Categories
Commentary

Daily Brief For February 7, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.

Fundamental

In late December 2022, this letter unpacked the likelihood that concerns over inflation were overblown. Strength in markets would re-appear despite earnings deterioration.

Graphic: Retrieved from Morgan Stanley (NYSE: MS) via The Market Ear.

“If the market sniffs out an inflation-driven pause or a pivot from the Fed, even before a drawdown in risk assets is seen, we may get a disinflation rally,” this letter quoted Andreas Steno Larsen explaining. Accordingly, when the Fed upped its benchmark rate by 25 basis points last week and chairman Jerome Powell appeared “not ‘overly combative,” traders turned ultra-optimistic and levered up.

Notwithstanding, the Damped Spring’s Andy Constan believes that pressures are set to remain strong. Traders are pricing higher rates for longer after some new data last week, and the flow of capital, out of capital markets (via quantitative tightening or QT), will be a strong headwind. 

Graphic: Retrieved from Bloomberg.

Fabian Wintersberger added that if central banks, indeed, are “more restrictive for longer to dampen the pressure of rising consumer prices, … [this] supports the thesis that stocks and bonds will have to fall … [leading] to a demand shift, back from financial markets into the real economy, … [and] the current consumer price disinflation is probably just an injury break before we see the real slowdown between inflation and central banks next year.” Consequently, the double-top inflation playbook appears intact, and volatility in financial markets is likely to persist. 

Positioning

Late last week, this letter talked about data that pointed to weaker returns over a 5- to 10-day window. This was, in part, the result of short-dated options activity. After implied volatility (IVOL) compression helped catalyze a rally, SpotGamma, noted that traders’ open interest at slightly higher S&P 500 (INDEX: SPX) prices, and associated counterparty hedging, would likely result “in range suppression or pressure” as time passes and volatility falls. Why? Well, if a long call option’s probability of having value at expiration falls, the counterparty’s risk falls as well and, so, they can sell some of their hedges. This is market pressure.

Graphic: Retrieved from SqueezeMetrics.

Anyways, SpotGamma added, yesterday, that “pressure surfaced just when the … data said it was most likely to surface. This appears coincidental, however … [as] the SPX drops began during the first round of [some] VIX [trades]. Some traders entered into 300,000 VIX March 24 and 26 strike calls. The selling accelerated into Monday when nearly 122,000 VIX June 30/40 call spreads fired off. Dealers who may be short VIX calls are likely hedged with VIX futures (or other long volatility hedges). This hedging is market pressure.”

Graphic: Retrieved from SpotGamma’s PM Note on 2/6/2023.

If you’re playing for expansive moves, an attractive way to protect portfolios includes selling rich call verticals to finance put verticals with months left before expiration.

Technical

As of 7:00 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to 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 $4,122.75. 

Key levels to the upside include $4,136.75, $4,147.00, and $4,165.75.

Key levels to the downside include $4,100.25, $4,079.00, and $4,052.25.

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.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

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


About

The author, Renato Leonard Capelj, works in finance and journalism.

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 options analyst at SpotGamma and an accredited journalist.

Capelj’s past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, 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 or find Physik Invest on TwitterLinkedInFacebook, and Instagram.

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.

Categories
Commentary

Daily Brief For February 3, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 8:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.

Positioning

The Federal Reserve’s (Fed) decision to increase its benchmark interest rate by 25 basis points kicked off a bout of strength, boosted by the compression of wound implied volatility (IVOL). This volatility compression we observed with a shift lower in the IV term structure in the S&P 500 (INDEX: SPX). Follow-on strength surfaced on Thursday and, based on an analysis of top-line IVOL measures such as the Cboe Volatility Index (INDEX: VIX) trending higher with the SPX, it was, in part, from traders’ demands for call options, hence high call option volumes.

Graphic: Retrieved from Bloomberg via Danny Kirsch on 2/2/2023.

Recall our detailed letter published prior to February 2, 2023 (e.g., February 1, 2023, January 26, 2023, and beyond). The context was set for the SPX and VIX to trend higher; traders bidding up call options due to their fear of missing out, in the context of less liquidity to absorb those demands, would be beneficial to owners of structures like call option butterflies and ratio spreads. Additionally, owning such structures would help dampen the impact of potential SPX downside on portfolios.

For instance, on January 25, 2023, this letter said trades structured in the indexes such as the Nasdaq 100 (INDEX: NDX), where there was a steeper skew that would enable us to collect more credit in the options we are short, thereby lowering the cost of the spread we own, looked attractive, given the likelihood that the index would stay strong after the earnings reports of some big movers like Tesla Inc (NASDAQ: TSLA). 

