Categories
Commentary

Daily Brief For May 11, 2021

Market Commentary

Index futures in balance.

  • Inflation fears stoking weakness.
  • Ahead is JOLTS data, Fed speak.
  • Index futures lower, tech weighs.
Graphic updated 7:55 AM EST.

What Happened: U.S. stock index futures auctioned lower, overnight, alongside fears of rising inflation. Most affected were heavily-weighted index constituents (e.g., Facebook, Netflix, Google, Microsoft, Amazon, Nvidia, and Tesla), or stocks that have the most to lose in an environment that favors cyclical and value assets.

Adding, despite the Federal Reserve’s commitment to limiting talk of taper and rate hikes, traders are positioning themselves for a change in tone. Activity in the 98.00 put strike options, in the Eurodollar, suggests traders are betting on a potential surprise at the Jackson Hole symposium.

Graphic: Eurodollar bet on SHIFT’s institutional platform. The purchase of 98.00 strike put options suggests traders are looking to add “two Fed hikes to [current] expectations.”

What To Expect: Tuesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will open far from prior-range and -value, suggesting a limited potential for immediate directional opportunity. Reason being — a state of shock, as a result of a severe overnight drop.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by initiative trade below the $4,216.00 low volume area (LVNode). The HVNodes at $4,199.25, $4,190.75, and $4,177.25 (a major pivot) all were in play, yesterday.

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

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

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,169.75 overnight pullback high targets the $4,177.25 HVNode pivot. Initiative trade beyond the pivot puts in play the $4,191.25, $4,199.25, $4,211.50, and $4,224.75 HVNodes. 

In the worst case, the S&P 500 trades lower; activity below the $4,177.25 pivot targets the $4,141.00 VPOC. Thereafter, if lower, participants may look for responses at the $4,137.25 and $4,122.75 HVNodes. Auctioning through $4,130.25 increases the odds of trade to the poor structure at $4,110.50.

POCs: POCs (like HVNodes described above) are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). The Dow is the strongest of the four. The Nasdaq is the weakest.
Graphic: SHIFT search suggests participants were very interested in put strikes at and below $4,200.00 in the cash-settled S&P 500 Index (INDEX: SPX), May 10.

News And Analysis

Economy | The Fed is playing with fire by clinging to emergency policies. (WSJ)

Economy | Homebuying sentiment negative despite economic improvement. (MND)

Markets | Pipeline shutdown could push prices at the pump above $3 a gallon. (CNBC)

Economy | Near-term activity data unlikely to affect Fed’s policy rate outlook. (BLK)

Economy | COVID one year on, global infrastructure proves its resilience. (Moody’s)

Recovery | New U.S. COVID infections fall to the lowest level in 11 months. (FT)

What People Are Saying

Innovation And Emerging Trends

Markets | What happens to stocks after the Fed stops raining money? (WSJ)

Housing | Americans moved during the pandemic. Where did they go? (WSJ)

Commodities | The role of critical minerals in the clean energy transition. (IEA)

Markets | More whacks around the head for investors after jobs data. (BBG)

About

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

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

Disclaimer

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

Categories
Commentary

Market Commentary For The Week Ahead: ‘Hello, Goodbye’

Key Takeaways:

What Happened: Coming into the extended holiday weekend, on tapering volumes, U.S. index futures balanced for four regular trading sessions (9:30 AM – 4:00 PM ET), before breaking out.

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

What To Expect: Thursday’s session found initiative buying surface above the $3,731.00 high-volume node (HVNode), the market’s most recent perception of value.

Given four-sessions worth of unchanged value, and the failure to fill the gap beneath a weak low (i.e., a visual level that attracts the business of short-term, technically-driven market participants) at $3,714.50, participants will come into Monday’s session knowing the following:

  1. Amid Thursday’s late-day buying, price diverged from value.
  2. The overnight rally high at $3,747.75 was recovered (i.e., based on historical trade, there were low odds that the overnight all-time high would end the upside discovery process).
  3. The multi-month upside breakout targeting S&P 500 prices as high as $4,000.00 remains intact.

In light of the above dynamics, the following frameworks apply for next week’s trade.

In the best case, the S&P 500 remains above its $3,731.00 HVNode. Expectations thereafter include continued balance, or a response followed by initiative buying to take out the price extension at $3,756.75.

