflation to the increasing pace of COVID-19 coronavirus vaccinations and a rebound in economic activity.

At the time, the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility based on S&P 500 (INDEX: SPX) options, hit the lowest level since February of 2020. This was likely the result of an oversupply in volatility due to contract rolling, signaling a shift in the demand for volatility and options-based hedging.

*Graphic 1: Volatility* *declines* *ahead of the extended holiday weekend.*

Adding, the market is entering into a historically bullish period, ahead of the upcoming corporate earnings season, with structural flows supporting the ongoing narrative, also, at least until mid-April. The reason being, most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection.

*Graphic 2: April,* *historically speaking, is usually a good month for equity investors.*

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

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

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

What To Expect: Balance-to-higher into mid-April.

Why? One last hurrah before the reopening accelerates and flows turn.

When flows turn, it is likely that equity and bond market volatility converge; the ongoing divergence comes alongside an attempt, by market participants, to price in rising debt levels and inflation. As consumers shift their preferences from saving and investing to spending, this divergence ought to disappear.

*Graphic 3: Q1 2021 the worst quarter for bonds in decades, via* *Bloomberg*.

*Graphic 4:* *Divergence* *in volatility across the bond and equity market.*

Adding, metrics, like DIX, confirm increased buying pressure while divergences in options activity and volume delta suggest opportunistic selling.

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

Volume Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

*Graphic 5: Physik Invest maps out the purchase of call and put options in the* *SPDR S&P 500 ETF Trust* (NYSE: SPY), for the week ending April 4, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, in strikes as low as $330, which corresponds with $3,300 in the cash-settled *S&P 500 Index* *(INDEX: SPX).*

What To Do: In the coming sessions, participants will want to pay attention to where the S&P 500 trades in relation to Thursday’s end-of-day spike higher.

More On 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).

In the best case, the S&P 500 remains above the $4,004.25 spike base. Doing so means that the participants are finding higher prices, above the VWAP anchored from the March 17 rally-high, valuable (i.e., buyers, on average, are in control and winning since the March 17 rally-high).

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

In the case of higher prices, given that the $4,015.25 price extension was achieved in after-market trade that established an overnight high at $4,038.25, participants can target the $4,062.00 extension.

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 $4,004.25 spike base puts the rally on hold and calls for balance or digestion of higher prices.

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

In the case of lower prices, participants can look to whether a test of the $3,943.00 and $3,908.25 high-volume areas (HVNodes) solicit a response.

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

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

*Graphic 6: 4-hour profile chart of the Micro E-mini S&P 500 Futures.*

Conclusions: The go/no-go level for next week’s trade is $4,004.25.

Any activity above this level confirms the bullishness of last Thursday’s end-of-day spike.

Levels Of Interest: $4,004.25 Spike Base.

Cover photo by Taryn Elliott from Pexels.

Tags Balance, DIX - Dark Pool Index, Earnings Season, HVN - High Volume Node, MOVE - Merrill Lynch Options Volatility Estimate, ONH - Overnight High, Shortened Holiday Trade, Spike, SPX - Cash S&P 500 Index, SPY - SPDR S&P 500 Trust ETF, Stimulus, US10Y - US Government Bonds 10 Yr Yield, VIX - CBOE Volatility Index, Volume-Weighted Average Price (VWAP)

Commentary

Market Commentary For The Week Ahead: ‘To The Moon’

Post author By Renato L. Capelj
Post date February 14, 2021
4 Comments on Market Commentary For The Week Ahead: ‘To The Moon’

Key Takeaways:

Positive earnings revisions nearing records.
Equity mutual funds attract strong inflows.
Multi-asset funds raising equity allocations.

What Happened: U.S. stock indexes resolved a week-long trading range, Friday.

What Does It Mean: As the new administration looked to advance the status of coronavirus relief, U.S. stock index futures established record highs.

This comes as stock indexes, particularly the S&P 500, traded sideways after a rapid de-risking event associated with the GameStop Corporation (NYSE: GME) crisis, and subsequent v-pattern recovery.

More On The V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.

As stated on Friday, the tight trading range is most likely attributable to the large February monthly options expiration (OPEX), after which, the interest at the $3,900.00 S&P 500 option strike will roll-off.

*Graphic 1: 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 12, 2021. Activity in the option market was primarily concentrated in short-dated tenors near $390, a strike that corresponds with $3,900.00 in the cash-settled ***S&P 500 Index*** *(INDEX: SPX).*

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

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

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

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

If the interest near $3,900.00 S&P 500 is not rolled up in price and out in time, then option hedging requirements will change.

However, it is important to note that, in recent days, some exposure has been rolled up in price and out in time. This suggests an inclination by participants to maintain long exposure through OPEX, a day that would mark an end to pinning (which we’ve seen over the past weeks).

One such example can be seen below.

*Graphic 4: Purchase of call positions higher in price and farther out in time in the cash-settled S&P 500 Index*

What To Do: In coming sessions, participants will want to pay attention to the $3,919.75 spike base and $3,928.25 balance-area high.

More On 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).

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).

Given the spike out of balance, the following frameworks ought to be applied.

In the best case, the S&P 500 opens and remains above the $3,919.75 spike base, confirming last week’s higher prices. In the worst case, the S&P 500 auctions below the $3,919.75 spike base.

Trade below the spike base would be the most negative outcome and may trigger a new wave of downside discovery, repairing some of the poor structures left in the wake of the aforementioned advance.

*Graphic 5: Profile overlays on a 30-minute candlestick chart of the Micro E-mini S&P 500 Futures*.

Conclusions: The go/no-go level for next week’s shortened holiday trade is $3,919.75. Trade below this level suggests markets are not yet ready to rally.

Levels Of Interest: $3,919.75 spike base.

Cover photo by Pixabay, from Pexels.

Tags Balance-Break, GME - GameStop Corporation, HVN - High Volume Node, Long Gamma - Buy Dip & Sell Rip, OPEX, Shortened Holiday Trade, Spike, SPX - Cash S&P 500 Index, SPY - SPDR S&P 500 Trust ETF