In yesterday’s letter update, we said that such trades were working spectacularly. In fact, your letter writer’s trading partner, who “initiated some +1 x -2 (17 FEB 23 13500/14000) [NDX] call ratio spreads for free (i.e., $0.00 debit or better to enter),” saw his spreads price in excess of a $40.00 credit to close, yesterday. That structure went from a $0 debit to open to a $4,000.00 credit to close. Again, nice job Justin. I’m expecting that case study, soon!

The NDX was probably the best place to be, yesterday, looking at the magnitude of movement in some of the heavyweights in the SPX, yesterday.

Graphic: Retrieved from Tier1Alpha.

Noteworthy is that many of the strongest performers (e.g., Google, Amazon, Apple) weakened considerably in the after-market when their earnings, and the speeches associated, pointed to some challenges ahead.

Graphic: Retrieved from Bloomberg.

Breadth was, generally, not that strong, to add. This validates your letter writer’s belief the market is in a precarious position. Notwithstanding the market’s potential to stay strong into the mid-February timeframe as some strategists believe, the data seems to suggest that “whenever there are two million or more call contracts that exchange hands on the Cboe, future 5- and 10-day returns tend toward being negative (about -1.37% and -2.12% respectively),” SpotGamma said.

SpotGamma added: “This is, in part, because the bullish hedging impact of short-dated call options activity is not long-lasting. Also, IV compressing from a relatively low starting point also does little to bolster long-lasting rallies.”

As further validation for the precariousness the market is in, “[t]he most prominent feature of the 0DTE landscape is actually customer-bought calls way out at $4,200.00 (which would ramp up buying from dealer long-gamma if SPX were to rise to ~$4,170.00.” Per SpotGamma, should “traders’ interest build at or slightly above current SPX prices, then dealers’ hedging may actually result in range suppression or pressure” as time passes and volatility falls. That’s because if a long call option’s probability of finishing in the money at expiration falls, the dealer’s risk falls as well and, so, the dealer can sell some of their hedges. This is market pressure.

Graphic: Retrieved from SqueezeMetrics.

As this letter stated, yesterday, knowing that longer-dated SPX IVOL “is cheap, now attractive trades include selling rich call verticals to finance put verticals.”

Per Joseph Wang, the “increasing probability of a second bout of inflation, an issue in the 1970s that the Fed is keen to avoid … [by] retighten[ing] financial conditions … through its balance sheet,” the flow of capital out of capital markets presents more pressure on the financial economy (not necessarily the real economy). Cheap put protection may help hedge the realization of further macro-type market pressure.

Graphic: Retrieved from Fabian Wintersberger.

Technical

As of 8:15 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a negatively skewed overnight inventory, inside of the prior range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,165.75. 

Key levels to the upside include $4,189.00, $4,202.75, and $4,214.25.

Key levels to the downside include $4,153.25, $4,136.75, and $4,122.50.

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

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

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


About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For February 2, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 7:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.

Positioning

The Federal Reserve (Fed) upped its benchmark interest rate by 25 basis points. This puts the target rate range between 4.5% and 4.75%.

Graphic: Retrieved from Bloomberg.

The Fed’s Jerome Powell signaled that toughness on inflation will last; though the “disinflation process has started,” and markets are pricing about 50 basis points of cuts by year-end, Powell said rates will continue to increase at least a couple more times. He said rates may reach as high as 5.25% to cut “inflation to 2% over time.”

Graphic: Retrieved from Bloomberg.

Markets rallied sharply when Powell began talking. Some suggest his not “overly combative” responses were a reason. Looking back to the Daily Brief for February 1, 2023, we said that in spite of “toughness from the Fed,” markets would likely trend sideways to higher as traders would “not be able to justify the pricing of the ultra-short-dated options they demanded heading into Wednesday.”

Consequently, the supply and expiry of short-dated options coincided with dealers, who were short-stock against the puts they supplied, buying back their hedges. Kai Volatility’s Cem Karsan put this well in a media appearance pre-Fed. 

He said that “vol structurally affects how markets move” and that put options, which traders own and dealers are short (and hedging with short stock, as well), would likely go down in value as the “event vol” falls; “those vanna and charm effects will naturally lead to a buyback.”

Graphic: Retrieved from SqueezeMetrics. Click to learn the implications of volatility, direction, and moneyness.

For context, vanna is the change in an options delta with respect to changes in IVOL. Charm is the change in an options delta with respect to changes in time. These are second-order derivatives of an option’s value, once to time or IVOL, and once to delta.

The positive market response, however, should not overly excite. Rather, the market is in a precarious position, and the compression of volatility, given its low starting point, probably does little to encourage a long-lasting rally.

