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Graphic updated 7:30 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.
Administrative
A brief letter today. In the next sessions, this letter will publish an exclusive first look at comments from this letter writer’s recent chat with Simplify Asset Management’s Michael Green for a Benzinga article.
Moreover, in a summary of last week’s comments, the economy is on a solid footing and this provides the context for alonger-lasting and, potentially, more aggressive tightening cycle. Notwithstanding, “stocks can ignore bonds for extended periods of time,” says Interactive Brokers’ (NASDAQ: IBKR) Steve Sosnick who thinks investors have sufficiently de-risked and, consequently, “they may not feel compelled to sell more stocks or clamor for protection.”
With less risk, traders may not need as much protection as well, hence low(er) implied volatility (IVOL) via measures including the Cboe Volatility Index (INDEX: VIX). Sosnick adds that “the ‘pain trade’ might be to the upside; institutional investors are highly susceptible to FOMO, especially if they areunderweight.”
Interested in how to participate in this volatile market? In the Daily Brief for March 3, we talked about big macro and positioning themes such as 0 DTE, as well as how to cut your downside and have more efficient exposure to the upside. Have a great day!
Technical
As of 7:30 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the mid-to-lower 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 $4,052.25.
Key levels to the upside include $4,059.25, $4,071.75, and $4,082.75.
Key levels to the downside include $4,045.25, $4,032.75, and $4,024.75.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
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
The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market.
You may view this letter’s content calendar at this link.
Disclaimer
Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.
The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!
Editor’s Note: Hey team, thanks again for your reading of this daily newsletter. Due to travel commitments, I will not be writing reports consistently for the rest of this month.
Don’t expect any updates until Monday, April 11, 2022. Thereafter, coverage may be sporadic for the rest of the month.
What Happened
Overnight, equity index futures were higher after exploring lower, briefly. Commodities were mixed while bonds were lower and implied volatility measures were bid.
In terms of news, the European Union said it was interested in penalizing Russia, further, for its actions in Ukraine. This is as China battles new COVID-19 sub-strains.
Ahead is data on factory and core capital equipment orders (10:00 AM ET).
Graphic updated 5:45 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 the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
What To Expect
Fundamental: In the face of geopolitical tension, supply pressures, and inflation, consumer sentiment is at or below pandemic levels, prompting the Federal Reserve (Fed) to destimulate.
Graphic: Via S&P Global Inc (NYSE: SPGI) research. “Confluence Of Risks Halts Positive Credit Momentum.
“It has entered 2008-09 territory and is not far from all-time lows in the ‘80s when inflation and interest rates hit double digits,” ARK Invest’s Catherine Wood explained in a Twitter discussion on yield-curve inversions and aggressive action by the Federal Reserve, as well as inflation.
“The economy succumbed to recession in each of those periods. Europe and China are also in difficult straits. The Fed seems to be playing with fire.”
In accordance, the Macro Compass’ Alfonso Peccatiello explains that his credit impulse metrics, which lead economic activity and risk asset performance, imply a slowdown in earnings.
Still, in spite of these metrics, on average, recessions happen 12 to 24 months after the first yield curve inversions, according to Jefferies Financial Group Inc (NYSE: JEF).
Post-inversion S&P 500 performance, actually, is often positive.
Bolstering the call for positive equity market performance are strong seasonality trends during Fed-rate-hike episodes, a contraction in equity risk premia, and “still accommodative” monetary policy, per explanations by rates strategist Rishi Mishra.
Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “Equities are a real asset as they make a claim on nominal GDP. In the post-financial crisis era, weak economic activity and lower inflation pushed down nominal GDP, raising the equity risk premium and reducing the bond term premium. So as long as economies grow, revenues and dividends should also grow. The dividend yield can be thought of as a real yield. Equity risk premia have started to decline in the post COVID cycle but remain higher than in the pre-financial crisis era.”
“[T]he 3ms2s vs 2s10s spread (or the 3m2s10s fly) is the widest it has been since the end of 1994. The widening of this fly is indicative of the fact that while the Fed shifted its guidance from dovish to extremely hawkish, the policy is still accommodative.”
