Categories
Commentary

Daily Brief For September 30, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 980+ that read this report daily, below!

Graphic updated 9:50 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. 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.

Administrative

Apologies for the delay. Hectic end-of-week! A little heavy on the fundamental side of things and light on the positioning. More to unpack next week. Have a great weekend!

Fundamental

As an update to our September 29, 2022 letter, Russia responded to the Nord Stream attack suggesting the incident spoke of state-sponsored “terrorism”, all the while “an EU official said the incident had fundamentally changed the nature of the conflict in Ukraine,” per Refinitiv.

Graphic: Retrieved from Bloomberg. Updated September 28, 2022.

In short, Russia’s throwing blame on the US, among others, suggesting it was likely to benefit through a boost in liquefied natural gas (LNG) sales. Russia previously said the leaks were in areas “fully under the control” of US intelligence agencies.

It’s the case that in February 2022, Joe Biden commented that if Russia invaded Ukraine, there would “no longer be a Nord Stream 2,” also.

In response, Nord Stream 1 leaks will be stopped on Monday with no forecasts yet on the future of the pipeline’s operation.

To note, the pipelines were not “supplying gas to Europe when the leaks were first detected, … [but] both had gas in them.” Regardless, the EU will be assessing the application of sanctions.

Moving on, as a recap, this week there was tons of volatility in overseas fixed income and FX markets. In short, the announcement of new fiscal policies coincided with market volatility that prompted reflexive feedback responses, which we dissected in our September 29, 2022 letter.

A cascade of margin calls, during the route to 7-8% yields, would have put in jeopardy 90% of UK pension funds. 

To explain, per Reuters, there are schemes “that pay pensioners a fixed annual amount, often a portion of the final salary they earned as employees.” The schemes invest about 50% of assets in bonds, in order to have cash on hand and pay pension liabilities.

To reduce the effects of market volatility, positions are hedged through derivatives “managed by so-called liability-driven investment (LDI) funds,” Reuters well explained. “For example, pension schemes might pay the floating rate leg of an interest rate swap and receive fixed rates.”

Due to the leverage, market moves have an amplified effect on the funds. Therefore, if bonds fall too much, too fast, more cash must be sent to these LDIs. 

“[P]ositions become loss-making – they are paying out more money in the transaction than they are receiving.”

In some cases, schemes were to have “cash reserves to cope with a 200 bps rise in swap rates over a year. However, 30-year gilt interest rate swaps … rose 360 bps this year and 120 bps in the last few days before the BoE stepped in” and bought bonds, boosting inflation expectations, the thing that monetary tightening was, in part, intended to reduce.

Graphic: Retrieved from Fabian Wintersberger.

Accordingly, pensions sold gilts to “ready cash to meet those collateral calls, or they were kicked out of their derivatives positions because they could not pay up in time and had to sell gilts to avoid having a naked exposure to further sharp moves.”

The BoE’s actions calm the market allowing for the more orderly processing of transactions. 

Still, the UK is seen “out-hiking the Fed in the wake of Kwarteng tax cuts,” while “schemes are running out of cash.”

Graphic: Retrieved via Bloomberg.

The risks don’t just stop there, though, we added. 

For one, there’s damage to be had if FX hedges go awry, which we said would likely prompt a call for collateral, too; investors will “buy overseas assets and hedge away the currency risk,” Jim Leaviss explained. “[I]f you had bought a dollar bond and hedged it, the dollars that you have effectively sold ‘short’ against sterling as the hedge have rallied, and the counterparty to the FX hedge will call for a collateral payment.”

The actions of the recent days likely put investors in a position of less liquid assets to meet the (potential) collateral calls, and this is part of the aforementioned technical factors that are likely to have a bearing on the direction of bonds and yields “over coming months.”

Additionally, some participants speculate the US may run into similar issues as the UK. A single (unconfirmed) participant explained pensions may be “selling equities and other asset classes to meet their swap obligations.”

Graphic: Retrieved via Bloomberg.

Separately, another topic of discussion was the People’s Bank of China (PBOC) telling state-run banks to prepare for the shedding of dollar holdings to buy and assist in propping up the yuan.

Graphic: Retrieved from Reuters’ John Kemp.

This is all the while the Federal Reserve (Fed), to address problems of its own (e.g., real estate affordability) is implementing aggressive monetary tightening (prompting a rise in the dollar and triggering a “reverse currency war”). 

Graphic: Retrieved from Bloomberg. “So if you want to spend $2,500 a month, you can now buy a house that costs $476,425. For that same monthly payment, you could have purchased a $758,572 house in early 2021.”

As an aside, US mortgage rates hit a 15-year high and home prices are falling.

Graphic: Retrieved via Bloomberg. To note, housing wealth regressions indicate “that every dollar of changes in housing wealth leads to a 38-cent change in consumption.”

China is looking to do less of the same and “spark growth in an economy that’s been dragged down by COVID-19 lockdowns, a real estate crash, and supply chain snags,” which have hurt some US firms including Apple Inc (NASDAQ: AAPL).

Graphic: Retrieved from Bloomberg. Apple’s manufacturing exposure to China.

That’s the mismatch (i.e., China easy, US uneasy) that’s going on and, per some, the Fed may be acting on a set of lagging indicators; monetary policy action may do more harm than good.

Graphic: Retrieved from Bloomberg. Via Liz Ann Sonders. “Unbelievable decline in shipping rates … cost to send a 40-ft container from Shanghai to Los Angeles has fallen by 74% from peak and is back to August 2020 levels.”

But, for now, a robust labor market and continued spending by American consumers have some feeling there’s far more room to go before US monetary policy does more harm than good.

Graphic: Retrieved from Bloomberg. An end of an era is approaching, however, as companies that grew largely over the past years, including Meta Platforms Inc (NASDAQ: META), seek to reduce headcount and reorganize.

Positioning

All that was said yesterday, and earlier this week, remains valid. In short, the decline prompted traders to demand downside protection, and this wound measures of implied volatility (IVOL).

Graphic: Retrieved from Interactive Brokers Group Inc (NASDAQ: IBKR). Read, here, to understand backwardation and contango in futures markets.

For IVOL measures to remain wound, something bad needs to happen, in short. Otherwise, as seen yesterday, slightly, the S&P 500 drifted lower while certain IVOL measures, such as the Cboe Volatility Index (INDEX: VIX) printed a lower high than that observed on Wednesday.

Per SpotGamma, “If the decline in IVOL is very pronounced, relative to the decline in the S&P, that too can aid in a push-and-pull that actually serves to … resist far-reaching weakness.”