Graphic: Small spread between realized (RVOL) and implied (IVOL) volatility. Retrieved from Bloomberg via CME Group Inc (NASDAQ: CME) analysis.

Trades this letter put forth (e.g., call butterflies and ratio spreads) that would benefit from a sharp move higher while limiting the downside, in products like the Nasdaq 100 (INDEX: NDX), are working spectacularly. In fact, while your letter writer was traveling, his trading partner initiated some +1 x -2 (17 FEB 23 13500/14000) call ratio spreads for free (i.e., $0.00 debit or better to enter), and those spreads are now pricing over $6.00 credit to close. That’s $600.00. Nice job, Justin!

Anyways, though markets could continue trending higher, the risks for a move lower, particularly after mid-February, are increasing some say. Additionally, though we keep our technical analysis usually limited to volume and market profiles, there are a few anchored volume-weighted average price levels sticking out just above current prices.

For context, VWAPs are metrics highly regarded by chief investment officers, among other participants, for the quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Graphic: SPDR S&P 500 ETF Trust (NYSE: SPY) daily chart retrieved from TradingView.

Knowing that longer-dated S&P 500 (INDEX: SPX) implied volatility (IVOL) is cheap, now attractive trades include selling rich call verticals to finance put verticals.

As an aside, there are a number of reasons for calls pricing the way they do. Some of them include the opportunity cost of forgone interest (i.e., buy a call and invest the outlay difference in an interest-bearing account), as well as a fear of missing out in the context of a lower liquidity environment and less supply to absorb demand for hedging (hence higher lows in the VIX).

Graphic: Retrieved from Morgan Stanley (NYSE: MS).

Technical

As of 7:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of the prior range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,153.25. 

Key levels to the upside include $4,165.75, $4,189.25, and $4,202.75.

Key levels to the downside include $4,136.75, $4,122.50, and $4,100.25.

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

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.


About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For February 1, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 8:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.

Positioning

Markets think the Federal Reserve (Fed) raises its benchmark rate by 25 basis points. Notwithstanding the less aggressive hike, strategists believe the Fed will stay tougher on inflation for far longer and, accordingly, crush traders’ optimism.

“I suspect the Fed messaging tomorrow will push back against the pivot narrative and thereby current bond market pricing,” DoubleLine Capital CIO Jeffrey Gundlach said. Former investment banker and trader, as well as the president of the Minneapolis Fed, Neel Kashkari warned the Fed is set on finishing the job and cutting inflation, even if it costs millions of Americans their jobs. “I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic,” he said.

Further, relief in markets (e.g., stocks, housing) is a boon for asset owners and may enable companies to raise cash, bid up equipment prices, and demand new hires. 

Graphic: Retrieved from Mortgage News Daily. “A trend of [increasing] purchase applications implies home buyer demand is [increasing].” The prevailing narrative is that the Fed wants less inflation and less demand. This narrative’s been disrupted, in part. Recall our Monday letter talking about investors’ desire to put their cash to work and the demand for treasuries (i.e., bond bid and yield pressured) which forced investors into previously depressed assets.

With inflation still a problem, regardless of whether there are better solutions as we put forth in the January 31 letter, the Fed is looking to keep rates above 5% for the rest of 2023, though markets are pricing a pivot far earlier and at a lower rate.

Graphic: Retrieved from Bloomberg.

Despite the expectation of toughness from the Fed, markets have not broken down. Rather, if we zoom out, they are trending sideways to higher and may continue to do so. That’s according to Kai Volatility’s Cem Karsan who says that implied volatility (IVOL) is heightened across options with very little time to expiry (1- to 3-days). 

“Event vol, which is the pricing of one-, two-, and three-day options, is significantly higher than everything else behind it right now,” he said, noting that customers’ or traders’ demands for downside put protection is the culprit. That said, despite the committee’s recent hawkishness, “the market responded relatively well at those levels, and you’re seeing vol come back down.”

Graphic: Retrieved from TradingView. First included in SpotGamma’s PM Note for 1/31/2023. During Tuesday’s strength, measures of IVOL, such as the Cboe Volatility Index (INDEX: VIX) fell, though the VIX did not move lower in as sharp of a fashion that the S&P 500 (INDEX: SPX) traded higher. In fact, the VIX trended up into the close, after a mid-day bottom, suggesting some left-over hedging demands ahead of some important macroeconomic drivers this week.

“I think that’s kind of likely what you’re going to see, regardless of what the Fed does,” Karsan added. That’s because, barring some unexpected development, traders will not be able to justify the pricing of ultra-short-dated options post-Fed; the supply and expiry of short-dated options will coincide with the dealers or market makers who are short-stock against the puts they supplied buying back their hedges.

