Categories
Commentary

Weekly Brief For July 25, 2021

Market Commentary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That brings us to the topic of monetary policy. 

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

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

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

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

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

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

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

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

Note also that the last key level corresponds with two key Volume Weighted Average Price (VWAP) levels, a metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

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

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

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

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

About

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 8, 2021

Market Commentary

Equity index futures explore lower prices, widening a developing balance area.

  • Traders edgy over virus variant, Fed action.
  • Ahead is data on jobs and consumer credit.
  • Internal divergence resolved in lower prices.

What Happened: U.S. stock index futures liquidated as participants sought to price in anxieties surrounding the spread of COVID-19 variants as well as an evolution in monetary policy. 

“Worries about variant strains have hurt investor confidence that the pandemic’s effects on the global economy are truly past us,” Nicholas Colas and Jessica Rabe of DataTrek Research wrote in a note cited by Bloomberg. “Our working theory is that we’re in the middle of a modest global growth scare.”

Today, also, participants get data on initial and continued jobless claims, as well as consumer credit.

Graphic updated 6:58 AM ET.

What To Expect: Thursday’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. Balance-break and gap scenarios are in play.

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

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

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

Further, the overnight liquidation comes after participants had a tough time establishing value at higher prices. Despite steady exploration in days prior, internal divergences via breadth metrics, became more pronounced, while profile dynamics revealed weak commitment at higher prices and an abundance of poor structures (e.g., low-volume areas). 

Graphic: Equity index leaders rose in price as internal divergences – like the ratio of advancers to decliners – grew. Noting a bigger divergence in internals tracking Nasdaq issues. 
Graphic: Nasdaq-100 constituents fail to participate in price rise, via The Market Ear.

Also, yesterday, Federal Reserve officials, as evidenced by meeting minutes, were not yet ready to communicate their timeline for scaling back asset purchases. 

“The committee’s standard of ‘substantial further progress’ was generally seen as not having yet been met, though participants expected progress to continue,” according to minutes from the June 15-16 Federal Open Market Committee meeting published Wednesday. “Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings.”

Following closely after, rates on the 10 Year T-Note moved into trend support. Though usually perceived as a boon for stocks – especially growth names – as low rates have to potential to increase the present value of future earnings, all major equity indexes are off their highs.

Graphic: Treasury yields nearly three standard deviations below their mode-implied fair value, via The Market Ear.

Regardless of the cause – comments by the Fed, in addition to the spread of COVID-19 variants, geopolitical tensions, among other things – for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,285.00 micro-composite high volume area (HVNode), a pivot, participants may look for responses at the $4,299.00 Point of Control (POC), first. Thereafter, if higher, the $4,317.00 POC, which corresponds with the half-point of the overnight range comes next. If above $4,317.00, lookout. The S&P 500 may auction as high as the $4,340.75 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.

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

In the worst case, the S&P 500 trades lower; activity below $4,285.00 puts in play the $4,263.25 low volume area (LVNode). Trade beyond that signpost may reach as low as the $4,247.75 LVNode and $4,229.00 VPOC.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), yesterday. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside. Also, there was a meaningful bid in longer-dated puts on the S&P 500 and Nasdaq 100. This dynamic suggests participants, despite their commitment to higher prices, are hedging against near-term risks, like the Jackson Hole Economic Symposium.

News And Analysis

Economy | ECB unveils higher inflation goal that tolerates an overshoot. (BBG)

Politics | President Biden to speak on Afghanistan amid swift U.S. pullout. (REU)

Economy | Fed officials are split on easing quantitative easing program. (Axios)

Economy | Rates are down, jobs are up, but mortgage apps still decline. (MND)

Economy | External liquidity strains easing in some APAC economies. (Fitch)

Energy | OPEC gets ‘pass to lift oil prices’ as hedging losses hobble U.S. (FT)

COVID | Europe’s summer in peril as France warns on Spain, Portugal. (BBG)

Economy | Quest to define post-crisis global economic order is gaining. (BBG)

COVID | Tokyo games to go without fans as Japan declares emergency. (BBG)

What People Are Saying

Innovation And Emerging Trends

Markets | Crypto scammers rip off billions on pump-and-dump schemes. (BBG)

FinTech | Powell diary shows he met Coinbase CEO, crypto investor. (BBG)

Markets | A $9 trillion binge turns central banks into the biggest whales. (BBG)

FinTech | Momentum behind blockchain in public, private markets rises. (MM)

Markets | The LSE had its first direct listing of a technology company. (MM)

About

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

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

Disclaimer

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

Categories
Commentary

Weekly Brief For July 3, 2021

Market Commentary

Key Takeaways: U.S. equity index futures diverge in their attempt to discover fair prices for two-sided trade.