Graphic: Retrieved from SpotGamma. SPX prices X-axis. Option delta Y-axis. When the factors of implied volatility (Vanna) and time change (Charm), hedging ratios change. The graphic is for illustrational purposes, only.

From hereon, the decay and/or removal of the protection that’s been demanded in the past days and weeks may place a like on IVOL and boost markets over a very short term. In the long term, however, weakness is here to stay, says Kai Volatility’s Cem Karsan. 

That’s amid impacts of quantitative tightening (QT) which is manifesting itself as “$4.5 billion less in demand for assets per day,” as well as the blackout period for buybacks (which were consistently “supporting the market”) and options repositioning bolstering the weakness.

Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.

A lot more on this positioning, and the rollover of some large fund exposures, which have grasped the attention of many online, in some coming letters.

Technical

As of 9:50 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher.

Any activity above the $3,638.25 LVNode puts into play the $3,688.75 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,722.50 LVNode and $3,771.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,638.25 LVNode puts into play the $3,610.75 HVNode. Initiative trade beyond the latter could reach as low as the $3,554.75 and $3,506.25 HVNode, 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.

Definitions

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.

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.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

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 September 27, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 950+ that read this report daily, below!

Graphic updated 6:45 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. 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.

Fundamental

Top of mind, yesterday, was the drop in Britain’s currency (GBP) and a surge in bond yields on the back of new fiscal plans and pledged tax cuts, alongside a more easy pace of interest rate hikes by the Bank of England (BoE). See the Daily Brief for September 26, 2022, for context.

Graphic: Retrieved from Bloomberg.

Knowing that the fiscal stimulus and an easy-moving BoE would add to inflation that is already high and sticky, traders began pricing emergency rate hikes, all the while conversation around the impacts of the UK’s rising rates on mortgage lending and the “dollar doom loop” surfaced.

In response, the BoE’s Governor Andrew Bailey said they were “monitoring developments in financial markets,” and at the “next scheduled meeting of the impact on demand and inflation from the Government’s announcement, and the fall in sterling, … [t]he MPC [won’t] hesitate to change interest rates by as much as needed to return inflation to the 2% target.”

Per Citigroup Inc (NYSE: C), however, “[m]onetary policy will struggle to save FX when fiscal policy is the culprit.”

Lawrence Henry Summers, a former US Secretary of the Treasury, also commented that he “would not be amazed if British short rates more than triple in the next two years and reach levels above 7 percent.”

That’s “because US rates are now projected to approach 5 percent and Britain, [which] has much more serious inflation, is pursuing more aggressive fiscal expansion and has larger financing challenges.”

Graphic: Retrieved from Bloomberg.

On the topic of rising yields and lenders’ disinterest to issue mortgages, among other things, it is the case that bond buying, via tools such as quantitative easing (QE), left room for confidence to eventually run out and the bond market to revolt.

Read our monetary policy explainers published on September 19 and 20.

Per statements authored by Bloomberg’s John Authers, the “UK appears to be the first case of a true disorderly bond selloff, where the moves are so swift that they affect the functioning of the financial system. It’s been triggered by a combination of inflation and rash fiscal policy.”

Accordingly, the actions by policymakers abroad serve to reinforce the earlier discussed “dollar doom loop”; the rising USD, though reducing the impact of inflation in the US, ultimately hurts most dollar-denominated debt servicing (see Latin America in the 1980s).

Graphic: Retrieved from Bloomberg.

Positioning

Seasonally speaking, the week after September options expiry (OPEX) is one of the worst on record. The weakness often persists into October.

To quote Kai Volatility’s Cem Karsan:

So, “less support from Vanna and Charm, less support through QT, and less buyback,” presents a “fragile moment” with the next week representing the most “dangerous period” on record.

Graphic: Retrieved from SpotGamma. “SPX prices X-axis. Option delta Y-axis. When the factors of implied volatility (Vanna) and time change (Charm), hedging ratios change. The graphic is for illustrational purposes, only.”

For context, it is the impacts of quantitative tightening (QT) which is manifesting itself as “$4.5 billion less in demand for assets per day,” as well as the blackout period for buybacks (which were consistently “supporting the market”) and options repositioning bolstering the weakness.

Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.

Separately, a hot topic concerns the money that is piling into money funds where “the vast bulk now earns upwards of 2%, with pockets paying 3%, 4% or more.”

Graphic: Retrieved from Bloomberg. “Money funds, banks, and others are so flush with cash these days that they’re shoveling record amounts into the Fed’s overnight reverse repurchase agreement facility, a short-term instrument that, following the central bank’s 75 basis point hike last week, now pays a rate of 3.05%.”

The theory is as follows: if “cash is yielding 4%, why not just sit in cash while the macro environment clarifies a little bit?”

With traditional 60/40 upended, and the gap “between what banks are paying on deposits and what money-market funds are offering” widening, “money funds are likely to attract more inflows going forward as a result, pushing [the] usage of the RRP facility even higher.” 

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).

This is all, however, money that is waiting to be deployed, “should market sentiment improve, or asset prices tumble to levels too attractive to pass up.”

Should you, too, desire to pursue guaranteed rates of return, last week Box Spreads were put forth as a solution. These trades “allow market participants to create a loan structure similar to a Treasury bill.” Upon maturity, the Box Spread earns a competitive interest rate.

Price some trades at boxtrades.com.

Graphic: Retrieved from boxtrades.com.

Technical

As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a 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.

Any activity above the $3,688.75 HVNode puts into play the $3,722.50 LVNode. Initiative trade beyond the LVNode could reach as high as the $3,771.25 and $3,826.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,688.75 HVNode puts into play the $3,638.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,610.75 and $3,554.75 HVNode, 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.

Definitions

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.

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

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

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.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

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 September 26, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 950+ that read this report daily, below!

Graphic updated 8:30 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. 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.

Fundamental

Overnight news was focused on the drop in Britain’s currency and a surge in bond yields. Per Bloomberg, the UK government’s talk about new fiscal plans and pledged tax cuts, alongside moderate interest rate hikes by the Bank of England (BoE), is the source of the weakness.

That’s because fiscal stimulus, which is part of a strategy to stoke “all-out” growth now, would add to the inflation already high and sticky from supply chokepoints and an easy-moving BoE.

Graphic: Retrieved from Reuters’ John Kemp. This action increases the UK’s competitiveness. It also increases the cost of important items in the UK, like gas for your car and electricity.

“An emergency rate hike would be a damning indictment of the government’s strategy, but it will become increasingly likely if markets fail to stabilize,” said Bloomberg economist Dan Hanson. 

Adding, traders are pricing increased odds of rate increases (~1.75%) by the BoE’s next policy meeting in November. Looking back, in the wake of previous tax giveaways, interest rates rose by a lot to stem the inflationary shock.

