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Commentary

Daily Brief For May 12, 2023

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Bloomberg reports that if the US defaults on its debt, which could happen as soon as June 1 if President Biden and House Speaker McCarthy fail to reach a deal on raising the ceiling, homebuyer borrowing costs may surge to 8.40%. As a consequence, the typical home’s monthly payment would increase by 22.00% and cool property sales; the monthly payment on a $500,000.00 mortgage may rise to $3,800.00, compared to about $3,095.00 at the current rate of 6.30%.

Image
Graphic: Retrieved from WSJ.

In prior letters, we concluded that past monetary action made stocks less sensitive to interest rates, quoting JPMorgan Chase & Co (NYSE: JPM) strategists that the market would likely continue to “artificially suppress perceptions of fundamental macro risks,” barring surprises like a debt limit breach.

US Tech Stocks Outperform | The Nasdaq 100 has soared amid expectations of easier Fed policy
Graphic: Retrieved from Bloomberg.

With a debt limit breach a potential reality, Moody’s Corporation (NYSE: MCO) says a breach may compound recessionary pressures; expect a drop in equities, a volatility spike, and a disruption of funding markets.

Graphic: Retrieved from Nasdaq Inc (NASDAQ: NDAQ).

“Data show that short-term bonds have the most predictable reaction – with interest rates and default insurance costs rising significantly – before quickly returning to normal after the uncertainty has passed,” Nasdaq’s Phil Mackintosh writes. “In reality, a crisis was averted in all [prior] cases, with the government able to increase or suspend the debt limit before the X Date.”

Graphic: Retrieved from Bloomberg.

Notwithstanding the short-term uncertainty regarding the debt limit, Bank of America Corporation (NYSE: BAC) is adamant there will be a recession that manifests cracks in “credit and tech,” similar to the situation in 2008. BAC sees the bubble in technology, media, and telecommunication stocks soon deflating as they face higher-for-longer interest rates and a tempered earnings outlook.

Graphic: Retrieved from Societe Generale SA (OTC: SCGLY) via The Market Ear. While investors poured $3.8 billion into technology stocks in the week through May 10, $2.1 billion was pulled from financial equities, the most significant redemption since May 2022.

Compounding the recessionary pressures BAC sees, EPB Research adds, are banks’ funding costs, which have increased too much relative to prevailing asset yields. If the spread drops too low, bank lending tightens, and a recession occurs. Also, other data suggests tightening is finally starting to have an impact. Bloomberg reports that initial claims for unemployment insurance are on the rise. There has been a drop in overall wage growth to 5.1% last month, too, the biggest fall in the rate of increase since the series began.

Graphic: Retrieved from Bloomberg.

Separately, breadth divergences are becoming more frequent, with the Daily Advance-Decline (A-D) Line for the NYSE showing lower highs while DJIA and S&P 500 show slightly higher highs, McClellan Financial Publications writes. The bond CEF A-D Line is also showing a bearish divergence, indicating a shift in liquidity that could weigh on other stocks, including the big-cap stocks holding up the SP500 and the Nasdaq 100.

bond cef a-d line
Graphic: Retrieved from McClellan Financial Publications.

McClellan adds that the A-D Line originated from data collected by Leonard Ayres and James Hughes in the 1920s. It was made famous in 1962.

nyse a-d line 1929
Graphic: Retrieved from McClellan Financial Publications.

That’s when Joe Granville and Richard Russell commented on it in their newsletters, noting how it had shown a big bearish divergence ahead of the 1962 bear market.

a-d line 1962
Graphic: Retrieved from McClellan Financial Publications.

To end, the economic calendar next week is focused on manufacturing and housing. The housing market is showing some downside risk for existing-home sales for April due to a weak reading on pending sales, MCO says, adding that housing permits and starts are expected to move sideways as builders remain cautious amid high-interest rates and economic uncertainty. Regional Fed surveys in New York and Philadelphia will provide the first read on factory activity for May, with little hope for a significant rebound in manufacturing. Jobless claims will be critical, as continuing the recent trend would likely signal a rapid deceleration in monthly job gains. Other critical data to be released include retail sales, industrial production, and business inventories.

Should readers wish to hedge the debt ceiling debacle, June call options on the Cboe Volatility Index appear attractive, some suggest. But, with RVOL as low as it is, owning optionality is not generally warranted. The risk is lower lows in volatility.

Image
Graphic: Retrieved from SpotGamma.

About

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.

Separately, please 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.