  • Economy is set for sustained boom.
  • Ahead is a light economic calendar.
  • SPX, NDX, DJI higher. RUT coiling.

Summary: Last week, U.S. stock index futures auctioned sideways to higher into Friday’s employment report. The release showed an addition of 850,000 jobs in June, the strongest employment gain since last summer. 

The S&P 500 and Nasdaq 100 led the week-long rally, while the Dow Jones Industrial Average followed closely behind. Though the Russell 2000 did end lower, it has been building energy for a break.

Considerations: It was the beginning of April JPMorgan Chase & Co’s (NYSE: JPM) Jamie Dimon wrote strong consumer savings, an increased pace in COVID-19 coronavirus vaccinations, and unprecedented efforts to spur economic activity could mean that a boom lasts as long as 2023.

Dimon’s comments remain valid. Months after, officials are hard at work in helping the U.S. reach herd immunity with vaccines that produce antibodies for the most well-known variants of COVID-19. Additionally, the economy is making progress toward meeting the Federal Reserve’s objectives for employment and inflation; just a couple of weeks ago the institution brought forward the time frame on when it will raise interest rates. 

In a statement, BlackRock strategists noted: “We believe the Fed’s new outlook will not translate into significantly higher policy rates any time soon. This, combined with the powerful restart, underpins our pro-risk stance.”

Alongside that news, the equity market sold violently, into Quadruple Witching, or the large expiry of futures and options. Thereafter, indexes staged a massive reversal, and the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility, traded to its lowest level since February 2020.

According to SpotGamma models, up to 50% of the gamma in and across the S&P 500 complex was taken off the table that expiry.

This, as SpotGamma has said in the past, “creates volatility because, as large options positions expire[], are closed and/or rolled, dealers have large hedges they need to adjust.”

Put more simply, the initial action, into the expiry, may have been attributable to the sale of long stock that hedged expiring short exposure above the market (i.e., call side).

After that exposure was cleared, the prospects for a rally improved, boosted by the buying back of short put hedges as volatility imploded.

Last week, though, things became a tad frothy with the number of put options sold-to-open seeing heightened levels.

Graphic: SpotGamma’s analysis suggests equity put options were sold-to-open (red arrow). 

Put sales, which can be part of sophisticated volatility-based trading strategies, often suggest increased confidence as market participants look to options for income, and not insurance.

Historically, the returns after such developments are mixed; more often the appearance of strong initiative buying surfaces (e.g., August and January 2020) before a liquidation helps correct excess inventory, and bring sense back into the market. 

Kris Sidial – co-chief investment officer at The Ambrus Group, a volatility arbitrage fund – and I recently held a conversation regarding meme stock volatility, market structure, and regulation. He noted that ongoing risk-on dynamics can be traced back to factors like Federal Reserve stabilization efforts, and low rates, which incentivize risk-taking.

“The growth of structured products, passive investing, the regulatory standpoint that’s been implemented with Dodd-Frank and dealers needing to hedge off their risk more frequently, than not,” are all part of a regime change that’s affected the stability of markets, Sidial notes. “These dislocations happen quite frequently in small windows, and it offers the potential for large outlier events,” like the equity bust and boom during 2020. “Strength and fragility are two completely different components. The market could be strong, but fragile.”

That dynamic is playing out as Cem Karsan, founder at Kai Volatility, notes volatility is dramatically oversupplied. As a result, as implied volatility drops, options gamma – an option delta’s sensitivity to market price changes – rises. Associated hedging forces make it so there’s more liquidity and less movement. In other words, the market tends to pin.

