Tag: S&P 500 Dividend Yield

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Commentary

Daily Brief For January 18, 2022

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What Happened

Overnight, equity index futures auctioned lower alongside a surge in bond yields. Rate-sensitive sectors were weakest in pre-market trade, in comparison to the value and cyclical names. 

Earnings are now in focus. Participants shall use earnings updates to gauge how companies are performing in spite of omicron, among other challenges.

Ahead is data on the Empire Manufacturing Index (8:30 AM ET) and NAHB Home Builders Index (10:00 AM ET). 

Graphic updated 6:30 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. 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

Fundamental: Ahead of earnings releases from Goldman Sachs Group (NYSE: GS), Morgan Stanley (NYSE: MS), Bank of America (NYSE: BAC), and Netflix (NASDAQ: NFLX), as well as key rate decisions, indices sold heavy. 

The Nasdaq 100 led the decline after holiday-trade, Monday, as yields surged alongside concerns central banks would tighten monetary policy sooner than expected.

This is as higher rates have the potential to decrease the present value of future earnings, making stocks, especially those that are high growth, less attractive. 

“The rationale behind this is the trade-off,” Grit Capital put well in a recent newsletter. 

“Why would I park my money somewhere that is only yielding 1%, when I can invest in riskier assets that can raise my return?”

Graphic: Per Grit Capital, “A common proxy that a lot of people look at is the S&P500’s earnings yield (yellow) vs. the 10yr (white).”

At the same time, narratives around quantitative tightening (i.e., the reduction in the size of the Federal Reserve’s balance sheet) are growing louder.

Graphic: QT mechanics per The Macro Compass.

This is what Andy Constan of Damped Spring Advisors refers to as the QT drumbeat. 

This drumbeat is to intensify in spite of strong economic and earnings growth, as well as a moderation in inflation, Constan says. 

“The lack of additional liquidity provided by Fed purchase will also remove a damper for the market and the economy keeping asset volatility well bid, while also causing asset diversification benefit to fall, generating rising portfolio volatility and the risk demanded to hold assets.”

Note: Check out this Constan’s really interesting story, below!

Graphic: Via The Market Ear, “Temporary relief from Powell – slow reverse QE’ confirmed. Powell says Fed will stop replacing maturing bonds, but will not sell holdings: slow QT.”

“If current, priced in, inflation and growth expectations are exactly realized we predict that risk premiums on 30-year yields will increase by 15bp and equity risk premium by 30bp,” Constan adds. “These risk premium expansions will generate a 2% headwind on long bond prices and a 10% headwind for equity prices.”

Constan’s comments line up with that of Morgan Stanley’s which sees markets selling down 10-20% during H1 2022, as expectations call for five 25 bp hikes. History is in alignment, below.

Graphic: S&P 500 performance before and after rate hikes, via The Market Ear.

So, despite recent inflows and “light positioning,” taking all of the above comments together, the window for stocks to rally is closing.

Positioning: The coming January 19 expiration of options on the Cboe Volatility Index (INDEX: VIX) and January 21 monthly equity options expiration (OPEX) has major implications.

According to Constan, the “[o]ptions expiration which includes lots of LEAP contracts will be a catalyst for a squeeze rally and a post-OpEx sell-off.”

This is as, according to Kai Volatility’s Cem Karsan, there is a constant structural positioning that naturally drives markets higher.

“I use this analogy of a jet,” he explained, referencing the three factors – the 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. 

“[T]he hedging vanna and charm flows, and whatnot will push the markets higher.”

To note, though, with narratives around higher rates and QT strengthening, so to speak, divergences between the S&P 500 and metrics like the Bond Closed-End Fund (CEF) Advance-Decline line have already appeared.

As McClellan Financial Publications explains, “liquidity has suddenly become a problem, and it is affecting the more liquidity-sensitive issues first. That can be a prelude to that same illiquidity coming around and biting the big cap stocks that drive the major averages.”

Graphic: Bond CEF A-D showing liquidity problems, via McClellan Financial Publications.

As an aside, some believe that the Fed’s removal of liquidity has the potential to prick the bubble, prompting a cascading reaction that exacerbates underlying price movements.

“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,” Karsan adds. 

“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.”

Technical: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 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: 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 best case, the S&P 500 trades higher; activity above the $4,593.00 point of control (POC) puts in play the $4,624.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,633.00 POC and $4,650.75 regular trade low (RTH Low), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,593.00 POC puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,549.00 VPOC and $4,520.00 RTH Low, or lower.

