Categories
Commentary

Daily Brief For December 14, 2021

What Happened

Overnight, equity index futures were mixed after Monday’s failed balance-area breakout in the S&P 500 had that index rotate to and through the opposite end of a multi-day consolidation.

This is as market participants await clarity on monetary policy from the Federal Reserve and the weighty “quad-witching” derivatives expiry, late this week. 

Ahead is data on the producer price index (8:30 AM ET).

Graphic updated 6:40 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

A change in the market was occurring, yesterday, as participants sought to break the S&P 500 out of a multi-day balance area and discover higher prices.

Shortly after the U.S. cash open, however, there was no follow-through; the index liquidated to the opposite end of the balance with sellers turning aggressive into the close.

Selling carried-forward, overnight, as the S&P 500 made it through the low-end of balance before finding responsive buyers at an anchored volume-weighted average price (VWAP) level, at which liquidity algorithms are benchmarked and programmed to buy and sell.

As noted many sessions ago, prior discovery left gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money covering shorts).

Participants are now revisiting, repairing, and strengthening – building out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes).

Graphic: Supportive delta (i.e., committed selling into end-of-day as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. Though initial readings were supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit), selling turned aggressive with the S&P 500 breaking its multi-day consolidation low, overnight.

Context: The S&P 500 can’t seem to crack the pin beneath $4,700.00.

This pin is the result of customers committing capital to bets on low volatility into this week’s Federal Open Market Committee (FOMC) meeting and Friday’s large derivatives expiry.

Graphic: Customers increased their exposure to short-delta call exposure. “Last week was about selling index calls,” SpotGamma’s Brent Kochuba said on Twitter. “This is likely why the $SPX stopped at $4,700.00.”

According to SpotGamma, participants are increasing their short-delta exposure (via a lot of call selling and a bit of put buying). 

In hedging their rising (declining) long-delta exposure, the dealer or counterparty to this positioning will sell (buy) futures into strength (weakness)

This forces the market into a consolidation

This trend ought to continue until (A) there’s a collapse in event-related implied volatility which would bring in positive flows as dealers cover static hedges, (B) the poor breadth and single-stock weakness feeds into feverishly destabilizing demand for downside protection, or (C) participants commit more capital to calls further out in time and higher in price.

We talk about the implications of options positioning mainly because it is a growing market that provides a clear indication of how participants (no matter how large) are positioned. 

Also, with FOMC approaching, the “other” timeframe participant (e.g., the hedge funds and institutions behind impactful buy/sell programs) is likely awaiting policy clarity to reposition.

As Mind Over Markets author James Dalton best explained: “Market participants balance their positions in expectation of the market’s reaction to the external stimuli – there is simply no activity. Trade is not being facilitated in any direction, for there is little participation and no confidence.”

Notwithstanding, last night, we broke a multi-session balance area. Based on profile theory, a new trend may begin. Context, though, suggests otherwise. 

Participants (large in size) are seeking clarity and, given the market’s responsiveness to technical levels, weaker, less well-capitalized short-term participants are in control

Therefore, we ought to discount (give less weight to) what happens in the coming days.

If later this week, participants are assuaged of their fears surrounding monetary policy, a collapse in event-related implied volatility ought to bring in positive flows as the long delta (from dealers’ exposure to short puts) decreases.

The decrease in dealer supply (short delta), via covering of short stock/futures hedges, would bolster any attempt higher

According to SpotGamma, if “interest in call options was to grow (evidenced by a shift higher in the Call Wall), a rally into (and beyond) end-of-year is further affirmed.”

That’s not to say that some of the vulnerabilities like participants’ large exposure to leveraged products (which increases the speed with which volatility is realized) couldn’t prompt a round of destabilizing demand for downside protection.

So, the question is whether the few companies leading this year’s rally can continue to lead? 

Or, in light of recent exuberance in heavy-weights like Apple Inc (NASDAQ: AAPL), in which participants are underexposed to downside protection, post-FOMC demand for protection bids volatility and results in a destabilizing, reflexive reaction on the part of dealers.

Graphic: As U.S. stocks’ inflation-adjusted earnings yield turns negative, as seen near the peak of the tech bubble, via Bloomberg, “Investors in the Nasdaq increasingly seem to think that only a few companies have much of a chance. With a growing possibility of more aggressive attempts to prosecute antitrust issues, that’s a riskier position than it appears.”

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

Balance-Break + Gap Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) is occurring.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 

Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator. 

Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,647.25 HVNode puts in play the $4,657.00 balance area low (BAL). Initiative trade beyond the BAL could reach as high as the $4,674.25 HVNode and $4,690.25 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,647.25 HVNode puts in play the $4,618.75 HVNode. Initiative trade beyond the latter could reach as low as the $4,581.00 and $4,523.00 untested point of control (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. Learn about the profile.

What People Are Saying

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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.

Liquidation Breaks: The profile shape suggests participants were “too” long and had poor location.

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Initiative Buying (Selling): Buying (selling) within or above (below) the previous day’s value area.

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

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

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

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, helping develop insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For December 10, 2021

What Happened

Overnight, equity index futures staged a reversal, auctioning back from yesterday’s knee-jerk liquidation toward intraday value, the levels at which 70% of Thursday’s volume transacted.

Ahead is data on the Consumer Price Index (CPI) and Core Inflation (8:30 AM ET), University of Michigan Consumer Sentiment and Expected Inflation (10:00 AM ET), as well as the Federal Budget (2:00 PM ET).