Still, in line with Sidial’s comments, Karsan believes expected distributions are fat-tailed, given “fragility.” In other words, it’s hard for the market to unpin. Should it unpin, however, there’s “not enough liquidity” to absorb leverage on the tails.

Given this, Karsan finds it interesting to sell at-the-money option structures to fund out-of-the-money structures. Alternatively, knowing what forces – e.g., charm or the rate at which the delta of an option changes with respect to time – decay poses on so-called “dealer positioning,” going into the July option expirations (OPEX), one could look into long calendar put spreads on the S&P 500.

In such a case, traders are short puts in July and long puts on forward. This way, you’re collecting decay as a result of realized pinning. Here’s Karsan’s full take, from the source.

Graphic: The risk profile of a long put calendar spread, via Fidelity.

After mid-July, though, the window for fundamental dynamics (e.g., a shift in preferences from saving and investing to spending, monetary tightening, seasonality, or a COVID-19 resurgence) to take over is opened. 

In a note on COVID resurgence, to not venture too far off into the abyss, I cite strategists led by JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic who last year correctly suggested equities would continue rallying on the basis of low rates, improved fundamentals, buybacks, as well as systematic and hedge fund strategies. 

“The delta variant should not have significant repercussions for the pandemic situation in developed markets (e.g. Europe and North America, which have [made] strong progress in vaccinations) due to the level of population immunity.”

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to Friday’s $4,323.00 untested Point of Control (POC).

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

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above the $4,323.00 POC puts in play the $4,347.00 excess high. Initiative trade beyond the excess high could reach as high as the $4,357.50 Fibonacci-derived price target.

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

In the worst case, the index trades lower; activity below the $4,323.00 POC puts in play the untested POC at $4,299.00, as well as the POC and micro-composite HVNode at $4,285.00. Thereafter, if lower, participants may look for responses at the $4,263.25 LVNode, $4,247.75 LVNode, as well as the $4239.25 HVNode and $4,229.00 POC.

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

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

For a full list of important levels, see the 65-minute profile and candlestick chart, below.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. This activity denotes (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside. Also, there was a meaningful bid in September puts on the S&P 500 and Nasdaq 100. This dynamic suggests participants, despite their commitment to higher prices, are hedging against near-term risks, like the Jackson Hole Economic Symposium.

News And Analysis

Markets | The premium Elon Musk adds to Tesla, other ventures. (Kyla)

Markets | Forward-looking indicators point to improving credit trends. (S&P)

Travel | TSA screenings surpassed 2019 levels in a pandemic first. (CNBC)

Energy | WH is worried about high oil prices, sees enough supply. (REU)

Energy | An overview of data from IEA’s Energy prices database. (IEA)

Energy | OPEC ends Friday’s meeting without a deal for agreement. (CNBC)

Agriculture | Dry weather damage spells trouble for U.S. spring crops. (S&P)

Economy | States ending jobless benefits early hit labor milestones. (REU)

Markets | Spotlight turning to mergers, acquisition for fintech SPACs. (S&P)

Economy | Jobs gain largest in 10 months; employers up wages. (REU)

Energy | Cal-ISO, utilities ask consumers to conserve amid heatwave. (S&P)

Economy | Economic growth hiccup to derail credit spread stability. (BBG)

Markets | Record S&P 500 masks fear trade gripping stock market. (BBG)

Innovation And Emerging Trends

FinTech | BTC mining now easier, more profitable after crackdowns. (CNBC)

FinTech | ‘Flight to quality’ as private insurtechs draw big investments. (S&P)

FinTech | Bank customers cement relationships with digital channels. (S&P)

Markets | Money-losing companies sell record stock, flashing signal. (CNBC)

Markets | Wall Street rebels warning of ‘disastrous’ $11T index boom. (BBG)

Mobility | When do electric vehicles become cleaner than gas cars? (REU)

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 1, 2021

Market Commentary

Index futures diverge as the bracketing process continues.

  • OPEC to decide on production today.
  • Ahead: Claims, PMI, ISM, Fed speak.
  • SPX and NDX explored higher prices. 