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Commentary

Daily Brief For May 10, 2023

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Our levels have been working. For instance, as shown below, yesterday’s Daily Brief levels were key response areas for the Micro E-mini S&P 500 Index (FUTURE: /MES).

Graphic: Retrieved from TradingView.

Some of the levels overlap centers of options activity; falling volatility coincides with increased sensitivity among those options, lending to reversion and responsiveness.

“This continues to suggest that our theoretical framework of ‘options dominance’ is indeed the driver. In 2017 when the XIV (inverted VIX ETF) was king of the hill, that 44bps high-low range would have been the 47%ile,” reports Tier1Alpha. “If you think these markets are boring, try 2017. Our suspicion is that similar forces are at work, just concentrated in 0dte options. The 2017 bear market in vol came to an end with Volmaggedon. The cycle will end this time as well, but the catalyst remains to be seen.”

Graphic: Retrieved from Michael Green of Simplify Asset Management.

Consequently, per SpotGamma, “there is little room for error.”

From an options positioning perspective, for volatility to reprice lower and boost the market, “we need a change in [the] volatility regime,” SpotGamma previously added. The likelihood of that happening is low since many expect the Federal Reserve (Fed) to stick to its message of higher rates for longer, notwithstanding the consumer price index rising by a below-forecast 4.9%, the first sub-5% reading in two years. Overall prices remain hot, and the job market remains robust. Policymakers need more than one month of data to be confident that prices are on a sustained downward path, Bloomberg reports.

Graphic: Retrieved from Bloomberg.

“Inflation is higher than the Fed’s mandate and not on a path to get to that mandate soon. The CPI report is one data point, and most measures show elevated inflation. Areas that had been disinflationary are reverting. And the stickiest parts of inflation remain elevated.”

Graphic: Retrieved from Bob Elliott of Unlimited Funds.

So, support for a pause or hold is the more likely scenario.

“When pauses have occurred against the backdrop of tight labor markets, the Fed has rarely eased in the subsequent six months — the most common outcome has been an on-hold Fed,” explained Praveen Korapaty of Goldman Sachs Group Inc (NYSE: GS). “In contrast, periods with material deterioration in the labor market have more reliably resulted in easing. At least during this period, the inflation backdrop at the time of the pause does not appear to have had a material influence on policy actions.”

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via Bloomberg. “As this chart from Goldman shows, when the employment is tight (which it plainly is at present), pauses tend to become extended. It’s only when employment is seriously deteriorating (on the right side of the chart) that the Fed pivots swiftly.”

Moreover, heading into price updates this morning, the expectation was for a smaller move in the S&P 500. However, with volatility very low, we’ve maintained that selling options blindly is dangerous. When you least expect significant movement, it often happens; just before the opening, the market has moved over 1.0%.

Graphic: Retrieved from Pat Hennessy of IPS Strategic Captial Management. “Welp, it was fun while it lasted. SPX straddle only pricing 83bps for tomorrow ahead of CPI, lowest on record since dailies were listed in May 2022.”

Check out our detailed trade structuring report for more on how to better manage a portfolio in this enviornment.

Graphic: Retrieved from Bloomberg. “The case for concerted easing rests fundamentally on the yield curve. Long-dated bonds have been paying a lower rate than shorter securities for the best part of a year, and this is a well-known recession indicator,” John Authers says. “It’s also a serious headache for banks, who traditionally borrow at low short rates (via deposits), lend at a higher rate, and make their profit from the difference. Banks, we know, are in trouble. If claims of a ‘crisis’ are a tad overblown, the deposit flight created for them by the inverted curve will contribute to the recessionary environment.” A way for the curve to return to its usual shape is for the Fed to cut rates, but the consensus among pros is that won’t happen for some more time.

About

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.

Separately, please 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.

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Commentary

Daily Brief For May 9, 2023

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Sentiment calmer on the heels of some weaker-than-expected data from China. Generally speaking, markets are holding well, led by technology and innovation. 

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via The Market Ear.

Price doesn’t tell the whole story, however. Breadth is softening while market boosters are slowly being picked off. Tier1Alpha says that “1-month realized volatility rose nearly 13%, [and] … if volatility continues to rise, it will have an outsized effect on the 1-month vol, as the sample is now largely filled by the smaller returns we experienced in April.” Altogether, this “could result in larger [selling] flows being triggered from systematic strategies that use volatility scaling as a means for risk control.”

Graphic: Retrieved from Bespoke Investment Group via The Market Ear.