Graphic updated 6:40 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

After a multi-day pin against the S&P 500 $4,700.00 area, on weak intraday breadth and market liquidity metrics, the worst-case outcome occurred; participants moved the index away from its intraday value, the levels at which participants found it most favorable to trade at.

As noted in past commentaries, participants’ discovery of higher prices left poor structure; both Monday and Tuesday’s sessions left gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering).

Thursday’s end-of-day liquidation, ahead of new data on inflation, brought the S&P 500 into a pocket of low volume (LVNode) that participants quickly rejected overnight.

This rejection suggests participants responsively bought the move lower; more information is needed to warrant an expansion of range in either direction.

Graphic: Supportive delta (i.e., committed end-of-day selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap

Context: Inflation is key in gauging monetary policy. 

Per Bloomberg, a CPI figure above (below) of 7% likely sparks a risk-off (risk-on) move.

Either way, next week the Fed ought to announce an acceleration in its taper to bond-buying. 

Upon an end to the taper, there ought to be a tightening; William Dudley, a former New York Fed governor, believes there will be three 0.25-percentage-point rate increases next year. 

In 2023, Dudley sees four rate hikes that bring the median target rate to 1.8%, and then, the target rate will reach 2.5% in 2024.

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive.

Higher inflation prints, today, could spark a risk-off move as participants price in more aggressive change to the monetary frameworks and liquidity provision that promoted a large divergence in price form fundamentals.

“[T]he Fed may be making a policy error by essentially overweighting a fight against inflation versus supporting growth,” Bank of America’s (NYSE: BAC) Mark Cabana explained.

Participants are “worried that the Fed is going to be tightening into supply-constrained inflation and reduction of consumer purchasing power and they’re doing that because they’re worried risk assets may be very sensitive to rate levels.”

Despite the doom and gloom, it’s worth noting that today’s rates and earnings support validations better than in the ‘90s.

The “growth in earnings is so far stronger than the multiple compression caused by rising rates (blue line),” and that will continue to bolster any rally attempt.

Graphic: Low rates support current valuations better than the ‘90s, according to Nasdaq.

Still, that intent to moderate stimulus serves as a headwind and some high-growth names have been weakening.

For instance, as shares of Tesla Inc (NASDAQ: TSLA) declined, yesterday, SpotGamma data suggested participants were seeking downside protection, in size.

Due to an environment wherein the counterparties to customer option trades buy (sell) into weakness (strength), indices are pinned.

“[D]ealer hedging has suppressed index level volatility, but underlying components are [] exhibiting idiosyncratic volatility,” as one paper puts it.

“The only reconciliation is a decline in correlation.”

If that activity in highly-weighted constituents like Tesla was to feed into the indices, the effects would be destabilizing.

However, in regards to positioning metrics, at present, the return distribution is skewed positive.

Adding, if participants are assuaged of their fears at next week’s Federal Open Market Committee (FOMC) meeting, a collapse in event-related implied volatility ought to bring in positive flows as the long delta (from dealers’ exposure to short puts) decreases; the decrease in dealer supply (short delta), via covering of short stock/futures hedges, would bolster any attempt higher. See below.

Expectations: As of 6:40 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance Expected: Rotational trade that denotes current prices offer favorable entry and exit. 

Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend). 

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,685.00 untested point of control (VPOC) puts in play the $4,705.75 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,716.75 LVNode and $4,740.50 minimal excess high, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,685.00 VPOC puts in play the $4,674.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,647.25 and $4,618.75 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. Learn about the profile.

What People Are Saying

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, helping develop insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For December 9, 2021

What Happened

Overnight, equity index futures auctioned sideways after the large move higher.

This comes alongside top news items including Evergrande’s default, omicron transmission, U.K. COVID-19 restrictions, among other things.

Ahead is data on jobless claims (8:30 AM ET), wholesale inventories (10:00 AM ET), as well as real household wealth and nonfinancial debt (12:00 PM ET).

Graphic updated 6:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On lackluster intraday breadth and supportive market liquidity metrics, the best case outcome occurred evidenced by sideways trade and overlapping value (i.e., the prices levels at which 70% of the day’s volume was transacted).

Notwithstanding, as stated in the past, though this activity marks participants’ willingness to discover and validate higher prices, the prior structure is poor; there is technical instability.

Specifically, both Monday and Tuesday’s sessions left gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering).

As said before, participants will look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes).

Graphic: Supportive delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap.

Context: Next week the Federal Reserve is likely to announce an acceleration in its taper.

“[T]he implicit expectation is that by moving more quickly and aggressively, the Fed will save itself from having to hike too far and make rates so expensive that they slow down the economy,” Bloomberg’s John Authers explained

Adding, William Dudley, a former New York Fed governor, believes there will be three 0.25-percentage-point rate increases next year. 

In 2023, Dudley sees four rate hikes that bring the median target rate to 1.8%, and then, the target rate will reach 2.5% in 2024.

Authers adds: “If we take broad ‘M2’ money as a yardstick for the amount of liquidity in the economy, it’s clear that the Fed has trodden on the accelerator for much longer than other central banks.”

Graphic: Via Bloomberg, while the strength of the U.S. recovery owes a lot to monetary responses, the Fed will have to work harder to “rein in liquidity and calm inflation down.”

Moreover, rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive.

As the market is a forward-looking mechanism, the implications of this are staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. 

The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

To put it simply, participants are more exposed to leveraged products, among other things, which increases the speed with which volatility is realized.