What Happened: U.S. stock index futures auctioned sideways to higher overnight.

The S&P 500 and Nasdaq 100 discovered higher prices before coming back into the prior range. The Russell 2000 and Dow Jones Industrial Average hugged channel resistances suggesting a break may be imminent.

Fundamentally speaking, the U.S. added more jobs than expected last month. That’s good news ahead of Thursday releases on unemployment claims, June manufacturing PMI, ISM manufacturing, Fed speak, used car sales numbers, OECD corporate tax talk, and some miscellaneous earnings.

Graphic updated 7:50 AM ET.

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

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by sideways to higher trade, above the micro-composite Point of Control (POC) at $4,273.25.

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

Further, after strong buying by longer time frame participants, short-term traders took over; moves became mechanical, halting at key, visual references. This comes alongside narrowing breadth, tapering volumes ahead of a holiday weekend, as well as fundamental concerns such as the resurgence of COVID-19.

Still, according to some, there is no cause for concern; “The delta variant should not have significant repercussions for the pandemic situation in developed markets (e.g. Europe and North America, which have [made] strong progress in vaccinations) due to the level of population immunity,” said strategists led by chief global markets JPMorgan Chase strategist Marko Kolanovic.

Given that broad outlook, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,285.00 POC puts in play the $4,294.75 level. Initiative trade beyond $4,294.75 could reach as high as the minimal excess $4,305.75 overnight high (ONH). 

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

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 S&P 500 trades lower; activity below the $4,285.00 POC puts in play the HVNodes at $4,273.25, $4,256.75, and $4,239.75. 

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.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside. Also, there was a meaningful bid in September puts on the S&P 500. This dynamic suggests participants, despite their commitment to higher prices, are hedging against near-term risks, like the Jackson Hole Economic Symposium.

News And Analysis

Markets | Tesla Q2 deliveries could clear 200K, set record. (BBG)

Markets | Congress has voted to overturn True Lender rule. (Moody’s)

Markets | Credit conditions ahead – things are looking good. (S&P)

Economy | Pandemic exacerbates affordable housing stress. (Fitch)

Markets | Ford will curb output at more plants on chip issue. (WSJ)

Markets | EV car sales up as Europe’s climate targets bite. (REU)

Markets | What could higher taxes mean for U.S. equities? (BLK)

Economy | Jobs gain is higher after disappointing months. (BBG)

Markets | Robinhood wants you to buy into its IPO in-app. (WSJ)

Markets | The delta variant poses no risk to stock markets. (MW)

Energy | Saudis, Russia have deal for OPEC+ output hikes. (BBG)

Markets | The spotlight is turning to M&A for fintech SPACs. (S&P)

What People Are Saying

Innovation And Emerging Trends

FinTech | Robinhood to pay $70M in large FINRA penalty. (CNBC)

Energy | Hydropower market report – analysis and forecast. (IEA)

FinTech | Senators mull Fed crypto as China races ahead. (S&P)

FinTech | A vision for decentralized finance built on bitcoin. (BBG)

FinTech | SoftBank gave $200M to Latam crypto exchange. (REU)

Travel | Air taxis coming but not in the way you are thinking. (WSJ)

FinTech | Bank users cement relations with digital channels. (S&P)

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 29, 2021

Market Commentary

Equity index futures diverge, trade sideways.

  • COVID variants cause lockdowns.
  • Ahead are some economic reports.
  • RUT, DJI firming. SPX, NDX weak.

What Happened: U.S. stock index futures auctioned sideways ahead of some key releases. The Russell 2000 and Dow Jones Industrial Average firmed up relative to their peers, the S&P 500 and Nasdaq 100, the group leader.

This activity comes as banks boosted their dividends and uncertainties surrounding the COVID-19 delta-variant. Some reports suggest nearly half of Australia’s population is in lockdown, while Asian countries are looking to reduce the spread with mobility restrictions. Still, not all news is bad; some European countries are lifting restrictions on travel and OPEC may increase the supply of oil.

Of interest today is data around home prices, consumer confidence, and Fed speak.

Graphic updated 7:20 AM ET.

