Categories
Commentary

Weekly Brief For August 29, 2021

Editor’s Note: If this commentary was valuable to you, consider forwarding it to your peers. Alternatively, share on social media and tag either @renatolcapelj or @physikinvest.

Wishing you good health and success!

Market Commentary

Equity index, bond, and commodity futures traded higher Friday. The VIX, US10Y, and dollar were sideways to lower.

  • What happened and things to expect.
  • Ahead is important employment data.
  • Trade Idea: Complex spread in GME.
  • Expecting less volatility to the upside.

What Happened: U.S. stock index futures auctioned sideways to higher last week alongside impactful events like the Federal Reserve’s Jackson Hole Economic Symposium. 

Ahead this coming week is important data on employment, consumer confidence, vehicle sales, manufacturing, and more. See here for updated calendar data.

Graphic updated 7:30 AM ET Sunday. Sentiment Neutral if expected /ES open is inside of the prior day’s range. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: During the prior week’s trade, on mostly strong intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by new all-time highs in the S&P 500 and Nasdaq 100. This is significant because it suggests continued bullishness after a v-pattern recovery.

V-Pattern: A pattern that forms after a market establishes a high, retests some support, and then breaks above said high. In most cases, this pattern portends continuation.
Graphic: Ally Financial Inc-owned (NYSE: ALLY) Ally Invest chart shows S&P 500 defending advance.

Further, the aforementioned trade is happening in the context of the Jackson Hole Economic Symposium. This event’s implications on price are supportive

To elaborate, given a slow down in the pace of the post-pandemic recovery, the Federal Reserve (i.e., Fed) decided not to manipulate policy to offset temporary factors. The reason being, policy effects are often delayed; doing something now could curb the recovery. 

Graphic: Guggenheim Investments unpacks the impact of weaker data on monetary policy.

At the same time, with measures like the Marshallian K – the difference between year-over-year growth in M2 money supply and GDP – turning negative, there are concerns around liquidity and its impact on the equity market.

Graphic: According to Bloomberg, “While stocks kept rising during frequent negative Marshallian K readings in the 1990s, the pattern since the 2008 global financial crisis — a period when the central bank was in what Ramsey calls a “perpetual crisis mode” — begs for caution.”

According to Moody’s, however, “it will take a while before liquidity concerns are justified even with the Fed likely to begin tapering its $120 billion in monthly asset purchases either late this year or early next.”

Why? Well, for starters, if liquidity was an issue, financial institutions wouldn’t be parking that much money at the Fed. Low volatility in the bond and stock market also implies ample liquidity, Moody’s adds.

So, by not rapidly reducing its asset purchases, the Fed isn’t worried about the economy overheating due to non-temporary inflation; instead, Chairman Jerome Powell maintains that “[o]verall global deflationary trends remain in force.”

Eventually, though, after progress is made on full employment, the Fed will taper, likely keeping inflation expectations in line.

To note, last week’s straight-up trade came alongside the so-called sale of any volatility spike which can – through the process of hedging – support the market. Here’s just one example that received a lot of attention.

“In theory, if a stock was dropping and the retail masses all started to sell puts, they could push market makers to start buying large blocks of shares,” SpotGamma, an important voice in the space, says. “This could stabilize a dropping stock.”

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on the underlying’s order book. For instance, in selling a put, customers add liquidity and stabilize the market. How? The counterparty long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

Moreover, given a divergent volume delta and decline in metrics like DIX and GEX, the odds of significant upside volatility are lower. Still, participants may make use of the following objective frameworks for next week’s trade. Check for updated levels in Monday morning’s commentary.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,495.00 high volume area (HVNode) pivot puts in play the minimal excess all-time high and $4,511.50 Fibonacci extension. Initiative trade beyond the $4,511.50 level could reach as high as the $4,520.25 and $4,556.25 extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,495.00 HVNode puts in play the $4,481.75 HVNode. Initiative trade beyond the $4,481.75 HVNode could reach as low as the $4,454.25 low volume area (LVNode) and $4,427.00 untested point of control (VPOC).

To note, the $4,454.25 LVNode corresponds with an anchored volume-weighted average price (VWAP), 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 Delta: Buying and selling power as calculated by the difference in volume traded at the bid and offer.

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

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.

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.

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.

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.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 7:30 AM ET Sunday.

Weekly Trade Idea

Please Note: In no way is the below a trade recommendation. It is a peek into the thought process here at Physik Invest.