“It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration” Karsan adds. 

“These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

Despite today’s rates and earnings supporting validations better than in the ‘90s, an intent to moderate stimulus serves as a headwind.

That said, the S&P 500 typically rallies into the first hike. After, expect noise.

Graphic: S&P 500 performance before and after rate hikes, via The Market Ear.

At present, the return distribution is skewed positive, but a lot of the punchy opportunity (based on how participants were positioned just a week ago) has disappeared.

The dynamics surrounding the collapse in volatility and expiry of extremely short-dated downside protection have played out; the market entered into positive-gamma wherein the counterparties to customer options trades add market liquidity and temper realized volatility.

Graphic: Per SpotGamma data, the S&P 500 is no longer in destabilizing negative-gamma (left). Instead, it is in stabilizing positive-gamma (right) territory.

If participants are assuaged of their fears at next week’s Federal Open Market Committee (FOMC) meeting, a collapse in event-related implied volatility ought to bring in positive flows as the long delta (from dealers’ exposure to short puts) decreases; the decrease in dealer supply (short delta), via covering of short stock/futures hedges, would bolster any attempt higher. See below.

Expectations: As of 6:15 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the bottom part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,691.25 micro composite point of control (MCPOC) puts in play the $4,705.75 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,716.75 LVNode and $4,740.50 minimal excess high, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,691.25 MCPOC puts in play the $4,674.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,647.25 and $4,618.75 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. Learn about the profile.

What People Are Saying

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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.

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.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, helping develop insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For December 8, 2021

Editor’s Note: The purpose of these commentaries is to align ourselves better for the day ahead. Seldom, however, do we step away to align ourselves with trade across larger time horizons. 

Given the proximity to the new year, I shall be placing more attention on planning.

How do we model a trading plan? Here is one link on things to consider.

What Happened

Overnight, equity index futures were divergent; the Russell 2000 and Dow Jones Industrial Averaged traded weak relative to their peers the S&P 500 and Nasdaq 100. 

This is as scientists discovered a harder-to-detect version of omicron that may be countered with an extra dose of vaccine.

In other news, the U.K. was set to impose new COVID-19 restrictions, the House passed a bill opening the way to a quick debt ceiling increase, and the list of Chinese developers warning they may not be able to meet upcoming financial obligations grew.

Ahead is data on job openings and quits (10:00 AM ET). 

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

What To Expect

On strong intraday breadth and divergent market liquidity metrics, the best case outcome occurred, yesterday, evidenced by an upside gap, expansion of range, and separation of value.

Similar to Tuesday’s commentary, though this activity marks participants’ willingness to change the trend, the structure is poor. As a result, there is technical instability.

Specifically, both Monday and Tuesday’s sessions left gaps and p-shaped emotional, multiple-distribution profile structures (i.e., old-money shorts covering).

As said before, participants will look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes).

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is attempting to balance).

Context: Has anything really changed since the November monthly options expiration (OPEX)?

Sure, we had some news with respect to COVID-19, China, and U.S. growth, but any associated fears were fast assuaged. 

In the span of four days, the S&P 500 rose nearly 5.00%. That’s just over 200 points!

Much of what we’re seeing is the direct result of changing market structure; participants are more exposed to leveraged products, among other things, which increases the speed with which volatility is realized.

Participants went from being exuberant and underexposed to protection – in the face of weakening breadth/fundamentals – to generating destabilizing demand for protection.

Alongside that demand of (shorter-dated) protection (where options sensitivity to direction is higher) was the market’s entry into short-gamma. In such an environment, counterparties to customers’ options trades exacerbate underlying volatility through hedging. 

Note all that movement in the front-end of the VIX futures term structure, below. Wow!

In the face of all the fear was “natural, passive buying support,” however, and expectations that short-dated protection (if realized volatility was to not be expressed to the downside) would either roll off the table (expire) or be monetized, resulting in counterparties reversing their hedges (initially short stock/futures) and supporting the market (buying to cover).

As said on December 6, and many commentaries before that, this “flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant,” and so on.

Based on this week’s trade, thus far, it seems that the bull thesis is playing out. 

So you’re telling me to buy every S&P 500 call under the sun, right? NO!

There has yet to be a notable strengthening in overall market breadth and volatility remains rich in the face of the fast-approaching December OPEX and December 15-16 Federal Open Market Committee (FOMC) meeting.

Traders are antsy and have already started pricing in potential rate overshoots; Federal Reserve Chair Jerome Powell went from being uber dovish to increasingly hawkish on the topic of taper and interest rate expansion.

Though today’s rates and earnings support validations better than in the ‘90s, an intent to moderate stimulus serves as a headwind; the U.S. may realize the swiftest tightening in financial conditions since 2005 if the Fed was to hike rates three times next year. Yikes!

So, we have to be careful here. 

Despite the S&P rallying into the first hike, historically, dynamics with respect to market structure introduce a lot of noise. Therefore, we ought to be looking at structures that have little to lose in episodes where stress surfaces and volatility is expressed to the downside. 

Graphic: UBS Group AG (NYSE: UBS) research on S&P performance into rate hikes.

Examples of low-cost options structures include call-side calendars, butterflies, and ratio spreads.

Graphic: Via Banco Santander SA (NYSE: SAN) research, the return profile, at expiry, of a classic 1×2 (long 1, short 2 further away) ratio spread.

If opportune (and well-capitalized), there are opportunities to finance debits on the call side with structures on the put side. 