Graphic: Retrieved from Bloomberg. “A combination of sharply rising bond yields and a sharply falling currency is very unusual outside emerging markets, and implies doubts over the government’s ability to service its debt.”

The weekend news, has us looking back to our letters on a “self-reinforcing ‘dollar doom loop,’” as Jon Turek of JST Advisors once put forth. It’s the case that the dominant currency for carry, due to easy monetary policies, was the dollar.

However, “the stronger the dollar gets in comparison, the less tenable it becomes as a global reserve,” and this puts pressure on the longer-term trajectory of the currency. 

Knowing that US market liquidity, as well as the dollar’s strong role as a reserve, put the S&P 500 at the center of global carry regimes, an unwinding of carry may compound a market fall affecting nearly all risk assets.

Graphic: Retrieved from Ian Harnett of Absolute Strategy Research. Via The Market Ear.

Accordingly, as put forth in Mr. Blonde’s letter, “[e]ven if you are optimistic about growth and the ability of [the] global economy to digest significant financial conditions tightening, you no longer need to be 100% invested in risky, less liquid, assets when you get a competitive return from risk-free cash.”

Graphic: Retrieved from Mr. Blonde.

Positioning

Following the September options expiration (OPEX), markets tend to have their worst week.

From thereon, the weak seasonality tends to persist for about a month, into mid-October. Given this, Kai Volatility’s Cem Karsan explained, “you need to keep selling the rallies, … [as the] war between the structural negative effects, macro flows, and positioning,” is likely to continue.

Graphic: Retrieved from Mr. Blonde.

Dollar strength should feed into margin compression just now “filtering through” and impacting “international dollar-denominated debt.”

That compounds the impact of quantitative tightening (QT) which is manifesting itself as “$4.5 billion less in demand for assets per day,” as well as the blackout period for buybacks (which were consistently “supporting the market”) and options repositioning.

Read our monetary policy explainers published on September 19 and 20.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.

At the beginning of the 5-week expiration cycle, Karsan explained, Vanna and Charm flows are reduced; there is “significantly less buyback” of counterparty short stock and futures hedges to “the decay of options which sit at the October monthly expiration.”

So, “less support from Vanna and Charm, less support through QT, and less buyback,” presents a “fragile moment” with the next week representing the most “dangerous period” on record.

Graphic: Retrieved from SpotGamma. “SPX prices X-axis. Option Delta Y-axis. When the factors of implied volatility and time change, hedging ratios change. For instance, if SPX is at $4,700.00 and IV jumps 15% (all else equal), the dealer may sell an additional 0.2 Deltas to hedge their exposure to the addition of a positive 0.2 Delta. The graphic is for illustrational purposes, only.”

Ultimately, “December’s quarterly [OPEX] is now coming into the picture, … [where] volatility is generally highly demanded. When you get a lot of volatility supply in that area, you begin to see people who are short getting back the volatility they were short.”

In other words, equities down, implied volatility down is likely to persist for a little while longer as the risks for a “tail” build; “there’s a window that is opening for long volatility to perform probably starting in about a month or two,” through to “January and March.”

Technical

As of 8:30 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively-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.

Any activity above the $3,688.75 HVNode puts into play the $3,722.50 LVNode. Initiative trade beyond the LVNode could reach as high as the $3,771.25 and $3,826.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,688.75 HVNode puts into play the $3,638.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,610.75 and $3,554.75 HVNode, 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.

Definitions

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.

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.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

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 September 12, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 900+ that read this report daily, below!

Graphic updated 7:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. 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.

Administrative

Hey team, before we get started, let’s address the mismatch some observed last week with this letter’s levels and S&P quotes, versus what they saw at home. 

It is basically the case that our charting platform rolled over to the December S&P 500 Index futures contract on September 9, 2022. This was about 1-week ahead of the expiry of the old contract on September 16, 2022.

Going forward, unless otherwise noted, 6-days prior to the expiration of a quoted contract, the levels and prices in this letter may reflect that of the new, father-dated contract.

As an aside, based on CME Group Inc’s (NASDAQ: CME) Equity Quarterly Roll Analyzer Tool, the pace of the E-mini S&P 500 (FUTURE: /ES) roll is far off of what it has historically been at this stage of the roll period. 

This roll, too, caught your letter’s writer by surprise. Sorry!

Graphic: Retrieved from CME Group Inc (NASDAQ: CME).

Moving on, coverage this week may be sporadic due to some uncertain travel commitments. It is seeming very likely that there may not be a letter published on September 13 and 14, 2022.

Fundamental

Let’s get into it.

At its core, there’s a lot of stuff happening on the monetary and fiscal front. Guiding some of this action, on those fronts, are (geo)political happenings, the rising tide of populism, and beyond.

On the political fronts, Ukrainians “broke through weakened Russian lines, seizing the strategic railway hub of Kupiansk and the key staging area of Izyum,” Noah Smith explained in his letter.

Recent happenings illustrate “some important principles about the broader conflict unfolding across our world between liberalism and illiberalism,” as well as what a “successful defense of Ukraine” would do to hurt “the dawn of a new age of imperial expansionism,” something we’ve talked a lot about in past letters, alongside the growing deglobalization pulse.

The go-to on the implications of these conflicts, as well as the “burgeoning monetary order,” dubbed Bretton Woods III, has been Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar who thinks the dollar “is entering a new and rockier phase” and what “matters more than access to dollars is access to commodities and actual things.”

From hereon, Pozsar thinks “commodity prices can go much higher, … and a dollar can get devalued in terms of commodities.”

In the face of geopolitical and supply chokepoints (further bolstered by such things as railroad strikes), as well as the fragmentation of “the physical world,” it’s no “longer appropriate to think about the world as a unified whole,” Pozsar explains.

Potentially at hand is a “self-reinforcing ‘dollar doom loop,’” Jon Turek of JST Advisors adds in the earlier quoted article. That’s big since, as we once explained, the dollar is the dominant currency for carry due to the easy monetary policies that removed the risk of a strong dollar. 

“Non-US entities make dollar-based loans and transactions … because it’s considered more trustworthy than native fiat,” Bankless explained. “When there’s a disruption in global cash flows, there’s effectively a short squeeze on the dollar.” 

Therefore, while efforts to stem inflation bolstered by supply chokepoints continue, “the stronger the dollar gets in comparison, the less tenable it becomes as a global reserve.”

That is pressure on the long-term trajectory of the dollar.

Ultimately, through the earlier mentioned developments, “breaking the dollar’s dominance could arguably help some countries avoid a tightening of financial conditions,” Bloomberg explains.