Options offer an efficient way to gain directional exposure. 

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

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

Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.

Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.

Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 

Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.

Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

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

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

Negative (positive) delta = synthetic short (long). 

Negative (positive) theta = time decay hurts (helps).

Negative (positive) vega = volatility hurts (helps).

Trade Idea: SELL -1 1/2 BACKRATIO GME 100 17 SEP 21 530/680 CALL @1.20 LMT

Though I began filling this trade at limits for credit as high as 2.00, the spread collapsed markedly, Friday. Still, there’s an opportunity for unique structures such as the 530C+1, 680C-2 that pay you to be long the stock.

All else equal (i.e., discounting factors such as an increase in volatility), should the spread trade fully in-the-money – meaning the stock travels to the $680 short strike – the 530 strike will be 150 points in-the-money while the at-the-money strikes, combined (based on current at-the-money pricing), will trade around $53.00.

That suggests the spread should price for a credit north of $97.00 to close. Nice!

Thesis: I’m bullish on GameStop and I think the stock may climb over the next week few weeks. 

I will structure a spread above the current stock price, expiring in 18 days. I will buy the 530 call option once (+1) and sell the 680 call option twice (-2) for a $1.20 credit or better. Should the stock not move to my target, I keep the $120.00 credit. Should it move to $680, I could make $15,000.00 at expiry. Should the stock move past $830 break even or so, I may incur unlimited losses. My goal with this spread is to capture the initial credit and close for additional credit if the stock moves higher. 

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

Below is a log chart of GameStop Corporation (NYSE: GME) and the ratio spread profit zone.

News And Analysis

Treasury bears redeemed as Citi, Michael Burry see higher yields.

Visa jumps into the NFT craze, buying a CryptoPunk for $150,000.

The top 7 reasons why COVID-19 could lead to inflationary regime.

Storm Ida roars toward Louisiana with winds of 150 miles per hour.

Chinese health officials reject U.S. allegations on COVID-19 probe.

What People Are Saying

Let’s Hang Out

Los Angeles, CA September 10-12

Salt Lake City, UT September 28-30

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 August 25, 2021

Editor’s Note: Dark Pool Index (DIX) and Gamma (GEX) visuals are based on where each metric falls with respect to the MAX and MIN for all data available on https://squeezemetrics.com/monitor/dix (i.e., DIX in relation to high and low of the entire DIX data set).

Market Commentary

Equity index futures trade sideways.

  • Updates to DIX, GEX calculation.
  • Implications of Fed’s cash deluge.
  • Ahead: Some goods orders data.
  • Positioned for sideways to higher.

What Happened: U.S. stock index futures auctioned sideways alongside an absence in overnight catalysts.

Ahead is data on durable and nondefense capital goods orders (8:30 AM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Wednesday’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, on strong intraday breadth and lackluster market liquidity metrics, the best case outcome occurred, evidenced by sideways trade at the $4,481.75 high volume area (HVNode). This is significant because sideways trade – after the completion of a v-pattern recovery – denotes an acceptance of higher prices (i.e., participants find prices valuable to transact at).

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

Further, ahead of the upcoming Jackson Hole Economic Symposium on August 26-28, 2021, the aforementioned trade is happening in the context of moderating economic growth and monetary distortions.

According to Bloomberg, “[d]emand for the so-called RRP facility has surged as a flood of dollars threatens to overwhelm funding markets. That’s in part a result of the central bank’s long-standing asset purchases and drawdowns of the Treasury’s cash account, which is pushing reserves into the system. As a result, liquidity has been swelling, especially as the Treasury cuts supply to create more borrowing room under the debt ceiling.”

“Even if the central bank were to complete tapering by August 2022, as JPMorgan expects, there may still be an additional $850 billion to $1 trillion of additional liquidity injected into the financial system.”

Graphic: Bloomberg plots Federal Reserve data on reverse repo usage.

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,481.75 high volume area (HVNode) puts in play the $4,492.00 overnight, minimal excess all-time high (ONH). Initiative trade beyond the ONH could reach as high as the $4,511.50 and $4,556.25 Fibonacci extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,481.75 HVNode puts in play the $4,454.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,427.00 untested point of control (VPOC) and $4,393.75 micro composite point of control (MCPOC).

To note, the $4,427.00 level corresponds with an anchored volume-weighted average price (VWAP), 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.

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

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.