This, above, is no recommendation. It’s more so how I’m looking at the current market.

In summation, the return distribution is skewed positive, still, at this juncture, but a lot of the opportunity (based on how participants were positioned just a weak ago) has disappeared.

That’s not to say we can’t go higher; upon a smooth passage of the December FOMC and OPEX there may be an unwind of “structural positioning that naturally drives markets higher as long as volatility is compressed.”

Expectations: As of 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely 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 sideways or higher; activity above the $4,691.25 HVNode puts in play the $4,705.75 LVNode and overnight high (ONH). Initiative trade beyond the latter could reach as high as the $4,716.75 LVNode/ONH and $4,740.50 minimal excess high, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,691.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 and $4,618.75 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. Learn about the profile.

What People Are Saying

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

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

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

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

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, helping develop insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For December 3, 2021

What Happened

Overnight, equity index futures auctioned in-sync, within the confines of yesterday’s recovery. 

This is as participants position themselves for Friday’s data dump that may shed light on how fast the Federal Reserve (Fed) intends to tighten monetary policy.

Ahead is data on nonfarm payrolls, the unemployment rate, and average hourly earnings (8:30 AM ET). Later is Fed-speak by James Bullard (9:15 AM ET), Markit services PMI (9:45 AM ET), as well as ISM services, factory orders, and core capital goods orders (10:00 AM ET).

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. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

In the face of strong intraday breadth, the best case outcome occurred, evidenced by the recovery of Wednesday’s value (i.e., the prices at which 70% of that day’s volume occurred).

This action negated the knee-jerk selling that coincided with COVID-19 variant news.

As a result, the S&P 500 is back inside of a short-term consolidation; participants had no interest in transacting the S&P 500 on prices advertised below the balance area.

Context: The Fed’s intent to moderate stimulus and uncertainty with regards to how a new COVID-19 variant will impact the global recovery.

In the face of it all, according to Bloomberg, “The market is again pricing June 2022 as the most likely timing for the first Fed rate hike, same as on Nov. 24. At various stages over the intervening days traders looked at July, or even as late as September.”

This is as an emerging trend from the Fed, confirmed by Chair Jerome Powell’s Congressional testimony – for weeks into this most recent equity – resulted in a re-pricing of bond market risk. 

That fear – demand for protection in the bond market – failed to appear in the equity market. 

Instead, there was an insatiable appetite for stocks, according to Bloomberg, with investors pouring more cash in 2021 than in the past 19 years, combined. 

That appetite for risk fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA), and, more recently Apple Inc (NASDAQ: AAPL). At the same time, the broader market was weakening, evidenced by a decline in breadth. 

With indices pinned, heading into the November monthly options expiration (OPEX), as a result of sticky and supportive hedging flows, correlations declined. 

Think about it. If heavily weighted index constituents are higher and the indices are pinned, then something has to give! 

After OPEX, the removal of certain hedging flows had the market succumb to fundamental forces. The addition of participants’ underexposure to downside put protection, according to SpotGamma, resulted in more rampant two-way volatility.

The reason being? The market quickly entered into an environment known as short-gamma. 

“What the heck is that? Please explain to me like I’m ten.” Okay, hold my beer.

Basically, funds holding long equity, in the interest of lower volatility returns, hedge. The S&P 500 is a benchmark and one of the best places to hedge, given liquidity, and so on.

These participants will sell calls against their long equity exposure. The proceeds from that sale will be put toward downside protection. Long equity, short call, long put. Get it?

The counterparty to this dominant positioning is a buyer (seller) of upside (downside) protection, a carry trade (i.e., long delta). 

This exposure is hedged, yes! However, this exposure will also decay, in time, all else equal. 

Volatility will slide down its term structure (vanna) and time will pass (charm); “as volatility ebbs and time passes, the unwind of these hedges brings in positive flows that can lead to lengthy sprints.” – Cem Karsan of Kai Volatility.

Now, within a certain range, said counterparties are, long-gamma also. Gamma is basically “the rate of change of delta per 1-point move in the underlying,” according to SqueezeMetrics.

As volatility and time to expiration decline, the gamma of at-the-money options rises; “option market-makers will hedge their positions in a fashion that stifles volatility (buying into lows, selling into highs).”

There are times, also, when the market is in a short-gamma; a “negative [gamma] implies the opposite (selling into lows, buying into highs), thus magnifying market volatility.”

With participants underexposed to downside protection, post-OPEX demand kicked the market into short-gamma; the conditions worsened when much of the activity was concentrated in shorter-dated tenors where the sensitivity of options to direction is higher, as stated.

Graphic: VIX term structure 11/25. Backwardation signaled an entry into an unstable environment with activity concentrated at the front-end of the curve.

Once that short-dated protection rolls off the table (and/or is monetized), counterparties will quickly reverse and support the market, buying to close their existing stock/futures hedges.

Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator on 12/2 shows positive options delta trades firing off, which likely had dealers buying stock/futures into the close.

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant, and the positive effects of pro-cyclical inflation and economic growth, improvements in global trade, and continuity at the Fed, among other dynamics, play out.

We see participants opportunistically buying the dip, already, via metrics like DIX that’s derived from liquidity provision on the market-making side.

Graphic: Earnings are rising and helping support historic PE multiples, via Nasdaq

Notwithstanding, the market is still in short-gamma and unless participants began betting on the upside (i.e., committing increased capital to calls at strikes higher in price and out in time), and we cross over to long-gamma, volatility ought to remain.