Accordingly, with “the dollar’s peak [] already in the rearview mirror,” concerns are amped in regard to how this impacts U.S. markets. It’s the case that U.S. market liquidity, as well as the dollar’s strong role as a reserve, put the S&P 500 at the center of the global carry regime. 

Thus, an unwinding of carry may compound a market drop affecting nearly all risk assets, even housing, and prompting recession, something we shall unpack further in coming letters.

Graphic: Retrieved from The Market Ear. Via Morgan Stanley (NYSE: MS). “MS Research thinks the lows for this bear market will likely arrive in the fourth quarter with 3,400 the minimum downside and 3,000 the low if a recession arrives.”

To round out this section, a bull case is likely characterized by less outsized interest rate hikes here, in the US, with quantitative tightening (QT) ramping “to its maximal caps” with no increase in “vol or yields,” said JPMorgan Chase & Co (NYSE: JPM) market intelligence.

Graphic: Retrieved from Bloomberg.

However, if inflation remains hot – 8% and 9% – and supply disruptions remain sticky, the Fed may continue on its path of higher for longer. That means an “outsized rate hike cadence in Nov/Dec, bringing Fed Funds above 4.0% … and QT put[ting] upward pressure on yields.”

Graphic: Retrieved from Callum Thomas. Via Bank of America Corporation (NYSE: BAC). Market bottoms often appear when the Federal Reserve (Fed) begins cutting interest rates.

Positioning

Demand for protection and re-entry into shorts was the context for selling that culminated in an S&P 500 (INDEX: SPX) low at $3,900.00 last week. 

It’s at this level, “where the demand for put options was concentrated,” analysis providers like SpotGamma saw “support” and, “absent an exogenous catalyst,” S&P 500 stability.

From thereon, into the end of the week, SpotGamma adds that “positive delta hedging flows” bolstered a “market move away from the $3,900.00 support.” Tools like SpotGamma’s HIRO showed volatility selling and this validated a SpotGamma call for “follow-on bullishness.”

Graphic: Retrieved from SpotGamma. Updated September 7, 2022.

Nonetheless, in light of the above fundamental and positioning contexts, after derivatives expiries this month, the stage is likely set for larger two-way ranges.

Technical

As of 7:20 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a balanced overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

In the best case, the S&P 500 trades higher.

Any activity above the $4,107.00 POC puts into play the $4,136.75 MCPOC. Initiative trade beyond the MCPOC could reach as high as the $4,189.25 LVNode and $4,231.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $4,107.00 POC puts into play the $4,071.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,018.75 HVNode and $3,991.00 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.

Definitions

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.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. 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.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For July 29, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 600+ that read this report daily, below!

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. 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.
Updates: Hey, team! I’m offering some updates on the letter and gauging your thoughts, if any.

Been incredibly busy juggling what is, basically, 3 jobs. Here’s a bit about me, if interested. That said, my attention has been elsewhere, to put it simply, so the letters have taken a bit of a hit. Sorry!

The few options I’ve been faced with include (1) lowering the frequency of letters to improve quality and/or (2) continuing pace but increasing simplicity for some time.

I’m aware that many rely on the key levels I provide, daily, as well as some of the narratives and trade ideas often included in the positioning section. Therefore, I’m soliciting feedback and will follow through with the consensus, if any. Have a great weekend!

Fundamental

The Fed’s preferred inflation measure – the personal consumption expenditure deflator (PCE) – is set to update. Per Bloomberg, this measure grew an annualized 7.1% for the second quarter. 

This is on the heels of the Federal Reserve’s (Fed) interest rate hike aimed at reining inflation, as well as data that suggests the “drumbeat of recession” growing louder.

Graphic: Retrieved from Bloomberg. “GDP fell at a 0.9% annualized rate after a 1.6% decline in the first three months of the year []. Personal consumption, the biggest part of the economy, rose at a 1% pace, a deceleration from the prior period.”

Yelena Shulyatyeva and Eliza Winger, economists cited by Bloomberg, comment that the fall in GDP growth “raises the risk that the economy will fall into recession by year-end.”

However, based on the research and expert commentary set forth in past letters, the case is the economy may already be in recession.

Notwithstanding, what’s the impact on equity markets (i.e., now earnings compression)?

It’s the consensus that equity markets endured one of the sharpest de-rates in three decades as participants priced the compression in multiples on the rise in interest rates and flow of capital to capital markets – the quantitative tightening (QT) – component.

For context, beyond raising costs to borrow and innovate, higher interest rates may mean future discounted valuations are lower. Additionally, yield-hungry investors may seek less risky assets, now, given that their yields are more attractive.

Recall that in engaging in practices such as quantitative easing (QE), central banking authorities purchase assets from private sector entities through the creation of central bank reserves. The unwind of this through the QT exercise removes reserves from balance sheets either through asset sales or non-reinvestment of the principal sum of maturing securities.

In less complex terms, the Fed’s purchase of assets depressed their yields forcing investors into risk. Liquidity withdrawal ought to have the opposite effect, amplifying the impact of rate hikes.

Adding, per Joseph Wang, who we’ve quoted in the past, with bank deposits expected to drain ~1T by year-end, the competition for cash forces investors to continue “lower[ing] their selling prices to compete for the cash they want.”

Accordingly, the “Fed will continue to hike interest rates until something breaks,” as explained by Andreas Steno Larsen. In ending forward guidance, “the Fed will rely even more on lagging indicators such as the unemployment rate and the monthly CPI report.”

Graphic: Retrieved from Andreas Steno Larsen. “Most leading indicators for inflation point (seriously) down, while early unemployment indicators are ticking up, but the Fed will not admit to it until risk assets have taken another beating.”

“Once unemployment starts increasing alongside weakening momentum in the inflation reports, it will likely be at least 3-6 months too late to pivot.”

The Eurodollar – which reflects the interest offered on U.S. dollar-denominated deposits at banks outside of the U.S. (i.e., participants’ outlook on interest rates) – curve is inverted and implies rate cuts ahead, “6-7 months from now.”

Given the above, portfolios can “stay away from highly speculative assets, own USD cash, and start allocating towards 5-10y+ government bonds,” as Alfonso Peccatiello explained well.

Context: A stronger dollar, on the tightening of liquidity and credit, as well as increased demand and competition for money, does more to pressure risk and, is an equity headwind. 

Additionally, per Morgan Stanley (NYSE: MS) research, "The simple math on S&P 500 earnings from currency is that for every percentage point increase on a year-on-year basis it’s [] a 0.5 hit to EPS growth.”

Positioning

For the past few sessions, we did much to unpack and understand some of the implications of participants’ market positioning.