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

News And Analysis

MSCI CEO dismisses concern Chinese stocks are uninvestable.

Federal Reserve policy got Chinese criticism as PBOC diverges.

President Biden praises house adoption of a $3.5B budget plan. 

S&P Global: Global oil demand peak by 2025 under UN pathway.

How U.S. infrastructure investment could boost jobs, productivity.

U.S. on a pace to complete a full Afghanistan withdrawal by 8/31.

Catherine Wood is more optimistic than pessimistic about China.

What People Are Saying

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 August 24, 2021

Market Commentary

Equity index and commodity futures trade higher overnight. Yields and VIX are higher, too.

  • Unpacking drivers behind market.
  • Ahead: Data on new home sales.
  • Eyeing digestion, sideways trade.

What Happened: U.S. stock index futures explored higher prices overnight as investors looked to position themselves for the upcoming Jackson Hole Economic Symposium August 26-28, 2021. The Russell 2000 is leading the pack alongside the Nasdaq 100.

Ahead is data on new home sales (10:00 AM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index (DPI) and Gamma (GEX). A higher DPI approximation is bullish. At the same time, the lower the GEX approximation, the more volatility. SHIFT data used for options activity approximation. Note that options flow is sorted by the call premium spent; if green and more positive then more was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index from 0-100.

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

Adding, during the prior day’s regular trade, on strong intraday breadth and middling market liquidity metrics, the best case outcome occurred, evidenced by trade above the $4,476.50 overnight high (ONH). This is significant because Monday’s trade took back 100% of last week’s liquidation, completing a v-pattern recovery.

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

Further, the aforementioned trade is happening in the context of impactful options market dynamics, moderating growth, and inclination to taper stimulus in spite of a resurgence in COVID-19.

Some of the implications of these themes on price are supportive and contradictory; to elaborate, “[t]he good news is that our economic recovery is unlikely to fully reverse, given lack of political will for a return to stricter lockdown measures. But evidence of a slowdown in third-quarter economic activity will continue to mount in the coming weeks, putting the Fed’s 7 percent real GDP growth projection for 2021 out of reach,” strategists at Guggenheim noted.

“This string of weaker data will likely prompt the Fed, led by Chair Powell and Governor Brainard, to take a more cautious approach to the timing and speed of tapering plans, in turn keeping Treasury yields low.”

At the same time, briefly, we should touch on the so-called sale of any volatility spike which can – through the process of hedging – support the market. Here’s just one example that’s been receiving a lot of attention.

“In theory, if a stock was dropping and the retail masses all started to sell puts, they could push market makers to start buying large blocks of shares,” SpotGamma, an important voice in the space, says. “This could stabilize a dropping stock.”

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on the underlying’s order book. For instance, in selling a put, customers add liquidity and stabilize the market. How? The counterparty long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

Moreover, for today, given expectations of heightened volatility and responsive trade, participants may make use of the following frameworks.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,481.75 high volume area (HVNode) puts in play the $4,492.00 overnight, minimal excess all-time high (ONH). Initiative trade beyond the ONH could reach as high as the $4,511.50 and $4,556.25 Fibonacci extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,481.75 HVNode puts in play the $4,454.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,427.00 untested point of control (VPOC) and $4,393.75 micro composite point of control (MCPOC).

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

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.

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

News And Analysis

Ignoring Risk: S&P 500 doubles to the fastest bull market.

Moviegoers return, but COVID, streaming threaten theater.

Fed Chairman Jerome Powell navigating inflation debates.

S&P Global unpacks digital asset infrastructure – custody.

Existing home sales back on a rise as inventory improves.

Latin American conditions are painting a favorable portrait.

Funds trimming hawkish Fed bets as Jackson Hole looms.

Ten cities successfully weathering COVID on management.

Cumberland Advisors: Who is working and who is not yet?

PBOC will boost its credit support, stabilize money growth.

USDC reserve to be converted into less risky investments.

Year-to-date loan default volumes down 88% versus 2020.

Bank acquisitions of big fintechs rare amid startup growth.

What People Are Saying

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

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

Weekly Brief For April 18, 2021

Happy Sunday! Though markets were relatively choppy, they ended higher last week. This came at a time of heightened public attention to the market.

The following commentary on U.S. broad market equity indices will discuss what happened, why it matters, what to expect, and how participants can position themselves for the coming week.

