Categories
Commentary

Daily Brief For July 26, 2021

Market Commentary

Equity index futures trade sideways to lower. Yields lead lower.

  • China tension, infrastructure, COVID talk.
  • Ahead are new home sales and earnings.
  • S&P plays with a potential auction failure.

What Happened: U.S. stock index futures auctioned sideways to lower overnight alongside narratives surrounding a U.S. and China stalemate, progress on infrastructure, as well as the spread of COVID-19 variants.

On COVID-19, Nordea analysts conclude: “Delta is a cause for concern around the globe, but judging from the case to hospitalization ratio, it seems as if the crisis is already mostly over. Central banks will conclude the same soon, even if the initial reaction to Delta is clearly dovish.”

Moreover, ahead is data on new home sales, as well as earnings reports by Tesla Inc (NASDAQ: TSLA) and Lockheed Martin Corporation (NYSE: LMT), among other companies.

Graphic updated 6:40 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

What To Expect: As of 6:40 AM ET, Monday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during Friday’s trade, the best case outcome occurred, evidenced by trade above $4,384.50, a prior all-time high (ATH) and balance-area high (BAH).

Balance (Two-Timeframe Or Bracket): Rotational trade in which 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).

To note, Friday’s trade happened on positive, albeit weaker breadth. This is in comparison to Thursday’s session during which breadth, measured by the Advance/Decline indicator, was negative and not supportive of an advance in price.

A key thing to watch for is acceptance (i.e., more than 1-hour of trade) and whether an auction failure transpires.

If initiative buyers were to further expand the range, then all is well. However, in a failure to move higher, confirmed by trade below Friday’s $4,372.50 regular trade low (RTH Low), an auction failure may foreshadow a liquidation break.

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

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,384.50 pivot puts in play the $4,398.50 high volume area (HVNode). Initiative trade beyond the $4,398.50 HVNode could reach as high as the $4,407.75 ATH and $4,428.25 Fibonacci-derived target.

In the worst case, the S&P 500 trades lower; activity below the $4,384.50 pivot puts in play a potential auction failure confirmed by trade below the $4,372.50 RTH Low. Initiative trade beyond the RTH Low may reach as low as the $4,353.00 untested Point of Control (VPOC) and $4,325.75 LVNode.

To note, the last key level corresponds with two anchored Volume Weighted Average Price (VWAP) levels, a metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

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

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

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Graphic updated 6:30 AM ET.

News And Analysis

China stocks tumble in panic selling amid a broad crackdown.

U.S. infrastructure talks near finish as Senators face pressure.

U.S. real yields fell to a record low alongside growth concerns.

The COVID-19 coronavirus crisis is officially over (in the West).

U.S. home price appreciation to moderate as supply increases.

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

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

Categories
Commentary

Daily Brief For July 22, 2021

Market Commentary

Equity index futures trade higher as volatility implodes. Yields, commodities are higher, too. 

  • President Biden played down inflation.
  • Ahead: Claims, home sales, earnings.
  • Equity indices up on fantastic breadth.

What Happened: U.S. stock index futures auctioned higher alongside comments against inflation by President Joe Biden, yesterday. Virus fears ebbed as infections accelerated. 

Bitcoin extended its advance after Elon Musk, Catherine Wood, and Jack Dorsey talked cryptocurrency at a virtual event.

Ahead is data on weekly jobless claims, existing home sales, and corporate earnings. 

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

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

Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area.

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.

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by trade above the $4,334.25 spike base. As that happened, participants found increased acceptance at higher prices, moving the micro-composite Point of Control (MCPOC) up to $4,341.75, a pivot point (i.e., above = bullish, below = bearish) for today’s trade. This is noteworthy since it suggests the fairest price to do business, on a larger timeframe, is higher. 

At the same time, in support of the price rise was fantastic breadth and dynamics with respect to the derivatives market; amidst a crash in volatility, associated hedging activities bolster the rally. 

Coming into the balance-area sellers initiated from the weak prior, however, certain mechanics may quell the upside volatility, potentially leading to a stall or slower advance. 