“With that vol premium getting squeezed out, there is little room for error,” SpotGamma adds; uncertainties that may manifest pressure and compound weaknesses under the hood include inflation reports and the debt ceiling issue.

“The next big moment comes Tuesday, when President Joe Biden is scheduled to meet House Speaker Kevin McCarthy and other congressional leaders,” Bloomberg explains. “The meeting is high stakes. Republican leaders want promises of future spending cuts before they approve a higher ceiling, while Biden is insisting on a ‘clean’ increase.”

Further, traders expect increased chances of rate cuts. This may not be outlandish; “Looking at the past 17 hiking episodes, the two-year, 10-year Treasury yield curve bottoms out 108 trading days before the first rate cut.”

Graphic: Retrieved from Bloomberg.

“Using that guide, the 2s10s curve reached negative 111 basis points on March 8 and has since steepened to about negative 41 basis points. Assuming that marked the trough, 108 trading days lands in mid-August — sandwiched between the Fed’s July 26 and September 20 rate decisions.”

Graphic: Retrieved from Bloomberg. “Look at the gap between the three-month and the 10-year yields, generally regarded as a surefire recession indicator. It’s also a great indicator of imminent rate cuts. An inversion is also a timing signal because it makes little or no sense unless you’re confident that rate cuts will be starting soon. And over the last 30 years, the curve has never been as inverted as it is now.”

For better hedging participation in market upside, check out Physik Invest’s recently published trade structuring report.

Graphic: Retrieved from BNP Paribas (OTC: BNPQY) via Bloomberg. JPMorgan Chase & Co (NYSE: JPM) strategistsay that “the first quarter will likely be the high point for stocks this year, … adding that equities won’t reach lows until the Fed has pivoted to rate cuts.”

About

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.

Separately, please 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.

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Commentary

Daily Brief For April 18, 2023

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Bank of America Corporation (NYSE: BAC) sees allocations to equities versus bonds falling. That’s amid recession fears. Per EPB, “the cyclical economy has just started to shed jobs today, and leading indicators signal the recession is likely underway.”

“To get advanced warning of recessions, you must look at the construction and manufacturing sectors, even though these two sectors are only 13% of the labor market,” EPB adds, noting traditional indicators’ weakening predictability is not so great to ignore the insight. “It’s clear that the composition of traditional leading indicators remains appropriate, and thus, the current resounding recessionary signal should not be ignored.”

BAC strategist Michael Hartnett said, though, that this “consensus lust for recession” must soon be satisfied. Otherwise, the “pain trade” would be even higher yields and stocks; the S&P 500 (INDEX: SPX) is enjoying an accelerated rally which Jefferies Financial Group (NYSE: JEF) strategists think portends a period of flatness, now, over the coming weeks …

Graphic: Retrieved from Jefferies Financial Group (NYSE: JEF) via The Market Ear.

… and through options expiration (OpEx), typically a poor performance period for the SPX.

Displaying
Graphic: Retrieved from Tier1Alpha. 

Beyond the uninspiring fundamentals, the positioning contexts are supportive. Recall our letters published earlier this year. If the market consolidated and failed to break substantially, then falling implied volatility (IVOL) and time passing would bolster markets and, potentially, help build a platform for a rally into mid-year. A check of fixed-strike and top-line measures of IVOL like the Cboe Volatility Index or VIX confirms options activities are keeping markets intact.

Graphic: Retrieved from Danny Kirsch of Piper Sandler (NYSE: PIPR). “SPX May $4,150.00 call volatility, the lack of realized volatility weighing on the market. Volatility low, not cheap.”

Beyond the rotation into shorter-dated options, just one of the factors exacerbating the decimation of longer-dated volatility, traders’ consensus is that markets won’t move a lot and/or they don’t need to hedge over longer time horizons; traders want punchier exposure to realized volatility (RVOL), and that they can get through shorter-dated options that have more gamma (i.e., exposure to changes in movement), not vega (i.e., exposure to changes in implied volatility).

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via Bloomberg.

Consequently, counterparties may be less dangerous to accelerating movement in either direction; hence, the growing likelihood of a period of flatness.

Graphic: Retrieved from SpotGamma.

“Despite the collapse in the 1-month realized volatility, we suspect most vol control funds have scaled into using their longer-term realized vols, which by design, lead to less aggressive rebalancing flows,” Tier1Alpha says. “For example, the 3-month rVol, which is currently driving our model, was essentially unchanged yesterday, which means volatility targets were maintained, and very little additional rebalancing had to occur. So even with the decline in the 1-month vol, overall risk exposure remained the same.”