Positioning: The equity market’s ferocious end-of-March rally, which placed the S&P 500 back above a key go/no-go level – the 200-period simple moving average – may have been in part the result of institutional investors purchasing equities ahead of quarterly reporting.
“Remember that stocks settle T+2, meaning that shares are actually owned by buyers two business days after they are purchased in the market,” says Interactive Brokers’ Group Inc (NASDAQ: IBKR) Steve Sosnick.
“That means that institutions who wanted to show stock positions on their quarterly reports would have needed to purchase those shares no later than Tuesday the 29th. The sharp end-of-day runups that we saw on Monday and Tuesday had the hallmarks of aggressive institutional buying.”
According to Deutsche Bank AG (NYSE: DB) analyses, “[a]ggregate equity positioning has now risen off the lows but only to the 22nd percentile and is still well below neutral.”
That said, quarter-end rebalances and options expirations (OPEX) likely do little to upset the balance of trade. Based on a lot of the insights shared in this letter, barring some exogenous event, the market is in a position to drift or balance.
This, as a result, may solicit a “stronger impulse to chase the rally,” at which point JPMorgan Chase & Co (NYSE: JPM) strategists say they would “generally be more concerned.”
A collapse (or convergence) in volatility metrics for different asset classes (like the Merrill Lynch Options Volatility Estimate [INDEX: MOVE] and Cboe Volatility Index [INDEX: VIX]) would bolster the “drift or balance” thesis.
Graphic: Via Physik Invest.
Technical: As of 5:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
In the best case, the S&P 500 trades higher; activity above the $4,527.00 untested point of control (VPOC) puts in play the $4,562.50 spike base. Initiative trade beyond the spike base could reach as high as the $4,583.00 VPOC and $4,611.75 low volume area (LVNode), or higher.
In the worst case, the S&P 500 trades lower; activity below the $4,527.00 VPOC puts in play the $4,501.25 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,469.00 VPOC and $4,438.25 HVNode, or lower.
Considerations: Spikes often 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 a spike up (down) situation, trade below (above) the spike base, negates the buying (selling).
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
The price strength in the SP500 lately has been impressive. But it is not even being confirmed (yet) by a higher high in the HY Bond A-D Line. That is less than impressive. pic.twitter.com/6X6DlXksol
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.
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.
Editor’s Note: The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!
Overnight, equity index futures auctioned lower in light of an escalation of geopolitical tensions between Russia, Ukraine, and the rest of the world.
Western powers imposed harsh sanctions including the exclusion of some Russian lenders from the SWIFT messaging system “that underpins trillions of dollars worth of transactions,” globally.
As the Russian ruble lost ⅓ of its value and costs of insuring Russian government debt rose, the Bank of Russia (BoR) doubled its key interest rate to 20% and imposed some capital controls to take from the risk of a potential run on banks. Policymakers also banned foreign security sales.
The odds of an aggressive lift-off in interest rates by the Federal Reserve declined, accordingly. The market is now pricing in under six hikes for 2022 as crisis opens room for policy mistakes.
Ahead is data on trade in goods (8:30 AM ET), Chicago PMI (9:45 AM ET), and Fed-speak by Atlanta Fed President Raphael Bostic (10:30 AM ET).
Graphic updated 6:30 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 the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive, then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.
What To Expect
Fundamental: As of February 27, 2022, there are reports that with its invasion of Ukraine, “Moscow was frustrated by the slow progress caused by an unexpectedly strong Ukrainian defense and failure to achieve complete air dominance.”
Graphic: Via Bloomberg, locations of Russian controls and attacks.
At present, Russia has only committed 50% of its available firepower to the war and solicited the involvement of neighboring allies. Still, even at 50%, it’s rough.
Russian markets, to put it simply, are in turmoil as a result of this conflict. Its policymakers, to stem the bleed, have banned foreigners from selling assets.
Graphic: Via Topdown Charts, Russian assets are imploding.
Accordingly, sentiment is as bad as it was in 2020, 2016, the period spanning 2008-2009, as well as the period just after the topping of the tech-and-telecom bubble.
Graphic: Via Topdown Charts, “sentiment basically as bad as the COVID crash.”