But first, here’s a quote from Sterling professor of economics at Yale, Robert J. Shiller:

“The current widespread fascination with the rising market accompanied by recent concern about a possible downward spiral and strained stock market valuations echo those of 100 years ago.”

Market Commentary

What Happened: The S&P 500, Nasdaq-100, and Dow Jones Industrial Average made new all-time highs before closing the week out with an attempt to balance and validate newly discovered prices.

  • Data suggests economic outlook improving.
  • Earnings pick up, add to clarity on recovery.
  • Risk, reward poor for new entries. Be picky.

Why It Matters: The price rise in U.S. broad market equity indices comes as the economic recovery from the COVID-19 coronavirus pandemic accelerated.

According to S&P Global, the recovery’s acceleration warranted a revision in the firm’s 2021 global GDP growth forecast to 5.5%, a 50 basis point change.

At the same time, it’s S&P’s belief that U.S. inflation fears are overblown. Traders began to price in that realization, last week. 

After a slew of economic releases, yields pulled back dramatically.

In a Bloomberg article, Barclays strategists, including Anshul Pradhan, noted a raising of the bar on reflation; the drop in yields “reflects the fact that expectations for growth, inflation and the hiking cycle have all been significantly revised higher.”

Further, participants saw the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility based on S&P 500 (INDEX: SPX) options, continue a multi-week drop attracting the participation of systemic strategies and opportunistic hedging, as noted last week.

It is important to note that this most recent rally in equity indices, which coincides with a historically bullish period, came soon after Archegos Capital’s default on margin calls which triggered a fire sale by several big Wall Street banks.

SpotGamma, a source for actionable insights based on activity in the options market, in a commentary, attempted to unpack the narrative which suggests the mechanical bid across the broad market is tied to a “tangled web of counterparty risk and hedging,” among other factors.

Moving beyond speculations, a couple of things are true and must be accounted for in our narrative.

First, equity market inflows, over the past 5 months, exceeded inflows of the prior 12 years, total. Second, as the April monthly options expiration (OPEX) passes and the positioning of participants changes, the risks of a near-term pullback have increased substantially. 

Despite the stock market trading in a historically bullish period, as well as declining volatility attracting the participation of systematic strategies, increased put selling, and the like, downside protection is trading cheap relative to its upside counterpart.

Option 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.

Should the market turn and customers demand downside protection in an increasing fashion, dealers’ risk exposure to direction and volatility will cause violent crash dynamics to transpire.

An example of this is last year’s sell-off.

In a discussion on rising delta and volatility forcing dealers to sell into weakness to hedge a rapid move in prices, Kris Sidial, a former institutional trader and the co-chief investment officer of The Ambrus Group, a volatility arbitrage fund that looks to exploit changing market structure dynamics, said: “You have this dynamic in the derivatives market where there is a gamma squeeze when people are buying way far out-of-the-money [options], and dealers reflexively have to hedge off their risk,” Sidial said.

Graphic: SqueezeMetrics highlights implications of volatility, direction, and moneyness.

Putting it all together, despite markets being in a position to move higher, should there be a turn and spike in volatility, participants must be ready to accept the possibility of a violent liquidation.

As Market Ear puts it, hedge when you can, not when you must.

What To Expect: An increased potential to correct in time and price.

In addition, metrics, like DIX, market liquidity, and speculative derivatives activity, confirm participants’ bullishness and opportunistic hedging ahead of an acceleration in the global restart and a turn in flows, the result of consumers shifting their preferences from saving and investing to spending.

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 ending April 16. Activity in the options market was primarily concentrated in short-dated tenors, in strikes as low as $364, which corresponds with $3,640 in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: SHIFT search suggests participants are not as inclined to add call-side exposure, through the month of May, in the SPDR S&P 500 ETF Trust (NYSE: SPY).

What To Do: In the coming sessions, participants will want to pay attention to where the S&P 500 trades in relation to Friday’s open-high-low-close (OHLC). 

Any activity above Friday’s regular trade-low suggests participants are not yet done discovering higher prices. Trading below Friday’s low suggests an inclination by participants to (1) form a consolidation area that denotes acceptance of higher prices or (2) revert to the mean and repair some of the poor structure left behind prior discovery. 

It is important to take note of the minimal excess and cluster of price extensions at $4,200.00, a typical price target based on Fibonacci principles.

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.

So, in the best case, the S&P 500 makes an attempt to balance or discover prices as high as $4,200.00. In the worst case, participants look to auction the S&P 500 into prior poor structures and low-volume areas (LVNodes) that ought to offer little-to-no support.