“Vol structurally affects how markets move. Puts are the way people hedge in the market and dealers are short the puts. If you have an event vol that comes down, those vanna and charm effects will naturally lead to a buyback,” post-Fed.

For context, vanna is the change in an options delta with respect to changes in IVOL. Charm is the change in an options delta with respect to changes in time. These are second-order derivatives of an option’s value, once to time or IVOL, and once to delta.

As your letter writer explained in a SpotGamma analysis yesterday, we saw an interest to hedge heading into this week’s Fed announcement. This coincided with a slight rebound in measures like the Cboe VIX Volatility (INDEX: VVIX) (which, in general, reads low and suggests convexity is a good place to be), and put a damper on the rally, hence its climax on Friday.

Graphic: Retrieved from Bloomberg.

Moreover, if “macroeconomic events do not disappoint, IVOL compression may provide markets a boost,” SpotGamma explained. “Notwithstanding, the marginal compression of heightened IVOL, because of its lower starting point, probably does less to encourage a longer-lasting rally,” hence the thought that, if there was to be relief post-Fed, it would likely last up until the mid-February monthly options expiration (OpEx). OpEx’s removal of traders’ options protection (as well as dealers’ supportive buyback to those options that were demanded), may leave the market at risk of bearish macro-type flows.

Compounding the risk is traders’ expected reaction in case of weakness. The desire to hedge during a drop would coincide with a re-pricing in IVOL dangerous to anyone who is short volatility, hence this letter’s recent focus on owning the S&P 500 (INDEX: SPX) via call butterflies and call ratio spreads, the sorts of trades that would benefit from an SPX and VIX up environment (the result of traders bidding up call options due to their fear of missing out, in the context of less liquidity to absorb those demands).

To summarize everything, we have the Fed rate decision coming up. After, markets will be volatile but more likely to trend higher into mid-February, bolstered by traders’ fears of missing out in the context of a lower liquidity environment, as well as stimulus (e.g., falling Treasury General Account played into an easing of financial conditions by making it easier for banks to lend and finance trading activities). After mid-February, the window for markets to weaken and accelerate to the downside may open, based on the information we have today.

As an aside, the last time the Nasdaq 100 (INDEX: NDX) was up more than 10% in January was in 2001, The Market Ear informed subscribers yesterday.

Graphic: Retrieved from BNP Paribas ADR (OTC: BNPQY) via The Market Ear.

Should you wish to hedge, longer-dated SPX IVOL is cheap, relative to recent history.

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via The Market Ear.

Finally, if you’re interested in following further along the fundamental conversation in Tuesday’s letter, check out Dr. Pippa Malmgren’s post on “ancient empires springing back to life.”

Technical

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

The S&P 500 pivot for today is $4,087.00. 

Key levels to the upside include $4,100.25, $4,122.50, and $4,136.75.

Key levels to the downside include $4,071.50, $4,055.00, and $4,028.75.

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

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

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


About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For January 30, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 8:45 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.

Fundamental

Since the start of 2023, markets have trended higher. This has coincided with traders’ expectations that inflation has peaked and the pace of tightening should slow or peak soon, China re-opening, and the aversion of an energy crisis abroad, given a warmer-than-expected winter.

Graphic: Retrieved from Bloomberg.

Investors continue to sit on a lot of cash, at this time. 

Graphic: Retrieved from Bank Of America Corporation (NYSE: BAC) via Bloomberg.

Some, in their desire to put their cash to work, have demanded Treasuries.

Graphic: Retrieved from Bloomberg. “Each of the Treasury auctions this month were awarded at a yield lower than expected based on pre-sale trading, known as ‘stopping through’ — meaning that demand was strong. Primary dealers (who are obligated to bid) in Thursday’s $35 billion offering of seven-year notes picked up just 6.1% of the securities, the smallest in any Treasury note or bond auction in data going back to 2003.”

Strong demand during Treasury auctions (i.e., bond bid and yield pressured), as some suggest, is forcing investors into previously depressed equities which Goldman Sachs Group Inc (NYSE: GS) showed investors selling heavily leading up to 2023.

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

In fact, Treasury auctions have coincided with big demand for short-dated exposure to call options and short-covering.

Graphic: Retrieved from SpotGamma’s Weekend Note. “Last week’s bullishness appeared to be bolstered by very strong treasury auctions, which ignited the trade of short-dated (i.e., 0 DTE) call options. You can see this relationship in the image below wherein large 0DTE options flow (bottom) were triggered by the 1 PM ET treasury auction (red vertical line).”

Additionally, the markets have enjoyed a liquidity boost, also a driver of equity market relief. The Treasury General Account (TGA), or the government’s checking account, if we will, was driven down and played into an easing of financial conditions which has benefitted stocks.