With IVOL at a lower bound, the bullish impacts yielded by its compressing have largely played out. There may be more to be gained by movements higher in IVOL, in addition to the expiry of many call options this OpEx. By owning protection, particularly far from current prices, you are positioned to monetize on the market downside and non-linear repricings of volatility, as this letter has discussed in recent history. The caveat is that volatility can cluster and revert for longer; hence, your structure matters.

“I am concerned that VIX is underpricing the series of events that we know to expect over the coming weeks,” says Interactive Brokers Group Inc’s (NASDAQ: IBKR) Steve Sosnick. “While there is now an 88% implied likelihood of a 25 basis point hike, the likely path of any potential future hikes and assumed cuts should be more clarified at the meeting and in its aftermath.  And oh, has anyone ever heard the expression “sell in May and go away?”

Graphic: Retrieved from Interactive Brokers Group Inc (NASDAQ: IBKR).

With call skews far up meaningfully steep in some products, still-present low- and zero-cost call structures this letter has talked about in the past remain attractive. If the market falls apart, your costs are low, and losses are minimal. If markets move higher into a “more combustible” position, wherein “volatility is sticky into a rally,” you may monetize your call structures and roll some of those profits into bear put spreads (i.e., buy put and sell another at a lower strike). An alternative option is neutral. Own something such as a T-bill or box spread (i.e., buy call and sell put at one strike and sell call and buy put at another higher strike). Some boxes are yielding upwards of 5.4% as of yesterday’s close.

To end, though the short-dated options activity may prompt cascading events in market downturns, the main issue is the reduced use of longer-dated options; a supply and demand imbalance likely resolves itself with an implied volatility repricing of a great size where longer-dated options outperform those that are shorter-dated.

Our locking in of rates or using the profits of call structures to position for a potential IVOL repricing, particularly in the back half of the year when dealer positioning is less clear, buybacks are to fall off of a cliff, rates may fall, and the boost from short-covering has played its course, is an attractive proposition given the context.

Graphic: Retrieved from Bloomberg. “The S&P 500 (white line) is well above its levels from early March, while the yield on the 3m-2y spread remains in a deep inversion, signifying meaningful expectations of cuts in the months ahead.”

About

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.

Separately, please 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.

Categories
Commentary

Daily Brief For April 11, 2023

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The narrative yesterday was bearish

A big deal was made surrounding some data that shows investors increasing their bets on US equities falling; net short positions in the E-mini S&P 500 (FUTURE: /ES) are the highest since 2011, Bloomberg reports. JPMorgan Chase & Co (NYSE: JPM) and Goldman Sachs Group Inc (NYSE: GS) concur as their data shows clients betting on stocks falling or reducing stock exposure quickly.

This is happening in the context of some mixed, albeit still robust-leaning, data; payrolls upped bets that the Federal Reserve or Fed would move its target rate to 5.00-5.25%. GS’ Bobby Molavi adds, “the prevalent view seems to be that more things will break on the back of rapid rise in cost of capital.”

Graphic: Retrieved from Bloomberg

In light of the rate expectations, the Nasdaq 100 (INDEX: NDX) appears to be handing over the leadership baton to the S&P 500 (INDEX: SPX), though both indexes remain primarily intact and coiling; the fundamental-type pressures are balanced by follow-on support from those actors that base their decisions on such things as the amount a market moves (i.e., realized volatility or RVOL), says Tier1Alpha and SpotGamma.

Graphic: Retrieved from Tier1Alpha.

The two providers of market insights see falling implied (IVOL) and RVOL as catalysts for buying stocks. This, coupled with the hedging of soon-to-expire large options open interest, particularly on the put side, in a lower liquidity environment, supports the indexes while underlying breadth and correlations are underwhelming.

A large concentration of put open interest near current prices is pictured just below. The eventual removal of this put-heavy positioning will reduce some directional risks to options counterparts; as puts disappear or decline in value, their delta or exposure to direction does too. If a counterparty is short a put and has less positive delta to hedge, they may buy back some of their short-delta exposure in the underlying index, a catalyst for higher S&P 500 prices.

Graphic: Retrieved from SpotGamma.

A large open interest concentration set to roll off this April is pictured just below.

Retrieved from SpotGamma.

This has happened before. Newfound Research explains it best in their paper titled “Liquidity Cascades: The Coordinated Risk of Uncoordinated Market Participants.”

In keeping the indexes and their underlying idiosyncratic baskets in line via arbitrage constraints, while there is a build-up of suppressive and supportive dealer hedging at the index level, “then the only reconciliation is a decline in correlation.”