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

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

News And Analysis

Economy | Housing starts reach the highest level since 2006. (MND)

Recovery | U.S. is unlikely to ‘just cancel’ J&J COVID-19 shots. (BBG)

Markets | Citi to exit banking in 13 markets across Asia, Europe. (BBG)

Markets | Record-high systemic leverage is pressuring rates. (Moody’s)

Economy | S&P Global Ratings expects global rebound to roar. (S&P)

Economy | Projections on global population, aging, urbanization. (REU)

Trade | Amazon sellers slammed with COVID-induced constraints. (S&P)

Recovery | How well COVID-19 vaccines work against variants. (AB)

Markets | SPACs boost credit at targets but carry unique risks. (Moody’s)
Markets | ‘Roaring Kitty’ adds to GME bet after exercising calls. (BBG)

What People Are Saying

Innovation And Emerging Trends

Economy | Looking at the pop culture of the original Roaring Twenties. (NYT)

Markets | Want to take your company public? Here are your options. (CB)

FinTech | Societe Generale adds first structured product on blockchain. (SG)

Exodus | Hedge funds are ready to get out of NY and move to FL. (BBG)

Trading | The answer to how much capital you should be allocating. (TT)

Venture | European venture reaches all-time high in first quarter 2021. (CB)

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, Canadian 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.

Cover photo by eberhard grossgasteiger from Pexels.

Categories
Commentary

Weekly Brief For April 11, 2021

Editor’s Note

Welcome to Market Intelligence, Physik Invest’s response to the many newsletters that seldom provide actionable market insights, free.

Through this newsletter you will get a glimpse into the following:

  • The implications of credit and positioning.
  • Impactful events in finance and technology.
  • Technical commentary for index products.
  • Media on emerging trends and hot topics.

Again, thanks for joining! Physik Invest looks forward to providing you an objective view into the who, what, when, where, why, and how in finance and technology.

Regards,

Renato Leonard Capelj


Market Commentary

Index futures are in price discovery mode.

  • Institutions bullish but risks add up.
  • Earnings season to start this week.
  • Balance-to-higher into April OPEX.

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

What Does It Mean: The S&P 500 closed above $4,100 for the first time as investors looked to price in an economic “‘Goldilocks moment’—fast, sustained growth alongside inflation and interest rates that drift slowly upward.”

According to a letter by JPMorgan Chase & Co’s (NYSE: JPM) Jamie Dimon, 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. 

This perspective differs from Dimon’s comments a year ago; he warned of a recession in which GDP could fall nearly 35%. Is Dimon one to fade? Likely not, given the fact that (1) he heads one of the biggest banks and (2) most forecasts by other institutions support Dimon’s perspectives.

Further, the CBOE Volatility Index (INDEX: VIX), a measure of the stock market’s expectation of volatility based on S&P 500 (INDEX: SPX) options, traded to its lowest level since February 2020.

At the same time, participants saw blocks of VIX call spreads — bets that serenity won’t last — hit the tape; the unknown participant(s) bought nearly 200,000 contracts.

Graphic 1: Risk graph of the 25/40 VIX call spread in question via MarketEar

“With VIX being priced in the low 17 area, I would imagine we would see more of these larger-sized bets going forward,” Kris Sidial, co-chief investment officer at Ambrus Group, told Bloomberg. “I think smart money understands that, although volatility has contracted a lot in these last two months, we are still seeing signs of excess market fragility appear from many different angles.”

Graphic 2: Volatility declines to its lowest level since February 2020.

As stated last week, the market is in a historically bullish period, ahead of the upcoming corporate earnings season, with structural flows supporting the ongoing narrative into the coming April monthly options expiration (OPEX).

Option Expiration (OPEX) Significance: 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.

Adding, most funds are committed to holding long positions. In the interest of lower volatility returns, these funds will collar off their positions, selling calls to finance the purchase of downside put protection.

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

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

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

What To Expect: Balance-to-higher.

Important to note is that equity market inflows, over the past 5 months, exceeded inflows of the prior 12 years, total. Think about the supply and demand dynamics of the market; in case of an equity market sell-off, a lot of late buyers will have poor location which may leave a thick area of supply above the market, putting a dampener on future rallies. 

“You should definitely be worried about valuations and all the more so when people start justifying extremely high valuations. We are risk-on, but we haven’t put our foot down on the accelerator because of valuations in some parts of the market,” said Fahad Kamal, chief investment officer at Kleinwort Hambros.