To assuage fears, though, here is a quote from Goldman Sachs Group Inc (NYSE: GS): 

“We find that the market has already priced in a significant downgrade in the growth outlook off the back of Omicron concerns. While we don’t believe that the most extreme downside scenarios are fully reflected in current market pricing, there are clearly still scenarios that could prove better than anticipated by the sharp shift in pricing in recent weeks, in our view”.

Expectations: As of 6:45 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper 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 sideways or higher; activity above the $4,574.25 high volume area (HVNode) puts in play the $4,590.00 balance area high (BAH). Initiative trade beyond the BAH could reach as high as the $4,629.00 untested point of control (VPOC) and $4,647.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,574.25 HVNode puts in play the $4,551.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,526.25 HVNode and $4,497.75 regular trade low (RTH Low), or lower.

Click here to load today’s updated 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. Learn about the profile.

What People Are Saying

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.

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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.

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

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

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For December 2, 2021

What Happened

Overnight, equity index futures steadied at the prior day’s lows

There were signs of a shift in relative strength as the Russell 2000’s extended-day recovery outpaced that of the S&P 500 and (now) weaker Nasdaq 100. 

At the same time, yields on the ten-year rose while volatility came in. Still, the VIX futures term structure remained higher, a clear indication of stress, in the face of demand for protection.

Ahead is data on jobless claims (8:30 AM ET) with Fed-speak scattered throughout the day.

Graphic updated 6:40 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On nonparticipatory breadth and weak market liquidity metrics, the worst-case outcome occurred, evidenced by the S&P 500’s spike away from the value (i.e., the prices at which 70% of the day’s volume occurred).

The knee-jerk selling, which coincided with news that a COVID-19 variant was spotted in the U.S., broke the S&P 500 out of a short-term consolidation (i.e., balance) area. 

The developing balance was a result of participants looking for new information to base a directional move. With new information, participants chose downside price exploration.

Adding, the knee-jerk selling and associated price action left behind poor structure (i.e., participants will look to validate [or invalidate] the move, spending time below [or above] the ~$4,574.25 spike base). Caution is warranted on overnight validation of the spike. 

Graphic: Supportive delta (i.e., committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of initiative trade (i.e., directional trade that suggests current prices offer unfavorable entry and exit; the market is seeking balance).

Context: A resurgence in COVID-19, a change in tone with respect to monetary policy, and last-minute tax-selling, in the face of seasonally-bullish buybacks and new month inflows.

The implications of these themes on price are contradictory. 

As stated, yesterday, the Federal Reserve’s Jerome Powell unexpectedly changed his tone around inflation, becoming more open to a faster taper in bond-buying and rate hikes. 

This is as policymakers look to tame price readings without inhibiting economic growth; fears of the aforementioned change in tone were clearly spotted by the bond market’s pricing of risk, so to speak, diverging from that of the equity market, weeks before current volatility.

Graphic: “The ICE BofA MOVE Index, which measures implied volatility for Treasuries, is close to the steepest level since April 2020,” via Bloomberg.

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive to own.

As the market is a forward-looking mechanism, the implications of this are staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

Graphic: Via The Market Ear, “Bank of America estimates that corporate earnings used to explain half of equity market returns up to the financial crisis, but since then they only explain 21%. Meanwhile, changes to the Fed’s balance sheet explain 52% of market returns since 2010, it estimates. Buy what the FED buys. Sell what the FED stops buying.”

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Eventually, the fear on the part of bond market participants fed into equity market positioning; breadth weakened for weeks into November’s large monthly options expiration, after which the absence of sticky and supportive hedging flows finally freed the market for directional resolve. 

Couple that with participants being “underexposed to downside put protection,” according to SpotGamma, there was an expectation that there could be a rough re-pricing of tail risk as participants, en masse, sought after highly “convex” downside options which had the counterparties to those trades exacerbating underlying price movement.

Per the VIX term structure graphic below, there is tons of movement in the front-end, a sign that participants are concentrating activity in shorter-dated tenors where the sensitivity of options to direction is higher.

Graphic: VIX term structure. 

So long as this dynamic remains, participants can expect instability.

In assuaging fears, however, Moody’s Corporation (NYSE: MCO) put out research that found “information about the variant and the policy actions taken to date do not yet support a material shift” in forecasts.

This is as S&P Global Inc (NYSE: SPGI), despite lowering growth forecasts a touch, expects GDP to reach a 37-year high in 2021. With odds that it will likely take the next few weeks to find out more with respect to the severity of new COVID-19 variants, attention moves to “cyclicals, commodities, and reopening themes,” according to JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic. 

Graphic: Via Bloomberg, “there is ‘plenty of liquidity available to drive stock prices higher as dip-buyers enter the market,’” strategists at Yardeni Research, wrote.

Expectations: As of 6:40 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the lower part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,551.75 low volume area (LVNode) puts in play the $4,574.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,629.00 untested point of control (VPOC) and $4,674.25 micro composite point of control (MCPOC), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,551.75 low volume area (LNVode) puts in play the $4,497.75 regular-trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,471.00 and $4,425.00 VPOC, or lower.

Click here to load today’s updated 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. Learn about the profile.

Charts To Watch

Graphic: (NYSE: SPY). (S~$448, $438 and R~$454, $460). S is for support. R is for resistance.

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

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

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For November 30, 2021

What Happened

Overnight, equity index futures auctioned sideways to lower. The Russell 2000 led the decline while the Nasdaq 100 buoyed the S&P 500 as yields were a touch lower.