In this context, Tier1Alpha explains, “lower correlations tend to lead to lower volatility … giv[ing] volatility control funds the go-ahead to augment their risk exposure, with an estimated $14 billion in equities purchases … to be spread out in blocks.”

Consequently, in line with our thesis that positioning and technical contexts support near-term strength, it still makes sense to take the profits of very wide, albeit low- or zero-cost, call ratio spread structures discussed in past letters to cut the cost of our bets on the equity market downside and lower rates with more time to expiry. Should the indexes trade higher, SpotGamma agrees with Kai Volatility’s Cem Karsan that volatility could be sticky.

Hence, call structures could keep their value better and enable us to lower the cost of our bets on the market downside. If the fundamental context supporting the rotation of call option profits into puts is no longer valid, then the losses on such trades are limited; the money is made in not losing it.

Graphic: Retrieved from SpotGamma’s Weekend Note.

Not doing as outlined and blindly buying put options to protect long equity exposure is generally a poor-performing strategy, despite the performance claims of some funds specializing in that practice.

Graphic: Retrieved from QVR Advisors via Bloomberg. “Buying puts is a money-losing proposition when considered in isolation. Chart shows the performance of hedges rolled every quarter with delta hedging, as a percentage of notional amount protected.”

About

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.

Separately, please 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.

Categories
Commentary

Daily Brief For April 10, 2023

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US payroll data has increased the possibility of a rate hike by the Federal Reserve or Fed in early May, leading to higher rates and affecting those who expected a pause or pivot through poorly performing yield curve steepener trades. The market expects the Fed to raise its target rate to 5.00-5.25% and keep it there through mid-year.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool.

There is more to the pressure than just yields. Surveys indicate a drop in profits for sensitive areas of the equity market, such as technology and banks; as soon as the labor market starts softening, a credit crunch is expected to accelerate by some.

Graphic: Retrieved from the St. Louis Fed via Cubic Analytics.

Despite the turbulence from earnings, data suggests the S&P 500 (INDEX: SPX) may perform well through year-end. Historically, the full-year return was always positive when the S&P 500 had a positive first quarter. However, there have been exceptions, says Callum Thomas, quoting data gathered by Ryan Detrick.

Graphic: Retrieved from Ryan Detrick via Callum Thomas’ Weekly S&P 500 ChartStorm.

Peeking beneath the hood, only a few (primarily rate-sensitive) stocks have bolstered recent index strength; many components are not participating in the rally, which could be a harbinger of potential post-earnings weaknesses. 

Graphic: Retrieved from McClellan Financial Publications.

Notwithstanding, if rates continue to fall, so do borrowing costs; falling inflation cuts pressures on input cost; rising unemployment helps keep labor costs under control, Bloomberg reports. The forecasts (not surveys) actually show earnings holding up better than the narrative suggests.

Graphic: Retrieved from Bloomberg.

So what, then? In an annual report, JPMorgan Chase & Co (NYSE: JPM) concludes that if “we have higher inflation for longer, the Fed may be forced to increase rates higher than people expect despite the recent bank crisis.” Compounding the rate hikes is quantitative tightening or QT, the process of a central bank reducing the amount of money it has injected into an economy by selling bonds or other financial assets, which “may have ongoing impacts that might, over time, be another force, pushing longer-term rates higher than currently envisioned.” The net effect, though insights gleaned from the curve may be muddied due to the scale of recent interventions, is an “inverted yield curve [implying] we are going into a recession” and lower credit creation because, as Sergei Perfiliev well puts it, “if capital ends with the Fed, it is dead – it has left the economy and the banking system.”

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via TheMarketEar.

How do we position ourselves, given all these narratives? Equity volatility implied (IVOL) and realized (RVOL) decreased. This may continue to be a booster. In fact, “if markets remain within a +/-1.5% range, a drop in volatility could trigger significant buying activity from the vol-control space, with up to $14 billion in notional flows hitting the tape, creating a favorable environment for equities,” says Tier1Alpha.

Graphic: Retrieved from Tier1Alpha.

So, positioning-wise, stocks could trade up into a “more combustible” state where “volatility is sticky into a rally,” as Kai Volatility’s Cem Karsan said would happen.

SpotGamma confirms that, based on current positioning, SPX IVOL is projected to move up as the underlying index moves up; there are likely many people chasing the rally with long calls, “creating a swelling of call skew.”