Graphic: Retrieved from Bloomberg.

Per past letters, we note that a falling TGA is likely to be accompanied by a rise in bank reserves (liabilities to the Fed), increasing the room banks have to lend and finance trading activities which add to market liquidity. This added market liquidity, some suggest, is due to the debt ceiling. Consequently, once a debt ceiling deal is signed, run for the hills!

Graphic: Retrieved from Fabian Wintersberger. “One driving factor is the US is facing its debt ceiling (again). Hence, the US treasury needs to run off its Treasury General Account, which injects liquidity into markets from which stock markets benefit.”

Morgan Stanley (NYSE: MS) concurs:

“[T]he single most important driver of equities over the last year has been excess liquidity, and it’s about to turn more restrictive. The amount of liquidity in the system is about to change again – the Treasury is increasing bill issuance sizes, which will drain liquidity from the system. The Treasury could build cash by more than $200 billion over the span of a month – which on top of QT will effectively drain nearly $300 billion from bank reserves – which implies the S&P 500 should be 6% lower over the net month.”

Anyways, strategists think markets are underestimating the Fed which is likely to keep rates higher for longer. There are not enough restrictions to reduce inflation. This would ultimately boost capital costs, leading to earnings misses and lower EPS.

Graphic: Retrieved from Morgan Stanley (NYSE: MS) via The Market Ear. “[M]isses, both on revenue and margin, were not punished as much as they have been historically.”

If this market strength is, in part, the result of a so-called front-running of the Fed’s pivot from tightening, either the failure to realize a pivot or an eventual pivot may be followed by the markets selling (i.e., buy the rumor and sell the news scenario). 

Graphic: Retrieved from Fabian Wintersberger. “Neither the ECB nor the Fed is restrictive enough to bring inflation back to 2 %. A look at the Volcker era shows that it is necessary to increase real interest rates above the inflation rate for a prolonged period to achieve that.”

A chart to tack on here at the end of the section is FINRA margin debt versus the S&P 500 (INDEX: SPX). In short, this measure is not supportive of the move up in stocks. More on this sometime later. Take care!

Graphic: Retrieved from Tier1Alpha via Callum Thomas.

Technical

As of 8:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside of the prior range, suggesting a potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,050.25. 

Key levels to the upside include $4,061.75, $4,071.50, and $4,087.00.

Key levels to the downside include $4,028.75, $4,011.75, and $3,998.25.

Disclaimer: Click here to load the key levels via the TradingView platform. New links are produced daily. Quoted levels hold weight barring exogenous event.

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

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


About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For January 27, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 7:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.

Week Recap

Monday’s newsletter was the first in-depth commentary on markets since the letter writer left on some travel. Discussed were recession expectations and traders’ bets on a policy reversal. The expectations of policy pivots and liquidity additions “due to the debt ceiling”, as well as the big monthly options expiration (OpEx) this January, manifested green shoots that likely do not last.

To be able to participate in the market’s upside (and take advantage of the S&P 500 and Cboe Volatility Index up environment) with limited downside, this letter offered some example trades that looked attractive.

Call structures with long options closer to the money and short options farther from the money (to lower the cost of the spread) have worked well, this letter explained.

February is likely to kick off with an interest rate hike. Traders are pricing the pace of rate hikes to slow, however. We’ll unpack this and more next week. Take care!

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

Technical

As of 7:00 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a balanced overnight inventory, inside of the prior range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $4,061.75. 

Key levels to the upside include $4,100.25, $4,083.75, and $4,071.50.

Key levels to the downside include $4,049.00, $4,028.75, and $4,011.75.

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

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

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


About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For January 26, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 8:00 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.

Positioning

It’s a dynamic this letter has discussed before. Levels quoted in the bottom section of this letter have proved useful in recent trade, marking the bottom and top of rallies precisely. A factor to blame is short-term participation. Let’s explain this further.

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

For instance, as SpotGamma said this morning, volumes at options strikes, very close to levels this letter quotes, are very large relative to the open interest changes. These volumes are large enough to add to the movement and result in responses to certain areas, but their impact is not long-lasting. In fact, some suggest the activity is part of “trading for risk positioning” and the impact “can net out” over a longer time horizon.

It is this letter writer’s opinion that the noise is easy to get swept into. Rather, we are interested in participating in the bigger strides, hence the trades we’ve quoted prior.

As your letter writer elaborated in a recent note for SpotGamma, following weakness heading into the January monthly options expiration (OpEx), the window was open for relief. A cross above big inflections like the 200-day simple moving average, a trigger for some to buy stocks, coupled with measures like the Cboe Volatility Index (INDEX: VIX) trending higher, partly the result of the fear of missing out and hedging in a lower liquidity environment, had us leaning optimistic.