Considerations: The S&P 500 remains above its 200-day simple moving average. The long-term trend remains up.

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

Definitions

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

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

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

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

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.

About

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

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

Disclaimer

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.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Mostly Sunny’

Key Takeaways:

  • $1.9T relief package is enacted.
  • Inflation to print past Fed goal.
  • Policy actions to limit volatility.
  • Potential for late-March selling.
  • Bond, equity volatility diverged.
  • U.S. to lead economic recovery.

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

This came alongside (1) the enactment of a massive, $1.9 trillion coronavirus relief plan, (2) convergence in the 10-year Treasury rate and S&P 500 dividend yield, as well as (3) a material divergence in bond and equity market volatility.

What Does It Mean: The pandemic disrupted the global economy, hitting the hardest airlines, leisure facilities, energy, manufacturing, and restaurants, among other industries.

The stock market tumbled, as a result, and the subsequent recovery was lead by technology, which delivered its strongest annual average return since the Global Financial Crisis (GFC).

Now, as virus case counts fall, the pace of vaccinations accelerates, and massive coronavirus relief bills are passed, shares of stocks in beaten-down industries are becoming favorites.

This reopening trade, as it’s called, comes alongside projections the U.S. will lead the 2021 global economic recovery.

Amidst the bullishness, the yield on a 10-year Treasury, a risk-free asset, which was — per Axios — “artificially depressed by the flight-to-quality trade during the coronavirus pandemic, as well as by large-scale purchases by the Federal Reserve,” converged with S&P 500’s dividend yield. 

Graphic 1: Goldman Sachs Group Inc (NYSE: GS) projects yields to rise and the curve to steepen.

Typically, the S&P 500’s dividend yield is less than the risk-free rate because investors expect to earn less in dividends than they would holding the same amount in bonds, absent rising stock prices.

Values are derived using the discounted cash flow calculation; as interest and discount rates go up, the present value of future earnings goes down, which will drag stock prices, especially in growth categories, as evidenced by the Nasdaq-100’s relative weakness.

Graphic 2: Nordea Group expects inflation to print above the Federal Reserve’s target, soon.

Still, historically speaking, rising yields aren’t that harmful. Looking as far back as the 1960s, there are 13 periods in which the yield on a 10-year Treasury rose by at least 1.5%.

“In nearly 80% (10 of 13) of the prior periods, the S&P 500 Index posted gains as rates rose, as it has so far in the current rising-rate period,” a statement by LPL Financial said. “In fact, the average yearly gain for the index during the previous rising-rate periods, at 6.4%, is just a little lower than the historical average over the entire period of 7.1%, while rising rates have been particularly bullish for stocks since the mid-1990s.”

Further, despite an attempted pricing in of rising debt levels and inflation, a divergence in bond and equity market volatility persists.

Historically, fear across markets tends to move in tandem. That’s not the case today.

Graphic 3: Divergence in volatility across the bond and equity market. 

What To Expect: Balance, or two-sided trade as participants look for more information to base their next move on after last week’s rapid recovery.

Coming into the weekend, market liquidity suggested (1) buying pressure was leveling out and/or (2) buyers were absorbing resting liquidity (opportunistic selling or selling into strength), while speculative options activity was concentrated on the put-side. 

Graphic 4: 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 March 12, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, in strikes as low as $353, which corresponds with $3,530.00 in the cash-settled S&P 500 Index (INDEX: SPX).
  • IWM Market Liquidity
  • QQQ Market Liquidity
  • SPY Market Liquidity

What To Do: In the coming sessions, participants will want to pay attention to the VWAP anchored from the $3,959.25 overnight rally-high, as well as the $3,840.00 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 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.

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.

In the best case, the S&P 500 remains above the $3,840.00 volume area, and VWAP anchored from the $3,959.25 peak. This would suggest buyers, on average, are in control and winning since the February 15 rally-high.

Any activity below the VWAP anchored from the $3,959.25 peak may (1) leave the $3,840.00 HVNode as an area of supply, offering initiative sellers favorable entry and responsive buyers favorable exit.

Graphic 5: Profile overlays on a 30-minute candlestick chart of the Micro E-mini S&P 500 Futures.
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 $3,840.00.

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: $3,840.00 HVNode.

Photo by Aleksandar Pasaric from Pexels.

Categories
Commentary

Market Commentary For 3/1/2021

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

What Happened: Overnight, U.S. stock index futures auctioned higher on news of COVID-19 vaccine approvals and stimulus progress.