In this environment, very wide call ratio spread structures discussed in past letters may continue to do well. We can use the profits from those call structures to cut the cost of our bets on the equity market downside and lower interest rates.

Graphic: Retrieved from SpotGamma’s Weekend Note.

About

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.

Separately, please 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.

Categories
Commentary

Daily Brief For April 3, 2023

LOAD S&P 500 LEVELS ON TRADINGVIEW BY CLICKING HERE.

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. Take care, and let’s dig in.

Markets are mixed with equities under light pressure following OPEC+’s surprise oil production cut. It’s likely that Saudi Arabia “realized they were getting played [on the Strategic Petroleum Reserve refill] and took matters into their own hands,” some say.

Graphic: Retrieved from Bloomberg.

As a recap, on Friday, measures of inflation abated. Though these measures remain high and support the context for rates to stay high, markets responded positively.

Expectations of interest rate cuts have been pulled forward based on markets like SOFR, correlated to existing money market rates, where traders’ demand for call options (i.e., bet on rates falling) reveals the fear of a heavy rate-cutting cycle.

Graphic: Retrieved from Bloomberg via @countdraghula.

The S&P 500 (INDEX: SPX) closed above $4,100.00 for the first time in months. Many quickly wrote about new bull markets blooming in previously depressed market areas most sensitive to monetary policymakers’ policymaking.

Recall, however, that during the dot-com bust, the Nasdaq 100 (INDEX: NDX) rallied ~20% numerous times before an actual bull market was born. Experts think the same thing is happening; the rally, partly driven by monetary policy expectations and the removal/monetization of downside protection, particularly in markets where traders were most concerned about a de-rate and volatility, is probably in its later stages.

Graphic: Retrieved from Bloomberg.

The marginal benefit of any further volatility compression is far less than the cost one may incur by volatility expanding; “there isn’t much juice left to squeeze,” SpotGamma adds, and though short-biased volatility trades (e.g., sell options) could work for a bit longer, the risks remain, as explained on Friday. Rolling profits from the initially low- or no-cost call options structures we discussed last week into fixed-risk debit equity put options structures seem attractive. More to come. Hope you liked the new format!

Disclaimer

Please 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.

Categories
Commentary

Daily Brief For March 31, 2023

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Graphic updated 8:00 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MNDClick here for the economic calendar.

Administrative

Keeping it brief for today. Enjoy your Friday. Be opportunistic and watch your risk.

Positioning

For days prior, top-line measures of implied volatility or IVOL like the Cboe Volatility Index (INDEX: VIX) fell, as did the Cboe VIX Volatility Index (INDEX: VVIX), the latter which is a way to gauge the expensiveness of IVOL or convexity. It was, in part, the resolution of a recent liquidity crisis that prompted this to happen. Under the hood, volatility skew told a different story; traders were hedging against tail outcomes. 

Graphic: Retrieved from Sergei Perfiliev.

Even so, this hedging and volatility skew behavior did little to boost the pricing of most spread structures above and below the market we analyzed. The non-stickiness of IVOL into this rally may have been detrimental to the more expensive call options structures, as we expected; hence, our consistent belief that structures should be kept at low- or no-cost.

The environment changed yesterday, however. Both top- and bottom-line measures of IVOL were sticky into equity market strength. This was observed via the pricing of spread structures (e.g., verticals and back- and ratio-spreads) structured above and below the market. The stickiness of volatility seemed to impact most the put side of the market. Some savvy traders may have been able to build spread structures below the market at a lesser cost potentially.

As an aside, some may have observed how well our levels have been working. For instance, as shown below (middle bottom), yesterday’s Daily Brief levels marked the session high and low for the Micro E-mini S&P 500 Index (FUTURE: /MES).

Graphic: Retrieved from TradingView.

Commentators online have rightly pointed out the build-up of short-dated options exposures near current market prices. In short, this activity, and its potential hedging, help promote mean-reversion and responsiveness at our volume profile-derived key levels, which often overlap with centers of significant options activity, as we see. Particularly after the quarterly options expiry (OpEx), this activity’s ability to contain markets will ease; markets will yield to fundamental strengths or weaknesses. Based on top-line measures of breadth and IVOL, “there isn’t much juice left to squeeze,” SpotGamma says. From an options positioning perspective, for volatility to reprice lower and solicit re-hedging that boosts the market, “we need a change in [the] volatility regime (i.e., soft landing, bank crisis resolved, etc.),” SpotGamma adds. The likelihood of that happening is low; some expect the Federal Reserve (Fed) to stick to its original message and continue to tighten and withdraw liquidity. So, blindly selling options (colloquially referred to as volatility) in this environment is dangerous.