Graphic: SpotGamma data suggests the S&P 500 is back in so-called “long-gamma” territory. 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.

Moreover, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,341.75 MCPOC puts participants just short of entry into a prior balance area, near the $4,357.75 low volume area (LVNode). Initiative trade beyond the $4,357.75 LVNode could reach as high as the $4,371.00 POC and $4,384.50 minimal excess regular trade high (RTH), the typical scenario on re-entry into balance. 

In the worst case, the S&P 500 trades lower; activity below the $4,341.75 MCPOC puts in play the $4,325.75 LVNode. Initiative trade beyond the $4,325.75 LVNode could reach as low as the $4,315.25 and $4,299.75 high volume areas (HVNodes). 

It is important to note also that the prior two HVNodes correspond with key Volume Weighted Average Price (VWAP) levels, a metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

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).

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

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

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

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Updated 6:30 AM ET.

News And Analysis

Strong job and real estate markets support credit. (Moody’s)

Federal Reserve ramps up debate on taper timing. (WSJ)

China offers oil reserves in a move to cool oil rally. (BBG)

Biden dismisses inflation worries, warns on hiring. (BBG)

U.S.-China goods trade booms amid virus, tariffs. (BBG)

Powell has broad support among top Biden aides. (BBG)

PG&E plans to bury power lines in fire-risk areas. (WSJ)

EMEA economies recovering faster than thought. (S&P)

Structured finance sees issuances rising to $1.4T. (S&P)

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

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

Categories
Commentary

Daily Brief For July 21, 2021

Market Commentary

Equity index futures sideways to higher overnight. 

  • Pandemic continues to accelerate.
  • Ahead is oil market data, earnings.
  • Indices sideways as volatility ebbs.

What Happened: U.S. stock index futures auctioned sideways to higher alongside an increased spread of COVID-19 variants, earnings, and tremendous bond market volatility.

The trade comes also as leading indicators for global economic growth show unusually strong readings, according to Merrill, “pointing to one of the strongest economic expansions of the past 70 years.” In line, strategists at JPMorgan Chase & Co (NYSE: JPM) revised higher their year-end S&P 500 price target from $4,400 to $4,600. 

Ahead, participants are looking forward to data on oil market inventory and earnings.

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

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

Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area.

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.

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by trade above the $4,285.25 micro-composite Point of Control (MCPOC). This is significant because it denotes movement above the fairest price to do business since the June 20 swing low. Now, initiative sellers have a clear line in the sand – $4,285.25 – when it comes to making headway into areas of demand.

Further, the near-vertical price rise wasn’t without a warrant.

After breaking down, the S&P 500 came to a micro-composite LVNode and halted. Thereafter, prices rebounded. Why was this? Stock indexes were positioned for a vicious rebound as near-term downside discovery may have reached a limit, based on market liquidity metrics and the inventory positioning of participants. 

According to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggested there was more risk to the upside than the downside, at that S&P 500 juncture.

Given this metric, strong breadth, and positive delta, as well as the resolve of a Volume Weighted Average Price (VWAP) pinch, the S&P 500 is positioned for higher.

Graphic: SPDR S&P 500 ETF Trust (NYSE: SPY) market liquidity, via Bookmap. Note the supportive volume delta, a measure of buying and selling power as calculated by the difference in volume traded at the bid and offer.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

For today, participants can trade from the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,334.25 spike base puts in play the $4,343.00 untested Point of Control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,357.75 low volume area (LVNode) and $4,371.00 VPOC.

In the worst case, the S&P 500 trades lower; activity below the $4,334.25 spike base puts in play the $4,314.75 HVNode. Initiative trade beyond the $4,314.75 HVNode could reach as low as the $4,299.75 HVNode and $4,285.25 micro-composite POC.