Adding to the narrative, metrics, like DIX, confirm increased buying pressure while divergences in options activity suggest opportunistic hedging, especially with puts trading at their cheapest level, relative to calls the same delta.

Graphic 3: 1-month 25 delta risk-reversal, via SpotGamma, suggests puts are trading cheap.
More On DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.
Graphic 4: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for the week ending April 9, 2021. Activity in the options market was primarily concentrated in short- and long-dated tenors, in put strikes as low as $340, which corresponds with $3,400 in the cash-settled S&P 500 Index (INDEX: SPX).

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

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

In the best case, the S&P 500 remains above the $4,104.00 spike base. Doing so means that the participants are validating the prices caused by the late-day knee-jerk rally. 

In the case of higher prices, given that the 161.80% and 127.20% Fibonacci price extensions were achieved, and after-market trade established an overnight high at $4,121.50, participants can target prices as high as the $4,197.25 price extension.

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

Any activity below the $4,104.00 spike base puts the rally on hold and calls for balance or an attempt to digest higher prices.

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

In the case of lower prices, participants can look to whether a test of the $4,069.00 high-volume area (HVNode) solicits a response. If not, initiative trade could take prices as low as $3,943.00, the next most valuable price area in the chain.

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

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic 5: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

News And Analysis

Economy | No elevated default risk expected until 2023. (Moody’s)

Economy | China looks to curtail loan growth amid bubble fears. (BBG)

Markets | Pre-IPO, Coinbase releases blowout Q1 2021 results. (BW)

Markets | Growing signs that equity bull market overheating. (Axios)

Economy | CFPB warns lenders of a wave of distressed mortgages. (MP)

Markets | Cboe extends global trading for VIX and SPX options. (Cboe)

Markets | Unpacking the feedback loop that is distorting markets. (RV)

Trade | Global trade disruptions after the Suez Canal incident. (S&P)

Economy | U.S. COVID-19 vaccination rates to plateau in April. (Surgo)

Markets | Treasuries rally signaling bets on Fed hikes pared back. (BBG)

Markets | Bitcoin fills a demand for alternatives to fiat currencies. (BBG)

Economy | Powell says the economy poised for stronger growth. (BBG)

Markets | Earnings season starts with banks reporting this week. (WSJ)

Markets | Citadel Securities feels the heat of the political spotlight. (BBG)

Markets | Oil sideways. Gold, DXY higher. Copper, aluminum lower. (REU)

What People Are Saying

Innovation And Emerging Trends

Strategy | Strategies one VC believes made Stripe so successful. (BI)

FinTech | Fidelity, Square, and others, form crypto trade group. (WSJ)

FinTech | WealthCharts expands offer, tackles emerging trends. (BZ)

FinTech | SoftBank invests $500M in mortgage lender Better. (CNBC)

FinTech | Rarible co-founder says NFTs to stay, growth robust. (BZ)

FinTech | JPMorgan’s Dimon acknowledges fintech’s big threat. (BZ)

FinTech | Vesica launches a search engine for the options market. (BZ)

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, Canadian 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.

Cover photo by Kammeran Gonzalez-Keola from Pexels.

Categories
Commentary

Market Commentary For The Week Ahead: ‘The Flow Won’

Key Takeaways:

What Happened: Amid a volatile, news-heavy week, after a slew of earnings reports by heavily weighted index constituents, and an FOMC meeting that made no change to existing monetary policy, financial markets experienced a rapid de-risking, similar to what transpired prior to the sell-off in February 2020.

What Does It Mean: After extending the S&P 500’s rally, as well as establishing acceptance near the $3,850.00 price extension, an upside target, and excess (i.e., a proper end to price discovery), participants auctioned back into range, repairing poor structures left in the wake of initiative buying.

The action found acceptance below the $3,824.00 – $3,763.75 balance-area, invalidating the prior week’s break-out to new highs.

Since then, market participants were witness to violent two-sided trade, a result of the market transitioning into a short-gamma environment (Graphic 1).

In such case dealers hedge derivatives exposure by buying into strength and selling into weakness. This, will exacerbate volatility.

Graphic 1: SpotGamma data suggests S&P 500 has entered short-gamma environment

In a conversation for a Benzinga article to be released this coming week, I spoke with Kris Sidial, co-chief investment officer at The Ambrus Group, a volatility arbitrage fund, regarding GameStop Corporation (NYSE: GME) share price volatility, market microstructure, and regulation.