Graphic: Retrieved from Bloomberg.

Notwithstanding, with measures like the Cboe VIX Volatility (INDEX: VVIX) “at low levels and rebounding” implying “(1) traders are looking to hedge for cheap and (2) convexity remains a good place to be”, we had the interest to limit downside via call structures with long and short options. The short options help us harvest a bit of call skew and lower the cost of the spread, helping it retain “value better through time.”

Graphic: Retrieved from Bloomberg.

In short, though “the marginal positivity of further IV compression likely does little to keep stocks on an upward trajectory”, SpotGamma explained, structures we explained recently may enable you to get on the right side of an SPX and VIX up environment (explained by SpotGamma), all the while limiting downside on the eventual turn.

If you’re averse to directional risk, consider trades like the Box Spreads we talked about many letters back, which are now gaining popularity.

Technical

As of 8:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Our S&P 500 pivot for today is $4,050.25. 

Key levels to the upside include $4,061.75, $4,071.50, and $4,083.75.

Key levels to the downside include $4,028.75, $4,011.75, and $3,998.25.

Click here to load updated key levels into the web-based TradingView platform. All levels are derived using the 65-minute timeframe. New links are produced, daily. 

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

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


About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For January 25, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 8:00 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.

Positioning

After a rocky end to 2022, the result of rebalances and repositioning, stocks rallied in the face of incredibly bearish sentiment and off-sides positioning. The detailed Daily Brief for January 24 discussed this context.

Presently, the S&P 500 (INDEX: SPX) is riding above an important inflection (i.e., the 200-day simple moving average) which is a trigger for many traders to flip to owning stocks. At the same time, implied volatility (IVOL), as measured by measures such as the Cboe Volatility Index (INDEX: VIX), is trending higher, and that’s, in part, a result of options hedging in a lower liquidity environment.

Anyways, little is expected to change until the middle of February, this letter quoted Kai Volatility’s Cem Karsan stating, yesterday. Following mid-February, a window for weakness opens. This could be a problem for some traders who are short volatility.

The reason being is as follows. Traders’ disinterest in hedging downside leaves them offside should the market drop quickly. Consequently, the demand for hedges (puts) will coincide with a re-pricing in IVOL dangerous to anyone who is short volatility.

Given the unstable SPX and VIX up environment, attractive trades provide exposure to the upside while limiting the downside. Structures such as call butterflies or ratio spreads, as included in yesterday’s letter, may work well.

In yesterday’s example, owning the 20-point FEB 1×2 Tesla Call Ratio Spread resulted in about 400% profit in the span of 14 days or so (i.e., $0.20 db → $1.00 cr). The loss was limited* to about $20.00 at entry while the exit was marked in excess of $100.00.

*Note that losses can exceed the entry debit should the underlying stock trade very far beyond the ratio spread’s short strikes.

Similar trades can be structured in the indexes such as the Nasdaq 100 (INDEX: NDX) where there is a steeper skew that may enable us to collect more credit in the options we are short, helping us lower the cost of the entire spread we own.

If you’re leaning toward the indexes, then you may avoid some of the volatility we saw yesterday when large swaths of stocks on the Intercontinental Exchange Inc-owned (NYSE: ICE) New York Stock Exchange commenced trading with an open book some reports have suggested.

As SpotGamma explained yesterday, “movement-reducing hedging activities” in the indexes “can mask realized volatility (RV) under the hood in single stocks.” Therefore, your index positions may be better isolated from what’s going on under the hood.

Graphic: Retrieved from Bloomberg.

Technical

As of 8:00 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Our S&P 500 pivot for today is $3,998.25. 

Key levels to the upside include $4,011.75, $4,028.75, and $4,045.75.

Key levels to the downside include $3,988.25, $3,979.75, and $3,965.25.

Click here to load updated key levels into the web-based TradingView platform. All levels are derived using the 65-minute timeframe. New links are produced, daily. 

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

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


About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For January 24, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. At the same time, 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.

Administrative

Monday’s letter had some holes. Let’s try to fill them in, today, and get a fuller picture.

Summary of today’s letter: though the real economy may be strong, sticky inflation likely results in higher rates for longer, as well as quantitative tightening. This is not good for the financial economy. Some suggest the equity market rally persists into mid-February before further weaknesses appear. Read on for more.

Fundamental

Many sentiment and positioning indicators are bearish.

For instance, surveys by Bank of America Corporation (NYSE: BAC) point to allocators being very underweight US stocks. Also, investors are reporting some of their biggest one-month exits from stocks since BAC started surveying.

Graphic: Retrieved from BAC via Bloomberg’s John Authers.