Though volatility is bid, related metrics suggest the removal of fear and added market stability. 

In short, conditions aren’t as bad as they were, Friday. 

Ahead is data on the S&P Case-Shiller Home Price Index (9:00 AM ET), Chicago PMI (9:45 AM ET), Consumer Confidence (10:00 AM ET). Scheduled also is testimony by Federal Reserve and Treasury members (10:00 AM and 1:00 PM ET).

Graphic updated 6:30 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. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On lackluster intraday breadth and divergent market liquidity metrics, the best case outcome occurred, yesterday, evidenced by a decisive move away from intraday value (i.e., the price levels at which 70% of the day’s volume occurred), into an area of resting liquidity that coincided with a volume-weighted average price (VWAP), anchored from the start of the decline. 

To note, VWAPs are metrics 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.

Moreover, given the divergences (one is pictured below), we can surmise that Monday’s recovery was responsively sold. 

Given the push and pull between the big indices, as well as lackluster breadth and market liquidity metrics, there is increased potential for sideways trade; participants are likely to base for a directional move in anticipation of new information in regards to dynamics like COVID-19, monetary policy evolution, and the like.

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is attempting to bracket/balance).

Context: Keeping it to the point, today.

There is less fear coming into Tuesday’s session than there was Friday. 

This dynamic is most clearly visualized with the VIX futures term structure which is much less flat, so to speak, than it was. 

Graphic: VIX term structure.

Though one could surmise that there is less risk of instability, as a result, rather, we should think about it as the demand for protection through time. The demand has cooled.

In building on that, we saw the market enter into a destabilizing environment characterized by counterparties to options trades selling into weakness and buying into strength. 

After a brief exit from that environment, Monday, an overnight liquidation has us on the cusp of re-entry. With options activity most concentrated in shorter-dated tenors where the sensitivity of options to direction is higher, if we will, then the expectation is that we realize more volatility.

That’s not to say that the market must trade lower. No. Instead, sideways trade as investors seek more information (in regards to COVID-19, monetary policy moderation, and the like) to base a directional move is just as likely. 

In that case, the short-dated, out-of-the-money protection that was demanded will quickly evaporate; associated hedging flows (i.e., the buy-back of short stock/futures hedges) ought to support the market. 

Should participants’ fears be assuaged, the aforementioned flows could play into a seasonally-aligned rally into Christmas. 

For that thesis to not play out, there would have to be increased participation below $4,600.00 in the S&P 500 (i.e., value, internals, market liquidity must support downside price discovery).

Graphic: Daily changes in the CBOE Volatility Index (INDEX: VIX) greater than 50% precede positive S&P 500 performance.

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

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,618.75 high volume area (HVNode) puts in play the $4,647.25 HVNode. Initiative trade beyond the latter HVNode could reach as high as the $4,674.25 micro composite point of control (MCPOC) and $4,691.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,618.75 HVNode puts in play the $4,590.00 balance boundary (BAH). Initiative trade beyond the BAH could reach as low as the $4,574.25 HVNode and $4,551.75 LVNode, or lower.

Click here to load today’s updated 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. Learn about the profile.

Charts To Watch

Graphic: (NYSE: SPY). (S~$453, R~$465). S is for support. R is for resistance.

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.

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.

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

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

Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For November 22, 2021

What Happened

Overnight, equity index futures were sideways alongside the narrative that a strengthening dollar and the need to counteract inflation may endanger the rally in risk assets.

Ahead is data on the Chicago Fed National Activity Index (8:30 AM ET) and Existing Home Sales (10:00 AM ET).

Graphic updated 6:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

To start, on weak intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas in the S&P 500.

Taken together, the activity of the past two weeks or so signals participants’ willingness to position for directional resolve (i.e., trend) in the face of new information, and the like. 

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: The aforementioned trade is happening in the context of concerns over peak liquidity and prevailing monetary frameworks. 

Specifically, as Bloomberg’s John Authers put it, the abundance of global liquidity, that stoked one of the best stock market recoveries in history, is in peril by the strengthening of the dollar and the need to counter inflationary pressures. 

“Obstinately low real yields help to explain why the threat to liquidity has as yet had minimal effect on the stock market. Higher real yields are the shoe that hasn’t dropped this year; investors need a clear plan of evasive action for such an eventuality. For now, liquidity, liquidity, liquidity is still keeping stocks going up, up, up.”

Some of this fear around monetary evolution, so to speak, though, has yet to feed into the pricing of equity market risk. Fear in one market tends to feed into the fear of another.

Graphic: “The ICE BofA MOVE Index, which measures implied volatility for Treasuries, is close to the steepest level since April 2020,” via Bloomberg. This measure, on a relative basis, has diverged from the CBOE Volatility Index (VIX), which is a measure of implied volatility for equities, specifically the S&P 500. 

At the same time, we see a divergence in breadth.

Graphic: % of SPX stocks above their 200-Day Moving Average versus SPX, via indexindicators.com.

The takeaway here is that the SPX is sideways to higher while many of its constituents seem to not be participating in the most recent round of markup.

What factors are to blame for this? Two include an all-time high in buybacks, as well as extremes in speculation and upside volatility in heavily-weighted index constituents.

Adding, the S&P 500 closing last week pinned to the level at which dealers (i.e., those participants that take the other side of options trades and warehouse risk) exposure to positive options gamma was highest. 

Note that I talk about the implications options so much due to increased use and impact on underlying price, as a result of associated hedging. 