According to Sidial, the dynamics that transpired in GameStop can be traced back to factors like Federal Reserve stabilization efforts, and low rates, which incentivize risk taking (see Graphic 2).

“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.”

The aforementioned regime change is one in which dealer exposure to direction and volatility promotes crash up and down dynamics. Last February, the market was heavily one-sided with participants, like target date funds (e.g., mutual funds), selling far out-of-the-money puts on the S&P 500 for passive yield, and investors buying-to-open put options in an increasing amount for downside exposure, thus exacerbating volatility. 

Graphic 2: Newfound Research unpacks market drivers, implications of liquidity.
Graphic 3: SqueezeMetrics highlights implications of volatility, direction, and moneyness.

Last week, per Graphic 4, the SPDR S&P 500 ETF Trust, the largest ETF that tracks the S&P 500, saw a rise in purchases of downside protection with time, which will likely lead to an increase in implied volatility and sensitivity of options to changes in underlying price.

These risks will be hedged off by dealers selling into weakness (see Graphic 3), thereby exacerbating downside volatility.

Graphic 4: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust, for the week ending January 30, 2021.

The activity was most concentrated in put options with a strike price of $361, corresponding with $3,610 in the cash-settled S&P 500 Index (INDEX: SPX). This, alongside the market’s entry into short gamma, and an inversion of the VIX futures term structure (see Graphic 5), in which longer-dated VIX expiries are less expensive, is a warning of elevated near-term risks for equity market stability.

Graphic 5: VIX Futures Term Structure per vixcentral.com.

What’s more? Aside from breaking technical trend (Graphic 6) is DIX, a proxy for buying derived from short sales (i.e., liquidity provision on the market making side) declining, and the presence of divergent speculative flows and delta (e.g., non-committed buying as measured by volume delta).

Graphic 6: Cash-settled S&P 500 Index experiences technical breakdown.
Graphic 7: DIX by SqueezeMetrics suggests large divergence between price and buying on January 27.
Graphic 8: Divergent Delta in the SPDR S&P 500 ETF (NYSE: SPY), the largest ETF that tracks the S&P 500.

What To Expect: In light of the technical breakdown U.S. stock indexes are best positioned for downside discovery.

As a result, participants ought to zoom out, and look for valuable areas to transact.

Graphic 9: 4-hour profile chart of the Micro E-mini S&P 500 Futures.

In Graphic 9, the highlighted zones denote high-volume areas (HVNodes), which can be thought of as building blocks.

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, as they have in the week prior, then future discovery ought to be volatile and quick as participants look to areas of value for favorable entry or exit.

Additionally, it’s important to remember what the market’s long-term trajectory is: up.

Late last year, JPMorgan Chase & Co. (NYSE: JPM) strategist Marko Kolanovic suggested equities would rally short-term with the S&P 500 auctioning as high as $4,000 on the basis of low rates, improved fundamentals, buybacks, as well as systematic and hedge fund strategies. Since then, Kolanovic has downgraded growth and suggested the limited potential for further upside despite odds of a sustained economic recovery.

Note, Kolanovic has not called for an implosion in equity markets. Instead, the market is due for some downside discovery given a moderation in the recovery.

Given the above dynamics, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 takes back Friday’s liquidation and auctions above the $3,727.75 HVNode. Expectations thereafter include continued balance.

In the worst case, any break that finds increased involvement (i.e., supportive flows and delta) below the $3,689.50 HVNode, would favor continuation as low as the $3,611.50 and $3,556.00 HVNodes. Note that the second to last HVNode corresponds with the $361 SPY put concentration, which may serve as a near-term target, or bottom, for this sell-off, given last week’s activity at that strike.

Graphic 10: Profile overlays on a 15-minute candlestick chart of the Micro E-mini S&P 500 Futures.

Conclusions: Participants ought to look for favorable areas to transact, such as those highlighted areas in the S&P 500, featured in Graphic 9.

Big picture, the sell-off ought to be bought, just not yet. Per Graphic 11, euphoria is still too high.

Graphic 11: Bank of America Corporation (NYSE: BAC) sentiment indicators.

Levels Of Interest: $3,727.75, $3,689.50, $3,611.50 and $3,556.00 HVNodes.

Cover photo by Pixabay from Pexels.