In the worst case, the S&P 500 initiates below its $3,731.00 HVNode. Expectations thereafter include a test of the weak, minimal excess low at $3,714.50, and subsequent follow-through as low as the $3,691.00 break-point. 

Noting: Excess forms after an auction has traveled too far in a particular direction and portends a sustained reversal. Absence of excess, in the case of a low, suggests minimal conviction; participants will cover (i.e., back off the low) and weaken the market, before following through.

Two go, no-go levels exist; trade that finds increased involvement above $3,752.75 and below $3,714.50 would suggest a change in conviction. Anything in-between favors responsive trade.

Conclusion: From an uneven recovery, stimulus, elections, trade, and the like, it helps to boil it down to what actually matters: price and value. 

Though risks remain, markets are pricing in the odds of a continued rebound. All broad-market indices are in an uptrend. A break below $3,600.00 in the S&P 500 would denote a substantial change in tone.

Pictured: Retest of the upside breakpoint on a weekly candlestick chart of the cash S&P 500 Index

Levels Of Interest: $3,752.75 rally-high, $3,714.50 weak low, $3,731.00 HVNode, $3,756.75 price extension, $3,691.00 break-point.

Bonus: Here is a look at some of the opportunities unfolding.

Photo by Max Walter from Pexels.

Categories
Results

Case Study: Trading Tesla’s S&P 500 Inclusion

What Happened: On November 17, 2020, shares of Tesla Inc (NASDAQ: TSLA) surged on news that S&P Dow Jones Indices would include the stock in the S&P 500, the most liquid index in the world.

Since markets are most influenced by credit and positioning, news of the inclusion was impactful. Funds tied to the S&P 500 would purchase Tesla shares from a dealer by the addition date. This means that dealers would look to purchase shares of the stock heading into the event, to later supply funds at the close of Friday, December 18, the last session before the inclusion.

In the simplest of terms, the event was a positive since it meant that (1) speculative derivatives activity and associated hedging, (2) short-term traders, as well as (3) dealers and index funds would now support the stock.

The following sequence analysis unpacks how Physik Invest traded equity and derivatives tied to the carmaker’s stock leading up to the December 21, 2020 index inclusion.

Note: Click here to view all transactions.

Sequence 1: On news of the inclusion, market participants initiated shares of Tesla out of balance, beyond trend resistance. Thereafter, in accordance with a typical give and go scenario, the stock faded, filling 50% of the low-volume area left after the initial move higher, before aggressive buying resurfaced to continue the new trend.

Through November 19, the following positions were added for a $61.00 debit, in total. At this point if all legs were to remain out of the money (i.e., expire worthless) by November 20, the maximum loss would be $61.00, approximately 1/10 of a standard risk unit, or the capital risked in a typical position.

  • 500+1/530-2 call ratio spread
  • 490+2/505-3 call ratio spread
  • 525+1/550-2 call ratio spread
  • 510+1/525-2 call ratio spread
  • 445-1 put
  • 460-1 put

By November 20, all aforementioned positions were closed for an $827.00 credit, a 1,255.74% return on initial investment.

All the above call-side structures were initiated against the $500 high open interest strike. Reason being, 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.

On November 20, nearly 40% of Tesla’s gamma was to roll off. 

Pictured: November options gamma by Spot Gamma
Pictured: Speculative call-side options activity after the index inclusion announcement 

Moreover, since derivatives exposure was rolled into farther dated expiries, the stock would now be supported by dealers buying to hedge their derivatives exposure and facilitate the index inclusion.

Noting, at a simplistic level, prices often encounter resistance at prior highs due to the supply of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 15-minutes above this level) portends continuation.

Sequence 2: On November 20, the following structures expiring on December 4 were initiated for a $644.00 credit.

  • 450-1 put
  • 520+1/550-1 call ratio spread
  • 570+1/600-2 call ratio spread
  • 490-1/475+1 put ratio spread

Through November 24, the above structures were removed for a $876.00 credit.

Sequence 3: On November 24, the cost basis from November 19 ($61.00 debit) was reduced via an intraday long stock delta hedge that bought 10 shares at an average of $539.50.

The initial cost basis, after this particular trade, was brought down to a $0.20 debit.