The consensus is turning more bearish, we see, and some of this letter’s most quoted voices maintain that markets (not necessarily the economy) are in for more weakness.

That is in the face of a severely depressed S&P 500 (INDEX: SPX) crossing above key areas denoting technical resistance, a signal for trend-followers to get involved on the long side (i.e., buy stocks) Kai Volatility’s Cem Karsan explained in a video last week.

Graphic: Retrieved from Bloomberg.

Equity market strength drivers, Karsan said, include China reopening and increasing stimulus, Europe’s not-so-bad winter, and little worsening of conflicts (e.g., Ukraine and Russia situation).

Adding, as The Macro Compass’ Alfonso Peccatiello said, the bond market thinks the Fed will not hike into a recession. Inflation likely “slows down to 2.5% quickly, [with] the Fed cutting rates to neutral (and never below). [That’s] not recessionary pricing. It’s immaculate disinflation pricing.”

The base case is a landing that’s soft.

To elaborate, the data shows the Fed cut by about 350 basis points or so within 18 months of the start of a recession, Peccatiello said. Now, the markets are pricing a mid-2023 pivot with about 200 basis points of cuts between 2023 and 2024.

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

“That must mean the bond market’s base case (60%) is a recession,” Peccatiello said, noting that the Fed Funds is not pricing “below reasonable estimates of neutral rate (2.25-2.75% in nominal terms)” in the next 2-5 years. That means this would be the first time ever the US is in a recession and the Fed doesn’t cut rates below neutral.”

Graphic: Retrieved from The Macro Compass.

And, though downside earnings revisions are happening, the “2023 EPS consensus at $225 implies a +4% earnings growth this year [while] in [past] recessionary episodes the average EPS decline is instead -30%.”

“[C]yclical sectors and countries are outperforming defensive,” and there is little fear and desire to protect against far-reaching weakness. “Protection in the S&P 500 is at the cheapest levels in 2 years” as evidenced by “the implied volatility in 20% out-of-the-money SPX puts … trading in the lowest” percentiles.

But, as Karsan implied in his recent appearance, there’s a disconnect. The economy is not the stock market, and the liquidity context is poor, which many may not recognize.

The economy performing well due to China reopening and strong demand among businesses surveyed, consumers’ savings excesses, persistent credit boom, and a strong labor market suggest inflation lasts longer.

Consequently, interest rates remain higher for longer and quantitative tightening is likely to persist. This is not so good for the financial economy.

Graphic: Retrieved from JPMorgan Chase & Co (NYSE: JPM) via Fabian Wintersberger.

“[B]lindly trusting the bond market could end badly,” Fabian Wintersberger added, noting that “recent bear market rallies in stocks and bonds will reverse” eventually. 

Karsan appears to agree: though green shoots are likely to push better than expected economic performance, the Fed “is in a box” and this rally likely ends in early spring.

Graphic: Retrieved from Nasdaq Inc (NASDAQ: NDAQ). Note that “[h]igher rates act as a headwind for valuations – prices should fall if earnings don’t change [and] increased earnings make PEs (valuations) fall and make stocks look more attractive.” Currently, “the market is currently pricing in a year where rates and earnings don’t change much … inflation could stay elevated [with China reopening and supply chain re-shoring] which means rates should too.”

For now, the break of the 200-day moving average is a significant impetus since it’s a level many watch (i.e., technicals matter if enough people look at them). The chase is manifesting an SPX up, Cboe Volatility Index (INDEX: VIX) up dynamic (i.e., those who fear they may miss a rally bid volatility while the underlying market trades higher).

The Daily Brief for January 13 said “the more depressed technology names to the upside for debits [looked] attractive.”

Accordingly, Tesla Call Ratio Spreads have performed really well.

The 1/2 BACKRATIO TSLA 100 17 FEB 23 160/180 CALL is pricing in excess of a $1.00 credit to close, up about 400% in the span of 14 days or so.

A push likely lasts until mid-February, after which a window for weakness may open, particularly with the liquidity context (see the below video) no longer as supportive. However, if the market consolidates for a period after, this would be bullish.

To end, the median projection puts the S&P 500 at a level above $4,000.00 by year-end with the worst estimate putting the index at $3,000.00.

Joseph Wang explained, also, that there is an “increasing probability of a second bout of inflation, an issue in the 1970s that the Fed is keen to avoid … [by] retighten[ing] financial conditions … through its balance sheet” with an extended quantitative tightening or QT maintained “even if policy rates are cut.”

Given that QT is the flow of capital out of capital markets, this context presents more pressure on the financial economy (not necessarily the real economy).

Technical

As of 6:55 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the bottom part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Our S&P 500 pivot for today is $4,028.75. 

Key levels to the upside include $4,045.75, $4,061.75, and $4,077.00.