The aforementioned explains why the S&P can’t move; “If dealer hedging has suppressed index level volatility, but underlying components are still exhibiting idiosyncratic volatility, then the only reconciliation is a decline in correlation,” according to one paper by Newfound Research.

So trash breadth and a deceleration in equity inflows, coupled with exuberance (and upside volatility in heavily weighted index constituents) and clustered options positioning over the past weeks, is part of the reason why indices are sideways. Yes, to some extent.

Graphic: Per The Market Ear, “BofA points out the halt to inflows in market leaders such as tech, energy and financials. Basically, the “pillar of the pillar” of this market is fading. Do we still trust the seasonality pattern?”

The tone is to change, soon.

After OPEX, the absence of supportive vanna and charm flows (defined below), for which we can attribute some of the trends in extended day outperformance, alongside that sticky gamma hedging, so to speak, frees the market for directional resolve

According to SpotGamma, in light of recent exuberance, “participants are underexposed to downside put protection. Should these participants reach for long-gamma put exposures amidst volatility, there is a potential for a destabilizing, reflexive reaction on the part of dealers.”

The reason is, as volatility rises and customers demand out-of-the-money put protection, counterparties are to hedge by selling stock and futures into weakness. 

Cognizant of the risks, though, I end this section with the following. 

“[D]uring the 12-month period starting six months before and ending six months after a tightening cycle begins, the valuation of the S&P 500 has on average remained remarkably steady,” according to a post by The Market Ear.

At the same time, seasonality is great as, according to Callum Thomas, “Historically most of the time if the market closed up 20%+ for the year, the next year was also positive (84% of the time). As of writing, the market is up some 27% YTD (albeit, this year ain’t over yet!).”

Going forward, we shall monitor for the first signs of instability via spikes in the CBOE Volatility-Of-Volatility Index (INDEX: VVIX) and upward shifts in the VIX futures term structure.

Expectations: As of 6:20 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, inside of prior-range, suggesting a limited potential for immediate directional opportunity.

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

We monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

Given the passage of OPEX, we ought to give more weight to directional resolve (i.e., trend).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 high volume area (HVNode) puts in play the $4,723.50 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, or lower.

Click here to load today’s updated 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. Learn about the profile

Definitions

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

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

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

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

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.

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, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For November 18, 2021

What Happened

Overnight, equity indices auctioned sideways to higher as the bellwether S&P 500 continues to encounter difficulty in overcoming the forces associated with the large derivatives expiry, Friday.

One headline worth mentioning concerns JPMorgan Chase & Co’s (NYSE: JPM) prediction the Federal Reserve (Fed) will raise interest rates next September, earlier than expected. 

Ahead is data on jobless claims and the Philadelphia Fed manufacturing index (8:30 AM ET), leading economic indicators (10:00 AM ET), as well as Fed-speak scattered throughout the day.

Graphic updated 6:00 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by a Gaussian profile, as well as the balance and overlap of value in the S&P 500.

This activity, which denotes participants positioning themselves for directional resolve, is adding structure, a technically stabilizing dynamic, in short.

Graphic: Lackluster delta (i.e., non-committed buying/selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: Amidst a rather large monthly options expiration (OPEX) this Friday, participants are having difficulty directionally resolving the S&P 500.

This is most visible by the S&P 500’s failure to move away from the $4,695.25 high volume area (HVNode), a level at which there is concentrated participation in the options market. 

As noted before, according to SqueezeMetrics, this level ought to be a magnet given hedging.

“As realized volatility falls from its peak around a year ago, more sold SPX options cluster at strikes nearer to spot. And as implied volatility falls with it, the gamma of those options increases. More dealer long gamma means more liquidity. More liquidity means less movement.”

Moreover, yesterday, there was a note about the market’s reaction to what SpotGamma labels a Call Wall, the strike with the largest net positive gamma in the underlying stock. 

This Call Wall is a reflection of participants’ commitment to higher prices. Should that level continue to move up, then that confirms a willingness to do business, higher, so to speak. 

Since participants were able to roll their exposure to positive options gamma, higher in price and out in time, dealers have to hedge. This maintains that positive (stabilizing) dealer flow we talk so often about, which has bolstered this equity bull market.

Graphic: Via SHIFT, we see participants rolling call exposures to strikes out in time.

That leads us to a dynamic I briefly mentioned last week. After being brought to my attention again, yesterday, there is obviously more to unpack there. However, in keeping it short, I’ll hit on the basics.

The bond market’s pricing of risk, according to Bloomberg, based on an “erratic … handling [of] large transfers of risk” – as evidenced by the Merrill Lynch Option Volatility Estimate (INDEX: MOVE) – has diverged from the pricing of equity market risk via the CBOE Volatility Index (INDEX: VIX).

Fear in one market tends to feed into the fear in another; regardless of the cause, equity and bond market participants are not on the same page.

What does that mean?

At its core, the fear is in tandem with “broad uncertainty about the direction of the economy and monetary policy amid surging prices, labor shortages and yields that are holding well below the rate of inflation,” according to Bloomberg.

In combating high inflation, policymakers ought to raise rates, right? 

Well, that’s at least what economists at institutions like JPM believe may happen as soon as next September, earlier than once forecasted.

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive to own.

As the market is a forward-looking mechanism, the implications of this seem staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Eventually, fear on the part of bond market participants may feed into equity market positioning.