What Does It Mean: Alongside (1) a material divergence in bond and equity market volatility, as well as (2) a convergence in the 10-year Treasury rate and S&P 500 dividend yield, U.S. stock indexes auctioned lower during regular trade, last week.

Aside from the volatility, the S&P 500’s long-term uptrend, and a skewness toward put options suggests the potential for a near-term turn-around.

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

Further, because the S&P 500 auctioned above the $3,840.00 high-volume area, or HVNode, attention shifts to the $3,860.75 low-volume area, or LVNode.

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.

In the best case, the S&P 500 is able to auction and maintain prices above the $3,860.75 LVNode, formed by earlier selling forces.

Auctioning beyond that reference suggests near-term conviction has changed; participants would look for responses at the $3,907.75 HVNode, an area that would offer initiative buyers (responsive sellers) favorable exit (entry).

In the worst case, the S&P 500 auctions below the $3,840.00 HVNode.

In such case, initiative sellers would be emboldened; participants may look to repair the gap below $3,785.00.

Levels Of Interest: $3,860.75 LVNode.

Categories
Commentary

Market Commentary For The Week Ahead: ‘Missed Approach’

Key Takeaways:

  • High doses of stimulus yet to be fully felt.
  • Hedge funds add to long, short exposure.
  • Economies eye growth, uneven recovery.
  • Powell kept stressing inflation downsides.
  • Traders price in a quarter-point rate hike.
  • 10-yr yield, S&P 500 dividend yield cross.
  • Bond, equity market volatility separations.
  • JPMorgan does not see a market bubble.

What Happened: U.S. stock index futures auctioned lower.

This came alongside (1) a material divergence in bond and equity market volatility, as well as (2) a convergence in the 10-year Treasury rate and S&P 500 dividend yield.

What Does It Mean: Equity traders began pricing in the risk of a rapid move up in rates, due to concerns over bond values, as a result of rising debt levels and inflation.

Additionally, the yield on a 10-year Treasury, a risk-free asset, which was — per Axios — “artificially depressed by the flight-to-quality trade during the coronavirus pandemic, as well as by large-scale purchases by the Federal Reserve,” converged with S&P 500’s dividend yield.

Typically, the S&P 500’s dividend yield is less than the risk-free rate because investors expect to earn less in dividends than they would holding the same amount in bonds, absent rising stock prices.

Values are derived using the discounted cash flow calculation; as interest and discount rates go up, the present value of future earnings goes down, which will drag stock prices, especially in growth categories, as seen.

Still, despite the pricing in of rising debt levels and inflation, a divergence in bond and equity market volatility persists. In such a case, market participants ought to widen their outlook; there is some potential for risk asset capitulation in the present down cycle.

Graphic 1: Divergence in volatility across the bond and equity market. 

Moving on, it’s important to take note of the market’s unpinning, after February’s monthly options expiration (i.e., OPEX), as well as the long-term trend.

More On 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.

Aside from OPEX, last week’s volatility did not disrupt the S&P 500’s long-term uptrend (Graphic 2), and a skewness toward put options — evidenced by Graphic 3 and market gamma — suggests the potential for a near-term turn-around.

Graphic 2: Long-term uptrend in the cash-settled S&P 500 Index (INDEX: SPX) is intact.
Graphic 3: 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).

What To Expect: Directional resolve, given the S&P 500’s rotation near a prominent high-volume area, or HVNode (Graphic 4), and an overnight rally-high at $3,959.25.

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

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

What To Do: In coming sessions, participants will want to pay attention to the VWAP anchored from the $3,959.25 peak and $3,657.00 low, as well as the $3,840.00 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.

In the best case, the S&P 500 opens and remains above the $3,840.00 volume area.

Additionally, auctioning above the $3,875.75 VWAP would suggest buyers, on average, are in control and winning, since the February 15 rally high.

Auctioning beneath $3,785.00 would (1) leave the $3,840.00 HVNode as an area of supply — offering initiative sellers favorable entry and responsive buyers favorable exit — and (2) portend repair of poor structures (e.g, the $3,785.00-$3,777.00 gap) left in the wake of a prior advance.

In such a case, participants should look to the next area of high-volume (i.e., $3,794.75 and $3,727.75) for favorable entry and exit.

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

Conclusions: The go/no-go level for next week’s trade is $3,840.00.

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: $3,840.00 HVNode.

Photo by Sohel Patel from Pexels.