Sequence 4: On November 25 the following positions were opened and closed the same day for a $179.30 credit.

  • Bought stock at $550.14 average
  • 480+1/500-2 call ratio spread

Sequence 5: On November 27, the following positions were initiated and closed by December 3 for a $117.10 debit.

  • Bought stock at $595.55 average
  • 475+1/437.5-2 put ratio spread

Sequence 6: On December 1 through December 3, the following positions were initiated, and then exited from by December 7 for a $1.77 debit.

  • Bought stock at $589.20 average
  • Bought stock at $563.77 average
  • 740+1/780C-2 call ratio spread

Sequence 7: Through December 17, the following positions were initiated and closed for a total $452.30 credit.

  • 720+1/820-2 call ratio spread
  • 740+1/830-2 call ratio spread
  • Bought stock at $632.17 average
  • 720+1/820-2 call ratio spread
  • Bought stock at $606.88 average
  • 800+1/860-2 call ratio spread
  • 500+1/480-2 put ratio spread

Sequence 8: From December 17 through December 23 the following positions were entered and exited from for a $322.00 credit.

  • 500+2/450-4 put ratio spread
  • 800+2/850-4 call ratio spread
  • 670+1/685-2 call ratio spread

Summary: In total, the above sequence of trades net a $3,098.29 credit after commissions and fees.

The strategies employed were in accordance with Physik Invest’s methodology: the trade of ratioed, multi-leg strategies that combine short and long positions to reduce risk and increase returns. 

Yes, in hindsight, one could have opted for something as simple as risk-reversals (e.g., buying calls and selling puts). However, the risks tied to such strategies are immense. By leveraging the dynamics of time and volatility, through complex spreads, risk was reduced.

Note: There were many times, during these sequences, that positions were structured in a way that would net no loss had the security moved sideways or lower into expiry.

Adding, per Fibonacci principles, one core aspect of Physik Invest’s market structure analysis, an upside target of $675.10 was established early on in the process. Tesla spent the majority of its December 18 session at this level.

Disclaimer: There is a $0.11 discrepancy between the transaction sheet and numbers provided in this case study. This is attributable to differences in rounding.

Categories
Commentary

‘Rising Tide Lifts All Boats’: Market Commentary For The Week Ahead

Key Takeaways:

What Happened: U.S. index futures auctioned to new all-time highs before weakening into Friday’s derivative expiry.

What Does It Mean: After participants established a rally-high in the December 9 overnight session, the S&P 500 liquidated down to the balance-area boundary near $3,625.00.

After the December 14 gap open on COVID-19 coronavirus vaccine and stimulus progress, for the remainder of the week, indices negated prior selling, establishing a new all-time high. Friday’s trade managed to repair some structural deficiencies left in the aforementioned advance.

Pictured: Profile overlays on a 65-minute candlestick chart of the Micro E-mini S&P 500 Futures

What To Expect: Friday’s session found responsive buyers surface at the low-volume node (LVNode) near $3,680.00. Low-volume areas denote directional conviction and ought to resist future auction rotations. Auctioning through the LVNode would foreshadow further rotation and trade as low as the balance-area low.

Given that the higher-time frame breakout remains intact and selling appears non-committal, participants will come into Monday’s session knowing the following:

  1. Both sentiment and positioning are historically stretched, while the recovery remains uneven
  2. Inflation remains cool due to the profound influence of disruptive innovation.
  3. U.S. Congress reaches deal on COVID-19 aid package, plans votes for Monday. 
  4. The decline in realized correlation due to factor and sector rotation, as well as the return of systematic option selling strategies will push the long-gamma narrative in which volatility is suppressed and the market pins or slowly rises in a range-bound fashion.
  5. The S&P 500’s higher-time frame breakout remains intact (see chart below); JPMorgan Chase & Co. (NYSE: JPM) confirms equities will rally short-term with the S&P 500 auctioning as high as $4,000.
  6. Despite high CAPE ratios, stock-market valuations aren’t that absurd.

Therefore, the following frameworks for next week’s trade apply.

In the best case, buyers maintain conviction and hold the index above the $3,680.00 LVNode. Auctioning below said reference denotes a change in conviction. Participants would then look for a response near the $3,667.75 HVNode. Failure to remain above the HVNode would portend rotation, further balancing. 