In summation, own volatility where the market is likely to not expire. Sell it where the market is likely to expire. Just because implied (IVOL) volatility is at a high starting point does not mean it should be sold, blindly, particularly on the put side, below the market.

Read: Explanations and Applications – Moontower on Gamma.

Technical

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

In the best case, the S&P 500 trades higher.

Any activity above the $4,111.00 RTH High puts into play the $4,149.00 VPOC. Initiative trade beyond the $4,149.00 VPOC could reach as high as the $4,164.25 RTH High and $4,189.25 LVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $4,111.00 RTH High puts into play the $4,073.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,041.25 and $4,015.75 HVNode, 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.

Considerations: This week’s advance was strong, based on market internals. Given this information, the rally is to not be sold, blindly.

Graphic: Market Internals (Advance/Decline, Up-Volume/Down-Volume, Tick) as Peter Reznicek at ShadowTrader teaches. Though positive, readings were weak and supportive of responsive trade, similar to what market liquidity (via Bookmap) was showing.

Definitions

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.

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

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 also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others. 

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For July 28, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 600+ that read this report daily, below!

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

Fundamental

Key, yesterday, was the Federal Reserve’s (Fed) move to rein inflation with another 75 basis point interest rate hike. This lifted the target for the federal funds rate to 2.25-2.5%.

Accordingly, with inflation (which is to be dampened) a negative for stocks, a primary driver behind this year’s de-rate, already, equity markets closed sharply higher.

Graphic: Via Schroders plc (OTC: SHNWF). Taken from the Weekly S&P 500 ChartStorm.

Despite room for higher rates, the Fed explained future decisions would “depend on the data,” and that, per Bloomberg, the economy is likely “to withstand rapid monetary tightening.”

Graphic: Retrieved from Bloomberg. Tighter liquidity and credit bolster demand for money as well as the deflation of risk assets. “There used to be too little demand. Now there’s too little supply. And in a world of too little supply, the country doing the most to generate demand, which is the US, is exporting its problem—its problem being inflation,” per Harvard’s Jason Furman.

Adding, participants are, now, pricing in the potential for a federal funds rate peak in the range of 3.25-3.50% early-to-mid 2023, down from 4.00-4.75% after the last rate hike took place.

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

Strategists at the likes of Bank of America Corporation (NYSE: BAC) put forth that it is likely, given an economic slowing, that the Fed, indeed, cuts rates next year and ends quantitative tightening (QT).

“The Fed is likely to stop QT with rate cuts due to the contradictory signal it sends on monetary policy and to simplify policy communications; the Fed will likely not want to be easing with rate cuts but tightening with QT,” the bank’s strategists explained. 

An end to QT would cut the supply that the “Treasury needs to issue to cover Fed redemptions. It also means the Fed may conduct secondary purchases, further limiting the amount of supply the market needs to absorb.”

This is in comparison to the narrative we discussed earlier this week, put forth by Damped Spring Advisors’ Andy Constan.

With “most of [the Fed] balance sheet reduction to be run-off” – non-reinvestment of “proceeds from maturing assets they own” – coupled with the Treasury halving “coupon issuance that the market must absorb,” Constan explained, instead, that the “Fed is done for the summer.”

This is likely to “result in less surprise and falling asset volatility” as investors realize “they are now under-risked,” which may drive a “risk premium contraction” and demand for risk assets.

Positioning

As of 6:50 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.22%. Net gamma exposures increasing may promote tighter ranges.

It is often, just after an event, that market movement is the result of inventory rebalances. Per Kai Volatility’s Cem Karsan, the subsequent move is to be “tied to the incremental effects on liquidity (QE/QT).” 

Graphic: Retrieved from MarketWatch.

Rising rates and the withdrawal of liquidity, coupled with the impact of inflation and an economic slowing, could prompt continued pressure on equity markets.

Given the macro risk, and the poor performance of implied volatility (IVOL), relative to that which markets have realized (RVOL), per The Ambrus Group’s Kris Sidial, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).

Should investors “ditch their [old] hedges in frustration as sentiment improves, because they didn’t work properly in a falling market,” this may set up “the potential for a second-leg-down event,” in the next year, as well explained in the Systemic Individual Investor.

“During the next sell-off, panic put-buying can cause a much more violent downward spiral, because options dealers are forced to sell an increasing amount of S&P futures into an accelerating down move.”

So, what to do? 

With call options outperforming “their delta to the upside,” it continues to make much sense to replace static equity long exposure with that which is dynamic, Karsan explained.

Technical

As of 6:50 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a negatively 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.

Any activity above the $4,015.75 HVNode puts into play the $4,041.25 HVNode. Initiative trade beyond the $4,041.25 HVNode could reach as high as the $4,071.50 BAL and $4,095.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $4,015.75 HVNode puts into play the $3,971.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,943.25 HVNode and $3,921.00 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.

Definitions

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.

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

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 also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, ex-Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For July 20, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

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

Fundamental

Thanks to all the subscribers who have signed up in the past few days. Not sure how you got here so thank you! Also, thanks to whoever may have shared the letter to make that happen!

From here, you can expect in-depth commentaries on aspects like fundamentals, technicals, and positioning. Insights are actionable as they help me protect and grow my own capital!

Without further delay, below is what you need to know for today!

In the news was Netflix Inc’s (NASDAQ: NFLX) post-earnings jump on better-than-expected subscriber loss numbers, the Russians and Europeans agreeing on gas pipelines, mortgage boycotts spreading across China, tight food supplies, gas prices falling to some of the lowest levels in months, and China warning against a Taiwan visit by the U.S.

View: Earnings calendar.

Further, after our July 19 remark on incredibly strong pessimism likely to serve as a contrarian signal, the equity indexes pushed higher, following through key multi-week resistance.

Key levels quoted held nearly to the tick. Now, both the Nasdaq 100 (INDEX: NDX) and S&P 500 (INDEX: SPX) are above their 20- and 50-day moving averages. The Russell 2000, a laggard, made it above the 200-day moving average.

Graphic: Retrieved from Bloomberg.

The speed and ferociousness of the rally have more to do with how participants were positioned – in light of what seemed to be a worsening fundamental situation – into the break of some very visual resistances, discussed in prior letters. Read the next section for more on the positioning.

Graphic: Retrieved from Bloomberg.

Cryptocurrencies, which were recipients of the same risk-on flows equities saw, too, went higher yesterday. Per CoinMetrics data, Bitcoin’s (CRYPTO: BTC) correlation to equities is positive.

Graphic: Retrieved from Bloomberg.

For context, asset volatility had fallen on participants’ extension of moneyness to nonmonetary assets, given easy monetary policies and an environment of ample debt and leverage. These policies made it easier to borrow and make longer-duration bets on ideas with lots of promise.