What To Expect: 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 the prior day’s regular trade, the best case outcome occurred, evidenced by initiative trade above the $4,257.00 Point of Control (POC), up to a new overnight high (ONH) at $4,283.00.

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

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

Prior to getting onto what’s expected for today’s trade, it is important to note some ongoing activity in the options market. Specifically, participants, despite their commitment to higher prices (as evidenced by longer-dated call activity), are likely hedging against near-term risks, like the Jackson Hole Economic symposium used in the past to signal monetary policy changes (see the graphic below for more detail). This hedging, in conjunction with lackluster breadth and poor expansion of range, cautions participants on increased volatility; a focus should be made on relatively strong issues.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,271.00 POC puts in play the $4,283.00 ONH. Initiative trade beyond the ONH could reach as high as the $4,294.75 Fibonacci-derived price target. 

In the worst case, the S&P 500 trades lower; activity below $4,271.00 puts in play the HVNodes at $4,256.75, $4,239.50, and $4,229.00.

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. Notice (1) increased churn at higher prices, (2) minimal excess on composite profile, (3) poor expansion of range, as well as (4) poor, and rather unsupportive, low volume structures beneath current price. 
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). 
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside. Also, there was a meaningful bid in September puts on the S&P 500. This dynamic suggests participants, despite their commitment to higher prices, are hedging against near-term risks, like the Jackson Hole Economic Symposium.

News And Analysis

Economy | The Bank of Japan cuts some bond purchase targets. (BBG)

Markets | BlackRock warns U.S. stocks at risk from higher taxes. (BBG)

Markets | United Airlines confirmed 270 Boeing, Airbus jet order. (REU)

Markets | Wall Street funnels cash to investors post-stress-tests. (BBG)

Markets | FTC Facebook ruling slams brakes on tech’s legal foes. (Axios)

What People Are Saying

Innovation And Emerging Trends

FinTech | State Street is building out data and digital experiences. (BZ)

FinTech | Robinhood CEO backs SEC market modernization vision. (MI)

FinTech | ICAP launching crypto platform with Fidelity, StanChart. (BBG)

FinTech | JPMorgan buys an ESG investing platform, OpenInvest. (CNBC)

Markets | Cathie Wood’s ARK Invest to create bitcoin ETF, ‘ARKB’. (CNBC)

FinTech | Deutsche Boerse is buying Swiss fintech Crypto Finance. (REU)

About

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

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

Disclaimer

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

Categories
Commentary

Weekly Brief For June 27, 2021

Market Commentary

Key Takeaways: Equity index futures struggle to discover higher prices.

  • Biden’s infrastructure deal back on track.
  • Week Ahead: Many economic releases.
  • SPX struggles. NDX weak at a key level.
Graphic updated June 27, 2021, at 11:50 AM ET.

What Happened: Last week, U.S. equity index futures discovered higher prices alongside some positive economic and political developments.

Of interest was an agreement on infrastructure, successful Federal Reserve bank stress tests, a record for U.S. factory activity, among other things. 

Prior to the price rise, markets sold heavily on a shift in the Federal Reserve’s so-called dot-plot. Bond yields on the short-end of the curve rose while long-dated yields dropped in line with projections future inflation is easing. This flatter yield curve is a negative for cyclical-type companies which can’t pass on increased costs, thereby impacting sales and margins.

Moreover, both the S&P 500 and Nasdaq 100 established new all-time highs (ATHs). The Nasdaq 100, though, found responsive sellers at a zone of overlapping Fibonacci-derived price targets, weighing down the S&P 500, which had a difficult time expanding range, a usual sight for a healthy bull market.

Partially to blame is narrowing breadth at heightened valuations, as well as a shift in monetary and fiscal policy narratives. According to Bloomberg, while the broader market is near ATHs, the “[l]owest % of stocks [are] above 50-dma since 1999, when S&P hits record.”

This narrowing breadth, in conjunction with weak seasonality, potentially unsupportive market liquidity metrics, trade in the options market, as well as poor profile structures that offer little-to-no support on liquidations, suggests participants ought to beware of an increased potential to violently backfill.

To note, next week, participants will get more Fed speak, data on home prices, consumer confidence, employment, PMI, construction spending, home and vehicle sales, trade, and factory orders.