In the worst case, participants initiate below the $3,625.00 balance-area low, jeopardizing the higher-time frame breakout.

Conclusion: As BlackRock Inc (NYSE: BLK) said, “a rising tide lifts all boats”; though financial markets have largely priced in positive news surrounding vaccines and stimulus, the rally remains intact, bolstered by a drive for yield — technical factors as a result of systemic and hedge fund strategies, among other things.

Pictured: Retest of the upside breakpoint on a daily candlestick chart of the cash S&P 500 Index

Levels Of Interest: $3,740.75 and $3773.75 price extensions, $3,724.25 all-time rally high, the micro-composite HVNode at $3,707.75, $3,691.00, and $3,667.75, as well as the $3,680 LVNode and poor structure near the $3,625.00 balance-area low.

Bonus: Here is a look at some of the opportunities unfolding.

Photo by Fede Roveda from Pexels.

Categories
Commentary

Market Commentary For 12/17/2020

What Happened: After yesterday’s Federal Reserve policy decision, U.S. index futures auctioned higher overnight alongside hopes of added U.S. fiscal and monetary stimulus, as well as vaccine rollouts.

What Does It Mean: During Wednesday’s regular trade, the S&P 500 initiated up to the $3,691.25 high-volume node, a valuable price, before sellers responded, established excess, and extended lower into the close.

Given the response to yesterday’s Federal Reserve decision, as well as overnight activity, the S&P 500 remains in a tactically bullish position, confirming the higher-time frame upside breakout which targets prices as high as $4,000.

What To Expect: In light of the overnight gap higher, the following frameworks apply for today’s trade.

In the best case, buyers maintain conviction and hold the index above the $3,691.25 high-volume node. Thereafter, upside references include the high-volume node near $3,710.00, and then the $3,720.00 price extension.

In the worst case, if the S&P 500 is brought back into range, participants can expect further balancing. The current market environment supports the long-gamma narrative in which volatility is suppressed and the market pins or slowly rises in a range-bound fashion.

Adding, the market has initiated back through $3,680.00, a low-volume area. Such low-volume areas denote directional conviction and ought to offer support on any test. Penetrating the low-volume area would put in play the $3,667.75 high-volume node.

Levels Of Interest:  $3,680.00 low-volume node, the $3,710.00 and $3,667.75 high-volume nodes, as well as the $3,720.00 price extension.

Bonus: Opportunities unfolding.

Categories
Commentary

Market Commentary For 12/14/2020

What Happened: Alongside optimism surrounding the COVID-19 coronavirus vaccine and stimulus talks, U.S. index futures auctioned higher overnight.

What Does It Mean: During last week’s trade, U.S. index futures auctioned to new all-time highs, before moving back into balance.

For the remainder of the week, participants accepted lower prices until Friday’s session established minimal excess lows, broke into prior poor structure, and ended the technical downtrend. 

Since Friday’s session found responsive buying surface at a key technical level (i.e., the high-volume node near $3,630.00 and 20-day simple moving average), buyers extended range through the $3,667.75 high-volume node, the most positive outcome.

What To Expect: In light of the overnight gap higher, the following frameworks apply for today’s trade.

In the best case, the auction makes an attempt to repair some of the poor overnight structure. Thereafter, buyers regain conviction and initiate back through the $3,667.75 high-volume node before continuing to at least the next high-volume node at $3,690.75, and then the prior all-time rally high.

In the worst case, if the S&P 500 auctions below $3,667.75, participants would look to whether the S&P 500 resists Friday’s range. Accepting Friday’s range (i.e., spending more than one half-hour period) may put in play the minimal excess lows near $3,625.00.

Levels Of Interest:  $3,667.75 high-volume node is the go/no-go level.

Bonus: Opportunities unfolding.

Categories
Commentary

‘To Infinity And Beyond’: Market Commentary For The Week Ahead

Key Takeaways:

What Happened: During last week’s trade, U.S. index futures auctioned to new all-time highs, before moving back into balance.

What Does It Mean: After participants established an all-time rally high during Wednesday’s overnight session, the S&P 500 liquidated in regular trading, down to the micro-composite high-volume node near $3,667.75, a price level where participants spent a large amount of time in the past. The session ended in prior balance and range with poor profile structure denoting the presence of directional conviction.