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

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

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

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

News And Analysis

Work-in-progress U.S. infrastructure bill faces test in Senate. (REU)

Housing starts continuing to improve as permits lose ground. (MND)

Nasdaq to spin out market for pre-IPO shares in a bank deal. (WSJ)

Decentralized finance builds on three major waves of bitcoin. (Future)

Startups on a record acquisition spree buying other startups. (CBN)

U.S. and European consumer confidence and spending rise. (Moody’s)

Titan – Fidelity for Millennials – raised $58M Series B round. (CBN)

Survey showing U.S. majority supports more tech regulation. (Axios)

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

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

Categories
Commentary

Weekly Brief For July 18, 2021

Market Commentary

Key Takeaways: Equity index futures spike lower in their attempt to discover fair prices for two-sided trade.

  • COVID, waning stimulus cloud outlook.
  • Ahead: Housing and employment data.
  • Indices diverge; breadth, inflows lower.

What Happened: U.S. stock index futures auctioned sideways to lower.

The drop wasn’t entirely uncalled for. 

Into the seasonally-aligned price rise led by the Nasdaq 100 and S&P 500, inflows decelerated and breadth weakened

At the same time, a measure of inflation – via the Consumer Price Index (CPI) – rose the largest since the Global Financial Crisis. In response, the 5s30s curve resumed its flattening and the 10-year U.S. Treasury yield ended little changed.

Graphic: Inflation at its highest in almost 30 years via Bloomberg.

Simply put, it’s likely that bond market participants shrugged off the data and an acceleration in inflation will be temporary.

Still, yields could become further depressed due in part to fundamental and technical factors – issuance, short coverings, a fading reflation trade, peak growth – as well as the August 1 reinstatement of the U.S. debt limit.

“[I]f Congress idly stands by, the Treasury will eventually hit the debt limit on October 18. The consequences would be severe,” Moody’s strategists believe. Michael A. Gayed of the Lead-Lag Report adds the odds of a rating downgrade increase, as a result, also.

Moody’s concludes: “[T]apering earlier than the markets are pricing would risk causing yields to jump when some of the technical drags are easing.”

Graphic: Bank of America Corp’s (NYSE: BAC) timeline for taper via The Market Ear

Adding, since inflation and rates move inversely to each other, a mistimed bump in rates – alongside increased nervousness over a COVID-19 resurgence and fading fiscal stimulus – would potentially take away from the commitment to keep inflation expectations closer to the Federal Reserve’s 2%-plus target.

In all, in support of the Fed’s target, COVID-19 must not become a problem, and the Biden administration, alongside Congress, must come to terms on another fiscal package – a few trillion in size – that looks to extend the Treasury debt ceiling.

As unemployment declines and labor force participation increases, expectations of rate normalization will solidify. This is a boon for beta sectors, according to JPMorgan Chase & Co’s (NYSE: JPM) Marko Kolanovic.

Considerations: Investment bank and financial services company Morgan Stanley (NYSE: MS) believes downside risks are compounded by equity and bond positioning, low short interest, and the involvement of systemic strategies which could intensify a sell-off.

Graphic: Bank of America Corp (NYSE: BAC) chart on futures positioning via The Market Ear.

MS says CTAs are still short bonds which, according to CityWire, could continue the bond rally, pressuring stocks as investors “fear the bond market may know[] something they don’t.”

Add the passage of the July options expiration (OPEX), the window for the aforementioned dynamics (alongside a shift in preferences from saving and investing to spending, monetary tightening, seasonality, as well as a COVID-19 resurgence) to take over is opened.

After OPEX, according to SpotGamma, “the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Graphic: SpotGamma’s EquityHub showed 30% of the S&P 500’s gamma expiring July 16 which, as SpotGamma has said in the past, “creates volatility because, as large options positions expire[], are closed and/or rolled, dealers have large hedges they need to adjust.”

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the $4,334.25 spike base.

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

In the best case, the S&P 500 trades sideways or higher; activity above $4,334.25 puts in play the $4343.00 VPOC. Trade beyond that signposts may then put in play the $4,346.75 HVNode – which corresponds with two anchored Volume Weighted Average Prices (VWAPs). 

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

More On Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

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

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

If higher, entry into an overhead supply area, above the $4,357.75 low volume area (LVNode), portends continuation to the $4,371.00 VPOC and$4,384.50 RTH High. 