Graphic: Retrieved from Bloomberg’s Joe Weisenthal.

Damped Spring’s Andy Constan overlays past and present inflation fights. What if?

Graphic: Retrieved from Andy Constan of Damped Spring Advisors.

Technical

As of 8:00 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET) in the S&P 500 will likely open in the middle part of a balanced overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,087.75. 

Key levels to the upside include $4,097.25, $4,108.75, and $4,121.25.

Key levels to the downside include $4,077.75, $4,062.25, and $4,049.75.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold, barring an exogenous development.

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

About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works, including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on TwitterLinkedInFacebook, and Instagram. Find Capelj on TwitterLinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements for their work.

Categories
Commentary

Daily Brief For March 30, 2023

Intrigued about what moves markets and economies and how that can impact your financial wellness? Subscribe to this free newsletter below!

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MNDClick here for the economic calendar.

Administrative

Thanks for the feedback on the newsletter design! The technical section has returned for your viewing of crucial levels. We may update this section or merge it with another in the future. If you have any feedback, please comment or reply!

By the way, check out fx:macro’s neat market dashboard how-to-build guide! They have a fabulous newsletter, and this dashboard is an excellent component.

Take care, everybody.

Fundamental

In the coming sessions, there will be a dive into the geopolitical developments of late, far higher in quality than what we started this week with. For a sneak peek at what we will be talking about, look at this article, this podcast, and the Daily Brief for 1/4/23.

Positioning

In yesterday’s letter on positioning contexts, we concluded it was likely for markets to remain contained through month-end.

We said, “there is potential for markets to move into a far ‘more combustible’ position, … [and], with call skews far up meaningfully steep, still-present low- and zero-cost call structures” in previously depressed products like the Nasdaq 100 (INDEX: NDX), buoyed by financial tensions easing, were attractive to express the bullish view.

Graphic: Retrieved from JPMorgan Chase & Co (NYSE: JPM) via The Market Ear.

Though we weren’t too right about the potential for volatility to be sticky, which may be detrimental to some of the more expensive structures, such trades’ exposure to direction and movement appears to be offsetting time decay and volatility, sped up by the resolution of the liquidity crisis (i.e., the asset-liability mismatch at some banks that thought their depositors were far more loyal, hence less of a need to hedge risk) which prompted traders a few weeks back to demand protection and reprice options higher; the Merrill Lynch Option Volatility Estimate (INDEX: MOVE) and Cboe Volatility Index (INDEX: VIX) have come in dramatically. Please take a look at the full letter here.

Graphic: Retrieved from NATIXIS via Bloomberg.

As stated on 3/29, the fundamental view hasn’t changed. Therefore, we may consider monetizing our structures now and in the near future and using those credits to offset debit risk in plays such as far-dated bear put spreads (i.e., buy put and sell another at a lower strike); options data and insight platform SpotGamma says the juice has been squeezed now with S&P 500 (INDEX: SPX) 1-month at-the-money implied volatility or IVOL pricing at 17%. “For a decline to continue, we need a change in volatility regime (i.e., soft landing, bank crisis resolved, etc.) because, with 1-month realized at 15%, you can argue there isn’t much juice left to squeeze.” Caution on the upside plays.

Graphic: Retrieved from Bloomberg via SpotGamma.

Technical

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 the prior day’s range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,077.75

Key levels to the upside include $4,087.75$4,097.25, and $4,108.75.

Key levels to the downside include $4,062.25$4,049.75, and $4,038.75.

Click here to load the updated key levels via the web-based TradingView platform.

New links are produced daily.

Quoted levels likely hold, barring an exogenous development.

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

About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works, including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on TwitterLinkedInFacebook, and Instagram. Find Capelj on TwitterLinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements for their work.

Categories
Commentary

Daily Brief For March 29, 2023

Physik Invest’s Daily Brief is a free newsletter sent to thousands of subscribers daily. Intrigued about what moves markets and how that can impact your financial wellness? Subscribe below.

Graphic updated 7:00 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. Click here for the latest levels. /MES levels are derived from the profile graphic at the bottom of this letter. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MNDClick here for the economic calendar.

Administrative

The newsletter format needs to evolve a bit. Feedback is welcomed! If you are looking for the link to the daily chart, see the caption below the graphic above. Take care!

Positioning

Fear of contagion prompted demands for protection. Measures of implied volatility or IVOL rose, and consequently, these demands for protection pressured markets.