For the remainder of the week, participants accepted lower prices until Friday’s session established minimal excess lows, broke into prior poor structure, and ended the technical downtrend. 

Given the mechanical trade (i.e., minimal excess at Friday’s lows) and poor structure (e.g., low-volume areas), it’s very likely that the selling range extension was the result of weak-handed, short-term momentum buyers liquidating positions in panic.

Pictured: Profile overlays on a 65-minute candlestick chart of the Micro E-mini S&P 500 Futures

What To Expect: Friday’s session found responsive buyers surface at a key technical level (i.e., the high-volume node near $3,630.00 and 20-day simple moving average). The fact that there was a response at a technical reference confirms that participation in the market is overwhelmingly short-term; in other words, institutions (e.g, funds) tend not to transact at exact technical levels. 

Given that the higher-time frame breakout remains intact, participants will come into Monday’s session knowing the following:

  1. Both sentiment and positioning are historically stretched while the market has entered a short-gamma environment; in such cases, dealers hedge their derivatives exposure by buying into strength and selling into weakness. This, alongside the presence of short-term traders in U.S. equities, will exacerbate volatility in the coming week.
  2. Looking to 2021, the decline in realized correlation due to factor and sector rotation, as well as the return of systematic option selling strategies should push the long-gamma narrative in which volatility is suppressed and the market pins or slowly rises in a range-bound fashion.
  3. JPMorgan Chase & Co. (NYSE: JPM) strategist Marko Kolanovic suggests equities will 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.
  4. Despite high CAPE ratios, stock-market valuations aren’t that absurd.
  5. Prior trade points to the non-presence of committed selling; after Friday’s session saw a failure to range extend and establish excess, the technical down-trend was broken.

Therefore, the following frameworks for next week’s trade apply.

In the best case, buyers surface at the $3,654.75 low-volume node and extend range up to the high-volume node at $3,667.75. High-volume areas denote value and should slow prices allowing participants enough time to enter and exit trades. An initiative drive through this area would portend a test of the $3,690.75 high-volume node, and then the prior all-time rally high.

In the worst case, if the S&P 500 auctions below $3,630.00, participants would look to repair the poor structure just shy of $3,625.00. Finding acceptance (i.e., spending more than one half-hour of regular trade) below Friday’s range would be the most negative outcome.

Conclusion: Though sentiment and positioning imply limited potential for further upside, the S&P 500’s higher-time frame breakout remains intact.

Pictured: Retest of the upside breakpoint on a daily candlestick chart of the cash S&P 500 Index

Levels Of Interest: $3,720.00 extension, $3,715.00 all-time rally high, the micro-composite HVNode at $3,690.75, $3,667.75, and $3,630.00, as well as the $3,654.75 LVNode and poor structure near $3,625.00.

Bonus: Here is a look at some of the opportunities unfolding.

Spotify Technology SA (NYSE: SPOT) – Acceptance after higher-time frame balance-breakout. Potential remains for a push to the balance-area projection.

Apple Inc (NASDAQ: AAPL) – Acceptance after higher-time frame balance-breakout. Potential scenarios include (1) continued rotation, (2) upside continuation, or (3) failed breakout and a return to balance.

Advanced Micro Devices Inc (NASDAQ: AMD) – Acceptance after higher-time frame balance-breakout. Potential for upside continuation or failed breakout and return to balance.

Shopify Inc (NYSE: SHOP) – Balance just shy of channel boundary. Potential for upside breakout and continuation.

Chipotle Mexican Grill Inc (NYSE: CMG) – Just shy of balance-area high. Potential for upside breakout and continuation.

Tesla Inc (NASDAQ: TSLA) – Rejected prior week’s balance-area. Likelihood of continuation up to S&P 500 index inclusion intact on surging call volumes, dealer accumulation. $700 strike is the high-OI strike of interest.

Zoom Video Communications Inc (NASDAQ: ZM) – Just shy of long-term trend, anchored VWAP. Potential for responsive buying.

Summit Materials Inc (NYSE: SUM) – Failed breakout, but speculative call volumes surfaced on the return into balance. Potential exists for another attempt higher.

Nasdaq-100 (INDEXNASDAQ: NDX) – Retest of balance-area high. Higher time-frame breakout remains intact.

Cover photo by SpaceX from Pexels.