Graphic: Via The Market Ear, in spite of earnings growth, buybacks, and seasonality, among other factors, Bank of America Corp (NYSE: BAC) sees large tech outflows. Fade as big tech starts to look relatively cheap?

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

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,695.25 high volume area (HVNode) puts in play the $4,711.75 regular-trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,695.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 untested point of control (VPOC), or lower.

Click here to load today’s updated 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. Learn about the profile.

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.

VPOCs: 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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

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

Categories
Commentary

Daily Brief For November 17, 2021

What Happened

Overnight, equity index futures were divergent. This comes as there were no significant news catalysts and there is a weighty CBOE Volatility Index (INDEX: VIX) expiration today.

Ahead is data on building permits and housing starts (8:30 AM ET). Numerous Federal Reserve members are scheduled to speak today.

Graphic updated 5:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

When analyzing the composite (i.e., overnight and day time frame) volume profile, yesterday’s double distribution suggests participants initiated from one area of acceptance to another.

Amidst divergent intraday breadth and market liquidity metrics, the S&P 500 came back into range and participants defended the $4,695.25 high volume area (HVNode). This level corresponds with what options analysis provider SpotGamma says is a Call Wall.

Given an implosion in volatility over the past sessions, the Call Wall is a near-term magnet due to associated hedging.

“As realized volatility falls from its peak around a year ago, more sold SPX options cluster at strikes nearer to spot. And as implied volatility falls with it, the gamma of those options increases. More dealer long gamma means more liquidity. More liquidity means less movement.” – SqueezeMetrics

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: The aforementioned trade is happening in the context of what Goldman Sachs Group Inc’s (NYSE: GS) CEO David Solomon says is a market environment dominated by greed. 

“[T]here have been periods of time when greed has far outpaced fear — we are in one of those periods,” he said. “My experience says those periods aren’t long-lived. Something will rebalance it and bring a little bit more perspective.”

This comes as markets surge alongside historic amounts of stimulus, improvements in fundamentals (i.e., earnings), supply chain demand/supply imbalances, inflation, and more. 

Further, as stated over the past few commentaries, economic structures are different and we are not in the 1970s. That said, there are a few big dynamics that are of concern.

The first is that we see supply pressures beginning to ease as at-home inventory build-ups are expected to take away from consumption during the holidays (for which businesses are scrambling to stock). Ultimately, this may pressure commodity inflation.

Graphic: Via The Market Ear, Bridgewater shows supply returning to pre-COVID-19 levels as demand explodes, “creating an imbalance of a magnitude that we haven’t seen since the 1970s. What happened in the ’70s truly was a supply shock: supply collapsed, and demand stayed relatively steady. Today, demand is surging, and supply is also growing, but it just can’t keep up with demand.”

The second is this concept of the velocity of money slowing as participants extend moneyness to nonmonetary assets. This is primarily because of monetary policies and an environment of debt and leverage that ultimately cuts into asset price volatility. Overall, this dynamic adds to the prevailing risks of carry when volatility does rise and the demand for money pushes deflation.

Solomon adds: “Chances are interest rates will move up, and if interest rates move up that in of itself will take some of the exuberance out of certain markets.”

With prevailing monetary frameworks and max liquidity promoting a divergence in price from fundamentals, as well as the growth of passive investing and derivatives trading, we ought to have some concern for pending monetary evolution, so to speak. 

As Kai Volatility’s Cem Karsan once told me: “A lot of the processes that enforce these bubbles are embedded in the volatility market.”

“There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed, or there’s a supply of volatility.” However, “At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Note: This structural positioning in the S&P 500 can be construed as customer long equity, long put, short call. This sort of positioning tends to leave the market in long-gamma whereby dealers buy into weakness and sell into strength. Amidst the decay in protection, dealers are to unwind their hedges (supply less liquidity), and this is a force that bolsters market price rises.

Even the slightest reduction in liquidity has the potential to prick the bubble, prompting a reaction that exacerbates underlying price movements; the response by customers, as well as the dynamics of dealers’ risk exposure to direction and volatility, ought to cut into liquidity and aid in an unraveling.

“It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

Case in point, the market’s reaction to prices near SpotGamma’s Call Wall. If participants were unable to roll that exposure to positive options gamma higher in price and out in time, dealers would not have to hedge. This cuts into dealers’ need to unwind hedges to customers’ options positions. This removes one positive (stabilizing) flow that has bolstered this equity bull market.
Graphic: Via SHIFT, we see participants potentially rolling call exposures.

We have seasonally-aligned inflows and earnings growth, among other things, bolstering the most recent rally to new highs. With this week’s implosion in implied volatility most noticeable at the front end of the VIX futures term structure, given the decay in shorter-dated customer protection, it may be an opportune time to hedge.

As The Market Ear stated yesterday, “Playing the term structure (i.e., [buying the] short end of the curve vs [selling] the longer part of the term structure curve) is becoming a rather cheap way to hedge some risks here.”

Expectations: As of 5:45 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

We shall monitor for acceptance (i.e., more than 1-hour of trade) outside of the prior day’s balance area (i.e., the price levels at which 70% of the day’s volume occurred). Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,695.25 high volume area (HVNode) puts in play the $4,711.75 regular-trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,695.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 untested point of control (VPOC), or lower.

Click here to load today’s updated 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. Note that the S&P 500 is pinning at $4,695.25 amid what looks to be a cave-fill (i.e., the widening of the area deemed favorable to transact in by an increased share of participants). Learn about the profile.

What People Are Saying

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.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

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