In the worst case, the S&P 500 trades lower; activity below $4,334.25 puts in play the $4,314.75 high volume area (HVNode). Initiative trade beyond $4,314.75 could reach as low as the $4,297.00 HVNode. Closeby is the $4,291.00 VPOC and $4,285.00 composite HVNode.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).

News And Analysis

When VIX hits an extreme, options traders look to volatility arbitrage. (tasty)

Identifying gamma squeezes with SpotGamma’s options modeling. (BZ)

U.S. banks see loan, revenue pressure despite consumer spending. (Fitch)

The U.S. economy continued to strengthen as mobility trended up. (S&P)

‘A free put on the market’: Ambrus CIO talking volatility dislocations. (BZ)

OPEC+ agrees oil supply boost after UAE, Saudi reach compromise. (REU)

An unexpected tightening in policy would generate market volatility. (Moody’s)

Semiconductor supply shortage, inflation, and technology regulation. (S&P)

Frenzied retail investing boom has been cooling off in recent weeks. (Fortune)

Delta Air is seeing positive growth in business travel as offices open. (S&P)

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

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

Categories
Commentary

Daily Brief For July 16, 2021

Market Commentary

Equity index futures higher overnight.

  • Watching: Delta variant, HK warning.
  • Light day ahead: OPEX, retail sales.
  • Indices rotating, recover lost ground.

What Happened: U.S. stock index futures auctioned sideways to higher last night ahead of the Friday monthly options expiry (OPEX). 

Key developments include a bump in the consumer price index (CPI), expectations the Biden administration will issue an advisory about the risks of doing business in Hong Kong, and the spread of COVID-19 variants.

Today, participants get data on retail sales, Fed speak, and earnings.

Graphic updated 7:00 AM ET. Sentiment Neutral if /ES open is inside of the prior day’s range. Sentiment Risk-On if /ES open is above the prior day’s range. Sentiment Risk-Off if /ES open is below the prior day’s range. See here for more on the Dark Pool Index and Gamma. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

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

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by trade below the $4,357.75 low volume area (LVNode) pivot. This is significant because that pivot marked a break from a multi-session balance area. 

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

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

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).

The downside resolve was the result of initiative sellers stepping in. For weeks, equity indices – particularly the S&P 500 and Nasdaq 100 – rose with tremendous speed, leaving behind low volume (poor) structures. Thereafter, responsive sellers surfaced, evidenced by sideways trade in the day’s prior. That said, weak breadth transpired into material price action with the Nasdaq 100 losing its relative strength – a deviation from prior trade – as it and the Russell 2000 sold into trend support. The S&P 500 and Dow Jones Industrial Average traded strong, in comparison, with the Dow positioned for a potential break higher. 

All of this push-pull and divergence comes ahead of the options expiration (OPEX) cycle which starts on the third Friday of each month (July 16). Associated hedging forces make it so there’s more liquidity and less movement. After OPEX, according to SpotGamma, “the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Graphic: SpotGamma’s EquityHub shows 30% of the S&P 500’s gamma expiring July 16 which, as SpotGamma has said in the past, “creates volatility because, as large options positions expire[], are closed and/or rolled, dealers have large hedges they need to adjust.”

Given the expectation for so-called unpinning in coming sessions, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,357.75 LVNode pivot puts in play the $4,371.00 untested Point of Control (POC). Thereafter, if higher, participants can look for responses at the $4,384.50 regular trade high (RTH High) and $4,398.50 Fibonacci price extension.

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

In the worst case, the S&P 500 trades lower; activity below $4,357.75 puts in play the $4,346.75 high volume area (HVNode). Trade beyond $4,346.75 could reach as low as the $4,332.25 LVNode and $4,314.75 HVNode.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Note the developing VWAP pinch. Buy above a flat/rising VWAP pinch. Sell below a flat/declining VWAP pinch.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right). See the response to trend support in the Nasdaq 100 and Russell 2000. Also, note the Dow’s relative strength.