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to Friday’s fairest price or Point of Control (POC).

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

In the best case, the index trades sideways or higher; activity above the $4,267.00 POC puts in play the $4,294.75 and $4,367.00 Fibonacci-derived price targets.

In the worst case, the index trades lower; activity below the $4,267.00 POC puts in play the $4,248.25 low volume area (LVNode) and $4,229.00 POC. Thereafter, if lower, participants ought to look for responses at the poor structure just below $4,200.00.

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-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside.

News And Analysis

Economy | Support doesn’t provide a meaningful boost until mid-decade. (Moody’s)

Economy | Inflation jumps on base effects, supply; inflation largely transitory. (S&P

Economy | Forecasts for eurozone growth revised up on stimulus, mobility. (S&P)

Markets | Tesla recalls nearly 300K cars in China over cruise control issues. (CNN)

Markets | El Salvador looks to hand out up to $117M in bitcoin to its citizens. (Block)

Media | Fast 9 propels box office to its biggest weekend since the pandemic. (BBG)

Markets | Boeing’s updated 777 hit with new safety concerns from the FAA. (BBG)

Weather | A record heatwave is set to scorch Pacific Northwest, South CA. (NPR)

FinTech | UK regulator bans Binance from regulated activities in the country. (Block)

Economy | Spreads and cost shocks could double the rate of loss-making. (S&P)

Markets | Chances of moderately big moves back-to-back are independent. (Tasty)

Markets | Banks clear stress tests; expecting a boost to buybacks, dividends. (REU)

What People Are Saying

Innovation And Emerging Trends

FinTech | New cryptocurrency startup funding is projected to continue rising. (CB)

FinTech | Elon Musk may debate Jack Dorsey at an upcoming bitcoin event. (Block)

FinTech | Citigroup launches digital asset units within wealth management. (Block)

FinTech | Morgan Stanley adds investment to bring blockchain to markets. (Forbes)

Work | An FBI body language expert on communicating back in the office. (BBG)

COVID | An ancient viral epidemic involving coronavirus impacted genes. (Cell)

FinTech | Xi and the CCP turn on Jack Ma, Ant, and other Chinese fintech. (BBG)

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 25, 2021

Market Commentary

Equity index futures balance, struggle in discovering higher prices.

  • Bipartisan agreement on infrastructure.
  • Ahead is income, spending, sentiment.
  • SPX struggles. NDX weak at key level.

What Happened: U.S. stock index futures auctioned sideways to higher alongside some positive economic and political developments.

President Biden announced an agreement on infrastructure which still faces opposition in Congress. Additionally, Federal Reserve bank stress tests went well, a boon for financials. 

Today, participants will receive data on U.S. personal income and spending, Core PCE, as well as University of Michigan sentiment. Also, please be aware that Fed’s Mester, Rosengren, and Williams will speak later today.

Graphic updated 7:30 AM ET.

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

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by sideways trade above the $4,251.25 high volume area (HVNode), up to the prior overnight high (ONH) at $4,258.00.

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.

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

Further, earlier in the week, participants saw strong initiative activity to the upside. Later, the S&P 500 took out its all-time-high (ATH) at $4,258.00, and the Nasdaq 100 found responsive sellers at a zone of overlapping Fibonacci-derived price targets. 

That said, this price action comes alongside narrow breadth; according to Bloomberg, while the broader market is near ATHs, the “[l]owest % of stocks above 50-dma since 1999, when S&P hits record.”

With those dynamics in mind, in conjunction with potentially unsupportive market liquidity metrics and trade in the options market, participants can expect more of the same: pinning, or sideways chop.

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

In the best case, the S&P 500 trades sideways or higher; activity above $4,257.25 – yesterday’s fairest price, or Point Of Control (POC) – puts in play the $4,264.25 ONH. Initiative trade beyond the ONH could reach as high as the $4,277.00 and $4,294.75 Fibonacci-derived price targets. 