Since then, fear has ebbed.

Read: Black Swan Funds Have A Moment As Investors Hedge Market Doom

Graphic: Retrieved from TradingView.

Previously, this letter explained for protection to keep its value, there would have to be a shift higher in realized volatility or RVOL. Well, RVOL did not come back in a big way at the index level, as many expected.

Thus, the positive effects of the bank-related stimulation and traders’ pulling forward their timeline for easing were compounded by the unwinding of hedging strategies. 

Read: MBA Data Shows Rate Decline Helped Boost Home-Purchase Applications

Graphic: Retrieved from Bloomberg via SpotGamma. “This drop in 5-day realized vol (orange) is pretty sharp, given it occurred from such a low relative level. ‘Can’t short it, don’t want to buy it.’ This vol decline comes as SPX put open interest was cleared with March OPEX, and big VIX call interest expired last week.”

Previously depressed products like the Nasdaq 100 or NDX, which are generally very sensitive to monetary tightening, have performed well.

Graphic: Retrieved from Callum Thomas’ Topdown Charts.

As we near month-end, there is a quarterly derivatives expiry. Above current S&P 500 or SPX levels is a significant concentration of soon-to-roll-off open interest held short by investors. This means the counterparties are dynamically hedging a call they own; they’re selling strength and buying weakness, albeit in a less and less meaningful way, as those options near this expiration and their probability of paying out (i.e., delta or exposure to direction) falls.

Graphic: Retrieved from Sergei Perfiliev.

Some would allege that volatility compression and time decay would have solicited a more meaningful response from options counterparties at those strike prices above; the absence of downside follow-through had traders supplying previously demanded downside put protection and catalyzing a rally. However, there are not many things for the market to rally on, and so much time has passed that the charm effects (i.e., the impact of time passing on an options delta) have lessened dramatically, some explain.

Graphic: Retrieved from Bloomberg via Liz Young. “The Nasdaq’s Cumulative Advance-Decline line has parted ways with index direction in recent days. In other words, the index has rallied despite weak breadth (more stocks falling than rising), the two lines are likely to find their way back together somehow…”

Therefore, it’s probably likely that the market remains contained through month-end. After, movement may increase. This letter acknowledged RVOL might come back in a big way, particularly with the bank intervention doing more to thwart credit creation.

The caveat is that markets can trade spiritedly for far longer. There is a potential for the markets to move into a far “more combustible” position. With call skews far up meaningfully steep, still-present low- and zero-cost call structures this letter has talked about in the past remain attractive.

Graphic: Retrieved from Charles Schwab Corporation-owned (NYSE: SCHW) thinkorswim.

If the market falls apart, your costs are low, and losses are minimal. If markets move higher into that “more combustible” position, wherein “volatility is sticky into a rally,” you may monetize your call structures and roll some of those profits into bear put spreads (i.e., buy put and sell another at a lower strike).

Daily Brief | February 17, 2023

The signs of a “more combustible situation” would likely show when “volatility is sticky into a rally,” explains Kai Volatility’s Cem Karsan. To gauge combustibility, look to the options market. 

Remember, calls trade at a lower IVOL than puts. As the market trades higher, it slides to a lower IVOL, reflected by broad IVOL measures. If broad IVOL measures are sticky/bid, “that’s an easy way to say that fixed-strike volatility is coming up and, if that can happen for days, that can unpin volatility and create a situation where dealers themselves are no longer [own] a ton of volatility; they start thinning out on volatility themselves, and that creates a more combustible situation.” 

To explain the “thinning out” part of the last paragraph, recall participants often opt to own equity and downside (put) protection financed, in part, with sales of upside (call) protection. More demand for calls will result in counterparties taking on more exposure against movement (i.e., negative gamma) hedged via purchases of the underlying. Once that exposure expires and/or decays, that dealer-based support will be withdrawn. If the assumption is that equity markets are expensive now, then, after another rally, there may be more room to fall, all else equal (a simplistic way to look at this), hence the increased precariousness and combustibility.

Read: Buy-Or-Rent Premium Is Highest Since 2006 Housing Bubble

Graphic: Retrieved from Callum Thomas’ Topdown charts.

About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works, including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on Twitter, LinkedIn, Facebook, and Instagram. Find Capelj on Twitter, LinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice; all content is for informational purposes. Capelj and Physik Invest are non-professional advisors managing their own capital. They will never openly solicit others for capital or manage others’ capital to collect fees and disbursements.