News And Analysis

Politics | U.S. warns investors on Hong Kong, citing China’s pressure. (BBG)

FinTech | Ethereum is the most important technology since the internet. (DDI)

Politics | Ocasio-Cortez warns progressives can ‘tank’ infrastructure bill. (BBG)

Markets | OPEC sees world oil demand reaching pre-pandemic levels. (REU)

Mobility | Biden looks into lifting Europe travel ban, a boost for airlines. (BBG)

Economy | Biden to reappoint Jerome Powell as Fed chair, some saying. (REU)

Markets | “Bad omen” for meme stocks as novice traders stop investing. (Axios)

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter that’s interviewed leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, Canadian businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

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 July 15, 2021

Market Commentary

Equity index futures sideways to lower overnight.

  • A $3.5T spending bill is gaining traction.
  • Claims, earnings, Fed speak, and more.
  • Indices diverge; breadth metrics weaken.

What Happened: U.S. stock index futures resolved lower after underlying breadth metrics failed to support further price discovery. 

Such lackluster trade comes ahead of a few key developments, most important of which include testimony by Federal Reserve chair Jerome Powell, employment data, earnings, industrial and manufacturing numbers, as well as the July 16 monthly options expiration.

Graphic updated 7:50 AM ET. See here for more on the Dark Pool Index and Gamma. Check out SHIFT search for data on the options activity.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open on a small gap below prior-range and -value. This suggests an increased potential for immediate directional opportunity.

Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area.

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.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by a failure to expand range above the Volume Weighted Average Price (VWAP) anchored from the CPI release (blue in color on the below profile graphic). Instead, on very slow tempo, indexes traded lower in the face of extremely poor breadth.

Graphic: Equity index leaders rose in price as internal divergences – like the ratio of advancers to decliners – grew. Noting a bigger divergence in internals tracking Nasdaq issues. 

As stated yesterday, the push-pull and divergence comes ahead of the options expiration (OPEX) cycle which starts on the third Friday of each month (July 16). Associated hedging forces make it so there’s more liquidity and less movement. 

After OPEX, according to SpotGamma, “the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Knowing the above, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,357.75 low volume area (LVNode) pivot puts in play the $4,371.00 untested Point of Control (POC). Thereafter, if higher, participants can look for responses at the $4,384.50 regular trade high (RTH High) and $4,398.50 Fibonacci price extension.

In the worst case, the S&P 500 trades lower; activity below $4,357.75 puts in play the $4,343.25 HVNode. Trade beyond $4,343.25 could reach as low as the HVNodes at $4,314.75 and $4,297.00.

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.

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

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

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

News And Analysis

Politics | Biden agenda gains Senate ground with big hurdles remaining. (BBG)

Economy | Restaurants signing most new retail leases as rents plummet. (CNBC)

Markets | Executive orders on competition and policy tightening impact. (Moody’s)

Economy | Jerome Powell dismisses claims of complacency on inflation. (FT)

Politics | China has accused Biden administration of hurting global trade. (Axios)

Markets | Reddit traders are upending the world of credit investing, also. (BBG)

Markets | No market breadth, no problem as Faangs lift S&P 500 higher. (BBG)

Economy | CEOs speak on elevated levels of inflation which may persist. (Axios)

Economy | China warns economic uncertainty despite moderate recovery. (FT)

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 14, 2021

Market Commentary

U.S. equity index futures sideways overnight.

  • Dems agree to $3.5T tax, spending plan.
  • Fed Chair Powell semi-annual testimony.
  • Earnings begin with a bang and continue.
  • Equity indexes mixed; sideways to lower.

What Happened: U.S. stock index futures resolved lower after underlying breadth metrics failed to support the post-CPI recovery.

Thereafter, indices traded sideways overnight alongside news Senate Democrats on the Budget Committee agreed to a $3.5 trillion spending bill. The bill would carry President Biden’s economic agenda without Republican support. 

Ahead, participants are expecting testimony by Federal Reserve Chair Jerome Powell, earnings releases from heavily weighted index constituents, as well as the latest Fed Beige Book.

Graphic updated 6:44 AM ET.

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

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by an intraday liquidation break and the subsequent acceptance below a Volume Weighted Average Price (VWAP) anchored from the CPI release (blue in color on the below profile graphic).