Key levels to the downside include $4,011.75, $3,998.25, and $3,988.25.

Click here to load updated key levels into the web-based TradingView platform. All levels are derived using the 65-minute timeframe. New links are produced, daily. 

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

Vanna: The rate at which the delta of an option changes with respect to implied volatility.

Charm: The rate at which the delta of an option changes with respect to time.

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

Options: Options offer an efficient way to gain directional exposure.

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

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

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

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

Be cognizant of risk exposure. 

  • Negative (positive) Delta = synthetic short (long). 
  • Negative (positive) Gamma = movement hurts (helps)
  • Negative (positive) Theta = time decay hurts (helps).
  • Negative (positive) Vega = volatility hurts (helps).

About

In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.

Categories
Commentary

Daily Brief For January 23, 2023

Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 7:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of this letter. Levels may have changed since initially quoted; 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. At the same time, 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) measure reflects the total attractiveness of owning volatility.

Administrative

Your letter writer has returned after a period of travel. Now, there is a lot of content to cover, so we’ll give it a good shot today and fill in some of the missing points over the coming days. Thanks!

Fundamental

At its core, the expectation is that the US economy will fall into recession in the first half of 2023, and traders are betting policymakers will reverse in the second half of the year. This, in part, has boosted the S&P 500 (INDEX: SPX) over the past weeks.

However, many strategists think there is little reason for the policymakers to reverse course, and that will not be good for the markets.

Graphic: Retrieved from Bloomberg. Traders bet big on a peak in interest rates; some have amassed positions “in June 2023 SOFR options targeting a policy peak between 4.75% to 4.875%, and paying a premium of approximately $5.25 million for the hedge.”

As a recap, recall our past letters featuring the likes of Kai Volatility’s Cem Karsan and Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar. The inflation conversation began when authorities cut rates and bought bonds, while money was sent to people.

Risk assets were the first to respond; it was easier to borrow and make bets on ideas with a lot of promise in the future. As the economy reopened and demand picked up, supply chains tightened, and prices in the real economy inflated. 

Graphic: Retrieved from Moody’s Corporation (NYSE: MCO).

As argued by Pozsar, Andy Constan, and Joseph Wang, inflation likely trends higher for longer. Trends in de-globalization, supply chain chokepoints and restructuring, and a large credit boom in the banking sector are among the factors to blame.

Policymakers will continue generating negative wealth effects. Collateral damages to the economy (e.g., Alphabet Inc [NASDAQ: GOOGL] [NASDAQ: GOOG] and Spotify Technology SA [NYSE: SPOT] layoffs) are expected, consequently.

Graphic: Retrieved from The Market Ear. Per Morgan Stanley (NYSE: MS), “the single most important driver of equities over the last year has been excess liquidity, and it’s about to turn more restrictive. The amount of liquidity in the system is about to change again – the Treasury is increasing bill issuance sizes, which will drain liquidity from the system. The Treasury could build cash by more than $200 billion over the span of a month – which on top of QT will effectively drain nearly $300 billion from bank reserves – which implies the S&P 500 should be 6% lower over the net month.”

Moreover, per Andreas Steno Larsen, markets likely bottoms in the middle of 2023.

“[Christopher] Waller said that the QT process will either have to slow or come to a complete halt if the amount of USD reserves is equal to 10-11% of USD GDP, which is around 2.5 trillion USDs relative to current GDP (but rising over time obviously).”

Because we have more than $3 trillion USD in the system, and “more to be added due to the debt ceiling, we need a withdrawal of another $5-600 billion before QT will end [or] slow in between weeks 34-40 on our calculations,” Steno Larsen added, noting that if GDP flatlines, that would help keep QT running for longer. 

“If the Fed is willing to bring reserves down to 10% of GDP, we should expect S&P 500 to bottom around $3,250.00 in the second half of the year,” Steno Larsen said. “The Waller Rule is not good news ultimately, but for now let’s enjoy the liquidity added in February and March due to the debt ceiling. When a debt ceiling deal is signed, run for the hills.”

Graphic: Retrieved from Andreas Steno Larsen.

Technical

As of 7:15 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Our S&P 500 pivot for today is $3,988.25. 

Key levels to the upside include $3,998.25, $4,011.75, and $4,019.00.

Key levels to the downside include $3,979.75, $3,965.25, and $3,949.00.

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

As a disclaimer, the S&P 500 could trade beyond the levels quoted in the letter. Therefore, you should load the above link on your browser for more relevant levels.

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

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

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

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

About

In short, an economics graduate working in finance and journalism.

Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.

Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.

Past works include conversations with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Contact

Direct queries to renato@physikinvest.com or Renato Capelj#8625 on Discord.

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.