In light of the world’s response to this conflict, Russia, too, has heightened its nuclear readiness.
Russian state TV has reportedly said:
“Our submarines alone can launch more than 500 nuclear warheads, which guarantees the destruction of the US and NATO for good measure. The principle is: why do we need the world if Russia won’t be in it?”
Moreover, over the weekend, Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar, in gauging the implications of conflict and sanctions, explained that excluding Russia from SWIFT may lead to missed payments and overdrafts similar to that experienced during March of 2020.
“Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf,” he noted.
“The consequence of excluding banks from SWIFT is real, and so is the need for central banks to re-activate daily U.S. dollar funds supplying operations.”
In light of this, some have advanced a narrative around a potential run on Russian banks.
The Moscow bank run: a queue for a Tinkoff ATM in the Liga shopping center in Khimki. There are about 70 people in line. Eyewitnesses say the money in the ATM runs out within 40 minutes. @bazabazonpic.twitter.com/MTMkEiCRHJ
However, former BoR official Sergey Aleksashenko, in an alarmed yet less pessimistic take on CNBC, suggested a “low likelihood” of a run on the ruble.
Further, in light of the deceleration at home in the U.S., Pozsar concludes that “the Fed’s balance sheet might expand again before it contracts via QT (quantitative tightening).”
Graphic: Alfonso Peccatiello of The Macro Compass. He says “YTD: 2022 hikes priced in up from 3 to 6-7. Curves big-time flatter. Inflation expectations 10 bps lower. Real yields higher 40-50 bps. Credit spreads wider. Cyclical growth impulse fading away. Not a risk-on environment.”
Interactive Brokers Group Inc’s (NASDAQ: IBKR) Chief Strategist Steve Sosnick adds: “The tide of money is still positive, and it should provide a cushion for nervous markets as long as that remains the case. But when we consider that monetary conditions are supposed to be changing, volatility should persist if the monetary tide actually ebbs as expected.”
Perspectives: “Geopolitical catastrophes tend to be worse than believed in the short term but less than believed in the long term,” Ophir Gottlieb of Capital Market Laboratories notes.
Similarly, JPMorgan Chase & Co’s (NYSE: JPM) head of global equity strategy Mislav Matejka says that “If one is selling on the back of the latest geopolitical developments now, the risk is of getting whipsawed.”
“Historically, [the] vast majority of military conflicts, especially if localized, did not tend to hurt investor confidence for too long, and would end up as buying opportunities.”
Adding, in light of the liquidation into last Thursday’s open (after which there was a large reversal), the VIX futures term structure, though in backwardation, was not as steep as in past moments of true panic.
IBKR’s Sosnick explains that “Even though VIX futures [were higher on Thursday morning] across the board and the curve has further steepened, neither the spot level nor the curve are yet demonstrating panic.”
“I interpret the message of the market to be that we should continue to expect volatility – remember that volatility encompasses moves in both directions – but not to expect that a major bottom was put into place in recent sessions.”
With realized volatility is heightened and implied volatility not performing, so to speak, @darjohn25 explains, try to avoid “any short gamma on all short-dated tenors—you want to own the short term stuff for the foreseeable future.”
Technical: As of 6:30 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.
Gap Scenarios Potentially In Play: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.
Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.
In the best case, the S&P 500 trades higher; activity above the $4,285.50 high volume area (HVNode) puts in play the $4,345.75 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,371.00 VPOC and $4,395.25 HVNode, or higher.
In the worst case, the S&P 500 trades lower; activity below the $4,285.50 HVNode puts in play the $4,227.75 HVNode and overnight low (ONL) area. Initiative trade beyond the HVNode/ONL could reach as low as the $4,177.25 HVNode and $4,137.00 VPOC, or lower.
Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
What People Are Saying
As a young market maker in the Eurodollar Options pit, I remember going into my first shit show like this and my boss advising me.
Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.
Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.
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-Weighted Average Prices (VWAPs): 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.
About
After years of self-education, strategy development, mentorship, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.
Capelj is also a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, FTX’s Sam Bankman-Fried, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor developing insights around impactful options market dynamics.
Disclaimer
Physik Invest does not carry the right to provide advice.
In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.
Physik Invest 