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

In the worst case, the S&P 500 trades lower; activity below $4,257.25 puts in play the $4,239.75 HVNode. Thereafter, if lower, participants ought to look for a response near the untested POC at $4,229.00. Below that level, caution. Odds could favor a move as low as the HVNode at $4,213.00.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Updated 7:20 AM ET.
Graphic: Daily 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’s relative strength weakens. Updated 7:30 AM ET.
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), yesterday. This activity may denote (1) stock replacement, (2) hedges for underlying short positions, or (3) speculation on the upside. Noting, similar to the two days prior, there was increased interest in farther-dated put strikes at and above current prices. This may denote opportunistic hedging or speculation on the downside.

News And Analysis

Economy | Biden infrastructure win ramps fight on economic agenda. (BBG)

Markets | Major European banks’ 2H21 earnings: structural challenges. (Fitch)

Markets | U.S. banks gear up for buyback bonanza after passing tests. (FT)

Travel | The U.K. expands ‘Green’ list as German urges more caution. (BBG)

Politics | Senior NATO officer warns of China’s ‘shocking’ military moves. (FT)

Markets | Visa to acquire open banking platform Tink for more than $2B. (TC)

Markets | Virgin Galactic cleared by FAA to fly customers into space. (BBG)

Markets | SCOTUS has decided not to light the housing market on fire. (Vox)

Markets | U.S. ban to have only limited impact on China’s solar industry. (BBG)

Trade | More container ships score ‘astronomical’ $100,000/day rates. (FW)

Markets | SpotGamma: Finding your next gamma squeeze candidate. (SG)

What People Are Saying

Innovation And Emerging Trends

FinTech | China crushed Jack Ma, and his fintech rivals are up next. (BBG)

Markets | Citi: Global investment is becoming less reliant on China. (BBG)

Politics | Polls unpack America’s continued move toward socialism. (Axios)

Economy | Hyun Song Shin on CBDCs and future of central banking. (BBG)

Mobility | Apple’s car obsession is all about taking eyes off the road. (BBG)

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For June 1, 2021

Market Commentary

Index futures in price discovery.

  • Optimism around a recovery mounting.
  • Ahead: Data on manufacturing, OPEC.
  • Stock indexes traded higher overnight.

What Happened: U.S. stock index futures auctioned higher overnight ahead of data on U.S. manufacturing.

Graphic updated at 6:30 AM EST

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

Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator. Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

Adding, during the prior week’s regular trade, the best case outcome occurred, evidenced by responsive trade after a breakout above the $4,177.25 high volume area (HVNode). This is significant because that HVNode marked a pivot (i.e., above = bullish, below = bearish) on the composite profile.

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

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

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

Further, this bullish price action is happening in the face of supply chain uncertainties and rising inflation, fiscal and monetary tightening, COVID-19 concerns, political risks, and the like. 

However, research by JPMorgan Chase & Co (NYSE: JPM), as well as Goldman Sachs Group Inc (NYSE: GS), suggests equities are still in play. This thinking would help explain the increased interest in S&P 500 and Nasdaq 100 call options.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above last Friday’s $4,217.75 overnight high (ONH) puts in play the $4,224.75 HVNode and $4,227.00 POC. Initiative trade beyond the two aforementioned signposts 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 S&P 500 trades lower; activity below the $4,217.75 ONH puts in play the $4,209.00 point of control (POC). Then, if lower, comes the $4,177.25 and $4,153.25 HVNode. On a cross of the $4,153.25 HVNode, the $4,122.25 HVNode and $4,071.00 POC come into play, also.

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

News And Analysis

Markets | Meme stock AMC continues rally, jumping on a share sale. (CNBC)

Markets | Cyberattack hits the world’s largest meat processor units. (CNBC)

Politics | Buttigieg: mask mandates on planes are a matter of respect. (Hill)

Economy | Mortgage rates dip beneath 3% again, offering new savings. (Y!)