This had consequences on the real economy and asset prices, accordingly, which rose and kept deflationary pressures at bay. The distinction between economies and financial markets blurred.

When the reverse happens – tighter liquidity and credit – and volatility eventually rises, demand (and competition) for money (or cash) deflates assets (e.g., equities, crypto, and the like).

Graphic: Via Schroders plc (OTC: SHNWF). Taken from the Weekly S&P 500 ChartStorm.

With U.S. market liquidity, as well as the dollar’s role as a global reserve currency, putting U.S. markets and the S&P 500 at the center of the global carry regime, a U.S. stock market drop is a recession and the direct reflection of the unwinds of carry.

It is the manifestation of a deflationary shock, and today’s sentiment reflects this.

Graphic: Retrieved from Layoffs.fyi Tracker.

Ultimately, a deflationary pulse manifesting disinflation in consumer prices may prompt the Fed (Federal Reserve) to reverse on rates and quantitative tightening (QT), the (out)flow of capital from capital markets.

Graphic: Graphic: Via Bank of America Corporation (NYSE: BAC). Retrieved from Bloomberg. “The previous low on this measure came five months before the final market low, but again this could be taken as evidence that the market has already taken enough evasive action.”

Positioning

The continued sale of volatility (as long volatility trades have not panned out), particularly across shorter time horizons, left those, on the other side, warehousing long volatility (a sort-of naive thing to say bluntly as we’re discounting customer trades being paired off with each other).

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).

Nonetheless, these liquidity providers’ positions, all else equal, will maintain or increase in value if underlying(s) realize volatility (especially that far in excess of implied). To (re)hedge, those on the other side will do less to add realized (RVOL) volatility and more to suppress implied (IVOL).

Graphic: Via Banco Santander SA (NYSE: SAN). Into strength (weakness), counterparties’ long call exposures will increase (decrease) in value. To re-hedge, counterparties will buy (sell) weakness (strength).

Moreover, with RVOL creeping (and exceeding, at times) the IVOL, short volatility structures, particularly if unhedged and across short time horizons, are not doing good. The unwinding of these structures can add fuel to the directional resolve (e.g., if the customer buys back a short call, the liquidity provider sells their long call and buys back their short equity to re-hedge).

Hence, options structures that we said may be good to take advantage of the “smiley” skew (e.g., zero- or low-cost call ratio spreads) are performing much better.

Graphic: Updated 7/18/2022. Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim. Skew resembles more of a smile, rather than a smirk.

Technical

As of 6:45 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced 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.

Any activity above the $3,943.25 HVNode puts into play the $3,982.75 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,016.25 HVNode and $4,055.25 LVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,943.25 HVNode puts into play the $3,909.25 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $3,867.25 LVNode and $3,829.75 MCPOC, 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.

Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

Definitions

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.

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

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 also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, former Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For July 18, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. 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.

Fundamental

Positivity across most products we monitor in this letter. This is alongside participants’ paring of bets on more aggressive Federal Reserve (Fed) action. It was just last week, right after the CPI dump, that participants were pricing a near-50% chance of a 100 basis point rate hike in July.

That is no longer the case. The odds are 60-40 in favor of a 50 to 75 basis point hike.

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

A quick check of the Eurodollar (FUTURE: /GE) curve, a reflection of participants’ outlook on interest rates, we see a peak of the Fed-rate-hike cycle – the terminal rate – near DEC 2022.

Below, we see the overnight rate expected to peak near 3.915% by late 2022.

Graphic: Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim.

For context, the price of /GE reflects the interest offered on U.S. dollar-denominated deposits at banks outside of the U.S. With that, they’re “expressed numerically using 100 minus the implied 3-month U.S. dollar LIBOR interest rate,” per Investopedia. This means that at current DEC 2022 prices (96.085), this reflects an implied interest rate settlement rate of 3.915%.

Read: The shift from the Eurodollar to SOFR is accelerating as “SOFR adoption cracked 50%.”

The U.S. Dollar (INDEX: DXY), though it is generally far stronger on pressures (e.g., recession, geopolitics) elsewhere, eased.

Read: Why the U.S. Dollar is booming and creating a possible doom loop and Sunak takes the lead in the voting for U.K. Prime Minister, as well as China weighs mortgage grace period to appease angry home buyers and the ECB case for a half-point rate hike just won’t go away.
Graphic: Via Bloomberg.

Further, it is policy adjustments that are inflicting damage on some inflated areas of the market like crypto and private equity.

Recall that prevailing monetary policies made it easier to borrow and make longer-duration bets on ideas with a lot of promise in the future. Central banks, too, underwrote losses of this regime and encouraged continued growth. This had consequences on the real economy and asset prices which rose and kept deflationary pressures at bay.

As well put forth in our May 18, 2022 commentary, the recent market rout is a recession and the direct reflection of the unwind of carry. Capital was “misallocated” and the Fed’s move to control price stability is “completely unreasonable” as they’re not in a position to do it “without bringing down the markets,” per Kai Volatility’s Cem Karsan.

Read: Kris Abdelmessih’s Moontower #148 on prevailing macroeconomic perspectives.

A prospective hit in demand is in the context of improvement among supply chains, as Citigroup Inc (NYSE: C) economists explain

Graphic: Via Bloomberg.

“The bad news is that this looks to be occurring on the back of a slowing in the global consumer’s demand for goods, especially discretionary goods, and thus may also signal rising recession risks.”

Graphic: Via Bloomberg. “Carmakers registered the fewest new vehicles in the European Union since 1996 as persistent supply chain snarls and record inflation afflict the industry. New-car sales in the EU and four other states tracked by the European Automobile Manufacturers’ Association fell 17% to 1.07 million last month, according to a statement. Volkswagen AG was the hardest-hit major carmaker, with registrations dropping 24% from a year ago.”

It is the case that as the “Fed is pursuing demand destruction through negative wealth effects,” it will, ultimately, pivot because “central banks can only deal with nominal [and] not real chokepoints,” according to Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar.

Read: Despite stronger than expected retail sales, inflation adjustments point to a leveling-off.

The “risk of recession, whether it is real or merely implied by an inversion of the yield curve, won’t deter the Fed from hiking rates higher faster or from injecting more volatility to build up negative wealth effects.” 

“Rallies could beget more forceful pushback from the Fed – the new game.”

Watch: Quantitative Tightening is the direct flow of capital to capital markets.

Positioning

Please check out the Daily Brief for July 15, 2022. There we summarized, well, the implication of the macro landscape and options positioning.