Economy | Inflation in the euro area climbed to 2% in the month of May. (BBG)

Energy | With oil majors under attack, OPEC’s hand has strengthened. (BBG)

Markets | Bitcoin is unlikely to escape regulation as authorities respond. (BBG)

Markets | Tesla’s vehicle price increases due to supply chain pressure. (REU)

What People Are Saying

Innovation And Emerging Trends

Markets | The 60/40 strategy needs a modern makeover to win skeptics. (BBG)

FinTech | Nasdaq: upstarts are forcing legacy banks to evolve and adapt. (NDAQ)

FinTech | Coinbase Institutional planning the launch of a prime brokerage. (MM

About

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

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

Disclaimer

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

Categories
Commentary

Weekly Brief For May 31, 2021

Market Commentary

Key Takeaways: Index futures in balance.

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

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

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

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

Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That said, participants can trade from the following frameworks.

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

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

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

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

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

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

News And Analysis

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

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

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

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

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

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

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

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

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

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

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

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

What People Are Saying

Innovation And Emerging Trends

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

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

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

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

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

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

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For May 24, 2021

Quick Note: From May 25 to May 28, the daily newsletter will be off as I will be on a trip. It would not be fair for me to provide lackluster content since I won’t have all the tools at my disposal.

Market Commentary

Index futures in balance.

  • The U.S. may be facing deflation.
  • Ahead is CFNAI data, Fed speak.
  • Stock indexes sideways to higher.

What Happened: U.S. stock index futures auctioned higher overnight alongside renewed political tensions, cryptocurrency volatility, as well as a crackdown by China on commodity speculation.

Graphic updated 7:50 AM EST.

What To Expect: Monday’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. 

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

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by the responsive selling that surfaced at and above the $4,177.25 high volume area (HVNode). This is not all too significant given the large monthly options expiration. Still, according to SpotGamma, “[w]hile roughly 1/3 of total QQQ gamma rolled off on Friday, … [the] QQQ remains under the control of put options,” a source of potential volatility in the Nasdaq 100.

Responsive Selling: Selling in response to prices above area of recent price acceptance.

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.

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: 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.

As stated in Sunday’s weekly note, equities are in a seasonally weak period. At the same time, inflation and uninspiring economic data are major worries investors are attempting to price in. That said, however, during the May 19 reversal, in the S&P 500 and Nasdaq 100, participants increased exposure to the upside with relatively cheap, longer-dated calls.

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

In the best case, the S&P 500 trades sideways or higher; activity above $4,177.25 puts in play the $4,227.00 point of control (POC). Initiative trade beyond the POC could reach as high as the $4,238.00 overnight all-time high. 

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.

Initiative Buying: Buying within or above the previous day’s value area.

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 S&P 500 trades lower; activity below $4,177.25 puts in play the $4,122.25 HVNode. Thereafter, if lower, key references include the $4,071.00 POC and $4,050.75 low volume area (LVNode). Long-biased traders are cautioned on trade below the LVNode. 

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). The Nasdaq is regaining relative strength. A rotation would be bullish, or supportive of a new leg higher (if one were to happen).
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for last week. Though activity in the options market was primarily concentrated in short-dated tenors, increased trade in farther-dated call-side strikes is observed as a commitment to higher prices.
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week. To note, however, participants began paying up for longer-dated upside exposure (evidenced by call activity).

News And Analysis

Economy | Cathie Wood: U.S. “setting up for a massive period deflation.” (BBG)

Economy | European labor market’s capacity to absorb shocks varies. (Moody’s)

Markets | How a global minimum corporate tax could impact markets. (WSJ)

Markets | Goldman sees oil hitting $80/bbl despite likely supply return. (REU)

Security | Three disasters show gaps in the $1.7T infrastructure plan. (BBG)

Markets | Mainstream markets shrug volatile $1T crypto flash crash. (BBG)

Trade | Sea change: global freight sails out of the digital dark ages. (REU)

Politics | EU weighs sanctions over so-called ‘hijacking’ of Ryanair jet. (BBG)

What People Are Saying

Innovation And Emerging Trends

FinTech | HSBC CEO says bitcoin, cryptocurrencies are not for them. (REU)

FinTech | Robinhood to allow users to buy into IPOs ahead of debut. (REU)

FinTech | VCs are predicting new areas of consumer fintech disruption. (BI)

Environment | Unpacking the problems with reinforced concrete. (Convo)

Markets | First warning sign in global commodity boom flashes in China. (BBG)

About

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

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

Disclaimer

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