The summary was that with commodities not offering protection, one has to be concerned if “the flock move[s],” per The Ambrus Group’s Kris Sidial and, ultimately, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”

This is as markets are in a window of “non-strength,” says Karsan in the video below.

Technical

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

In the best case, the S&P 500 trades higher.

Any activity above the $3,909.25 MCPOC puts into play the $3,943.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,982.75 LVNode and $4,016.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,909.25 MCPOC puts into play the $3,857.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,829.75 MCPOC and $3,800.75 LVNode, 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.

Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

Definitions

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.

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

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 also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, former Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For July 12, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

Graphic updated 7:00 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of 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. 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.

Fundamental

The top headlines are on the inflation conjectures, the depth and breadth of the energy crisis, supply constraints, EUR/USD parity, geopolitical unrest, and global economic slowing.

Graphic: Via Bloomberg. Dollar surge, European growth path, waning demand, and increasing supply weigh on copper, a bellwether of the world economy.

A boiling point, if not already, is soon to be reached, in short.

For instance, the energy crisis, which is, in part, the result of earlier capacity erosion, short-term triggers, and panic, is expected to worsen according to the International Energy Agency (IEA).

Per Goldman Sachs Group Inc (NYSE: GS), a “full interruption to Russian flows to Europe would be equivalent to a 35% supply shock to the European gas market.” 

Graphic: Retrieved via The Market Ear. Via Goldman Sachs Group Inc (NYSE: GS). “[W]e estimate bills would increase by c.65% from here in this event, bringing the total household cost for power and gas to nearly €500/month, creating a meaningful affordability problem. Versus the summer-2020 trough, we estimate that gas/power bills would have increased by nearly 300% on this basis.”

What does this mean for the markets we’re focused on day-to-day in this letter?

Well – and this is pursuant to the Daily Brief for Monday, July 11 – markets have only suffered through compression in multiples. Does it stop or is there a looming earnings compression?

Most likely there is an earnings compression. For now, it is only sentiment that is taking the hit. 

Graphic: Retrieved via The Market Ear. Taken from FactSet Research Systems Inc (NYSE: FDS). 

When will the turn occur?

As stated yesterday, it will be the earnings season that is likely to shed clarity on the answer all the while – what is known right now – a strong dollar is for sure to translate into a headwind for S&P 500 earnings growth.

Graphic: Via Bloomberg. The “Fed is still perceived as having more room to hike rates going forward, also on the back of the strong US jobs report for June,” Unicredito SPA (OTC: UNCRY) analysts explained. “On the other hand, other central banks, such as the ECB and the BoE, might be forced to become more prudent, given the more direct exposure their respective economies have to the gas and energy crisis.”

What’s lending to the dollar’s strength?

Let’s start with the following. Participants were extending moneyness to nonmonetary assets, given easy monetary policies and an environment of ample debt and leverage (which cuts into asset price volatility). 

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

When the reverse happens – tighter liquidity and credit – and volatility eventually rises, the demand (and competition) for money (or cash) deflates assets.

Graphic: Via Citigroup Inc (NYSE: C). According to Joseph Wang, amidst asset price volatility and bank deposits to drain about $1 trillion or so by year-end, investors will “continue to lower their selling prices to compete for the cash they want.”

It is a deflationary pulse manifesting disinflation in consumer prices, that will prompt the Fed to reverse itself on rates and quantitative tightening (QT).

What does this mean?

Depends on the timeframe. 

Though the policy pivot may come alongside a peak in the de-rate markets are experiencing, now, longer-term there are multi-decade trends brewing on the back of the de-globalization pulse, for instance, and a tendency to spend wealth, instead of creating it (as supply chains are replicated here at home), is inflationary which makes the context for a more two-sided market in the future (rather than straight up or down).

Read: Former Bridgewater Associate talks recession odds, capturing a macro edge.

What about the dollar?

With the Fed “still perceived as having more room to hike rates going forward,” per Unicredito SPA (OTC: UNCRY), all the while “other central banks, such as the ECB and the BoE … [are] more prudent, given … the[ir] gas and energy crisis,” short-term dollar strength does more to diminish the global reliance on the U.S.

This is explained even better by Lyn Alden of Lyn Alden Investment Strategy.

The dollar is the dominant currency for carry primarily due to easy monetary policies removing the risk of an ultra-strong dollar. Accordingly, the dollar is “the currency that most offshore debt is denominated in all over the world,” as explained by Bankless, who interviewed Alden.

“Non-US entities make dollar-based loans and transactions in pretty much all markets everywhere because it’s considered more trustworthy than native fiat,” they add. “When there’s a disruption in global cash flows, there’s effectively a short squeeze on the dollar.”

“The stronger the dollar gets in comparison, the less tenable it becomes as a global reserve,” and that is a pressure on the long-term trajectory of that currency.

Positioning

Yesterday’s letter was spot on with respect to positioning.

We can speculate as to where the market may move next, after the release of inflation figures, this week. What’s likely is that, even if the print is hot, the first move is to be structural, per Kai Volatility’s Cem Karsan.

“A function of inevitable rebalancing of dealer inventory post-event. The second move and final resolution, if you wait for it, is usually tied to the incremental effects on liquidity (QE/QT).”

Rising inflation probably bolsters the Fed’s backing of a 75 basis point rate hike on July 27. So, don’t fight the Fed. Rising rates and the withdrawal of liquidity prompts a continued de-rate.

Knowing this, the “flattening in the downside fixed strike skew, while the upside wings [are] more smiley,” as described by JPMorgan Chase & Co (NYSE: JPM), has made for attractive low-cost spread opportunities, as talked about yesterday and in the July 8, 2022 letter.

The moral is as follows: own volatility where the market is likely to not expire. Sell it where the market is likely to expire. Just because implied (IVOL) volatility is at a high starting point does not mean it should be sold, blindly.

Read: Explanations and Applications – Moontower on Gamma.

Technical

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

In the best case, the S&P 500 trades higher.

Any activity above the $3,830.75 MCPOC puts into play the $3,867.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $3,909.25 MCPOC and $3,943.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,830.75 MCPOC puts into play the $3,800.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,774.75 HVNode and $3,755.00 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.

Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

Example: The below 65-minute S&P 500 chart with volume profiles was included in the July 8, 2022 edition of the newsletter. Prices were near an inflection (micro-composite point of control and two key volume-weighted average price levels). From thereon, selling surfaced.

This is what is meant by responsiveness near key-technical areas.

Graphic: Updated 7/2/22. 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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.

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

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 also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, former Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For July 11, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

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

Fundamental

To start, thank you to the many new subscribers who joined in the past weeks. I’m honored.

Further, today we start broad (fundamental) and hone into specifics on how to act in the current trade environment (positioning), as well as potential inflection (technical) points.

I encourage you to read through to the technicals part, if possible. Have a great week!

Seasonally speaking, the markets are in the midst of one of the most bullish periods of the year.

Graphic: Retrieved from The Market Ear.

This is as stock market flows have yet to turn as they did for bonds months ago.

Graphic: Retrieved from Callum Thomas’ Topdown Charts. Via Bank of America Corporation (NYSE: BAC)

The cycle is as follows: typically bonds are the first to turn. Stocks and commodities follow. 

Graphic: Retrieved from @granthawkridge

With bonds and equity products now off their swing lows and commodities off their highs (as inflation has, potentially, peaked), we have to question how much more?

Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).

Well, thus far, and this is something we’ve talked about in the past, markets have suffered through compression in multiples. Does it stop or is there a looming earnings compression?

Graphic: Retrieved from Credit Suisse Group AG (NYSE: CS).

The earnings season shall shed clarity on the answer all the while – what is known – a strong dollar is sure to translate into a headwind for S&P 500 earnings growth.

Graphic: Retrieved from The Market Ear. Via Morgan Stanley (NYSE: MS) research. “The simple math on S&P 500 earnings from currency is that for every percentage point increase on a year-on-year basis it’s approximately a 0.5xhit to EPS growth. At today’s 16% year-on-year level, that translates into an 8% headwind for S&P 500 EPS growth, all else equal”

“The main point for equity investors is that this dollar strength is just another reason to think earnings revisions are coming down,” Morgan Stanley’s Mike Wilson explains

“[T]he recent rally in stocks is likely to fizzle out before too long.”

Moreover, with the impulse in credit falling, labor market showing preliminary signs of weakness, a drawdown in commodities (which is consistent with sharply lower economic growth), and bond market pricing rate cuts in early 2023, immediately following the hiking cycle, portfolios can “stay away from highly speculative assets, own USD cash and start allocating towards 5-10y+ government bonds,” as Alfonso Peccatiello explains well in his letter, The Macro Compass.

Graphic: Retrieved from The Macro Compass published by Alfonso Peccatiello.

Positioning

Calmer trade alongside easing volatility and generally rising gamma exposures. Trade, at times, was responsive. Participants would add positive (negative) delta bets into weakness (strength).

Graphic: Updated 7/8/2022. SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator registers the sale of put (blue line) and call (orange) options.

Noteworthy is the continued sale of volatility, particularly across shorter time horizons, as well as increased demand for call options, especially in some of the larger index weights. Volatility sale, on the part of customers, leaves liquidity providers warehousing long volatility (which is kind of a naive thing to say as we’re discounting customer trades being paired off with each other).

Nonetheless, these liquidity providers’ positions, all else equal, will maintain or increase in value if underlying(s) realize volatility (especially that far in excess of implied). To hedge, rips (dips) will be sold (bought) to offset the increasing positive (negative) delta.

Graphic: Updated 7/7/2022. SpotGamma’s HIRO indicator for Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL). Rising orange and blue lines point to call buying and put selling, both of which have bullish implications.

Moreover, this trend in volatility supply is in part on the loss of interest in “leveraged long S&P” trades, as well as “marginal demand for puts,” as SqueezeMetrics has stated, before.

Graphic: Retrieved from The Market Ear. Originally sourced via VIX Central. “Chart shows the VIX term structure ‘crash’ since June 13, which was the most recent VIX peak. The curve is now back to normal with the short end of the curve ‘much’ lower than longer-term maturities. Let’s see how far down they ‘press’ this.”

“Creeping into net selling territory is ‘smart’ bear market positioning. Short delta, short skew.”

Graphic: Retrieved from The Market Ear. “VIX has decoupled from cross-asset volatilities.”

Accordingly, the volatility markets have realized (RVOL) has crept (and exceeded, at times) the volatility implied (IVOL). 

Graphic: Via S&P Global. As explained by SpotGamma, “30-day realized SPX volatility is now trading above the VIX, something that generally shows after major selloffs wherein IV “premium” needs to reset to calmer/higher equity markets.”

This, coupled with “a flattening in the downside fixed strike skew, while the upside wings [are] more smiley,” as described by JPMorgan Chase & Co (NYSE: JPM), has made for attractive low-cost spread opportunities, as talked about in the July 8, 2022 letter.

Graphic: Via JPMorgan Chase & Co (NYSE: JPM). Taken from The Market Ear.

For instance, as discussed Friday, ratio spreads continue to work well for low- or no-cost exposure to the upside. 

Graphic: Via Option Alpha.

Pursuant to those remarks, no-cost spreads this letter’s writer has structured in Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) are pricing hundreds of dollars in credit to close.

Graphic: Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim. 

Obviously, there’s no mention, here, of the risk management (e.g., sizing and width) involved. Again, this is as I’m trying to give actionable info without providing explicit recommendations.

Similarly, if one thought volatility, though at a high starting point particularly at the money (ATM), was due for a repricing, they would look for exposure to the downside via something such as an inverse ratio (or back spread), as said last week.

Graphic: Via Option Alpha.

This is as the ATMs, unlike those further out of the money (OTM), are less convex in vega.

Graphic: Via Mohamed Bouzoubaa et al’s Exotic Options and Hybrids.

Technical

As of 7:00 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle-to-lower part of a negatively 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.

Any activity above the $3,867.25 LVNode puts into play the $3,909.25 MCPOC. Initiative trade beyond the MCPOC could reach as high as the $3,943.25 HVNode and $3,982.75 LVNode, or higher.

In the worst case, the S&P 500 trades lower.

Any activity below the $3,867.25 LVNode puts into play the $3,831.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,800.25 LVNode and $3,755.00 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.

Considerations: Responsiveness near key-technical areas (that are discernable visually on a chart), suggests technically-driven traders with short time horizons are very active. 

Such traders often lack the wherewithal to defend retests and, additionally, the type of trade may be indicative of the other time frame participants waiting for more information to initiate trades.

Example: The below 65-minute S&P 500 chart with volume profiles was included in the July 8, 2022 edition of the newsletter. Prices were near an inflection (micro-composite point of control and two key volume-weighted average price levels). From thereon, selling surfaced.

This is what is meant by responsiveness near key-technical areas.
Graphic: Updated 7/2/22. 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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.

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

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 also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga reporter.

Some of his works include conversations with ARK Invest’s Catherine Wood, investors Kevin O’Leary and John Chambers, FTX’s Sam Bankman-Fried, former Bridgewater Associate Andy Constan, Kai Volatility’s Cem Karsan, The Ambrus Group’s Kris Sidial, among many others.

Disclaimer

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.