Liquidation Breaks: The profile shape suggests participants were “too” long and had poor location. Such dynamic offers responsive buyers (initiative sellers) favorable entry (exit).

Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Prior to the liquidation, breadth metrics were firmly negative. Despite what appeared to be a strong recovery post-CPI, internal divergences via breadth metrics became more pronounced, while profile dynamics revealed weak commitment at higher prices and an abundance of poor structures (e.g., low-volume areas). 

Graphic: Equity index leaders rose in price as internal divergences – like the ratio of advancers to decliners – grew. Noting a bigger divergence in internals tracking Nasdaq issues. 

This push-pull and divergence comes ahead of the options expiration (OPEX) cycle which starts on the third Friday of each month (July 16). Associated hedging forces make it so there’s more liquidity and less movement. In other words, the market tends to pin.

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

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.

Thereafter, according to SpotGamma, “[t]he week after expiration the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Graphic: Volatility before and after OPEX, via SpotGamma.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,365.75 low volume area (LVNode) pivot puts in play the $4,375.00 untested Point of Control (POC), first. Then, the $4,383.75 regular trade high (RTH High) and $4,398.50 Fibonacci extension come into play.

In the worst case, the S&P 500 trades lower; activity below the $4,365.75 LVNode pivot puts in play the $4,353.25 LVNode. Trade beyond that figure puts in play the high volume areas (HVNodes) at $4,343.25 and $4,314.75.

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.

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

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

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in call strikes at and below the price in the cash-settled S&P 500 (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), yesterday. Noting, yesterday and over the past few weeks, there’s been increased activity in long-dated put options. 

News And Analysis

Politics | Senate Democrats Agree to $3.5T tax, spending plan. (BBG)

Markets | ‘A free put on the market’: CIO on volatility dislocation. (BZ)

Energy | OPEC reaches agreement with UAE over oil production. (WSJ)

Economy | Weekly mortgage refinances spike 20% on rate drop. (CNBC)

Mobility | EU set to call time on combustion engine in decades. (REU)

Economy | Broker says NYC’s real estate market is heating up. (CNBC)

Markets | Delta posts first profit since 2019 on aid, better revenue. (CNBC)

Economy | China’s GDP and the five things to keep an eye on. (FT)

Economy | Inflation climbs higher than expected; CPI up 5.4%. (CNBC)

Markets | Goldman, JPM pivot to M&A amid fading trade boom. (FT)

Mobility | Norwegian Cruise Line sues on vaccine passport ban. (CNBC)

Politics | China deals another blow to its cryptocurrency miners. (BBG)

Markets | Wood sells China tech stocks, warns of valuation reset. (BBG)

Economy | JPMorgan Chase CEO uber bullish on U.S. consumers. (Axios)

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 13, 2021

Market Commentary

U.S. equity index futures diverge overnight.

  • Ahead: Inflation, earnings, Fed speak.
  • SPX, RUT, DJI lower. NDX firming up.

What Happened: U.S. stock index futures traded in different directions.

The S&P 500, Russell 2000, and Dow Jones Industrial Average traded relatively weak, in comparison to the technology and growth-focused Nasdaq 100. 

This rotation is likely attributable to technical factors – issuance, short coverings, a fading reflation trade, and peak growth pushing lower Treasury yields – as well as the upcoming monthly options expiration and pre-earnings positioning.

Ahead is data on inflation and earnings with some Fed speak around noon Eastern time. 

Graphic updated 7:20 AM ET.

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

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by initiative trade up to the $4,373.00 Fibonacci-derived price target. 

This price exploration comes amidst a divergence. As noted, the Nasdaq 100 is trading relatively strong in comparison to the S&P, Russell, and Dow. The holding pattern is not only attributable to positioning ahead of the monthly options expiration (OPEX), but second-quarter earnings, inflation expectations, and the like. 

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

“The broad markets are settling back and awaiting U.S. inflation,” said Sebastien Galy, a senior macro strategist at Nordea Investment Funds SA. “We view the environment as one of gestation as earnings come in, before the risk-taking trend starts again, though a higher U.S. inflation print could create a temporary setback.”

That said, the dip in the 10-year Treasury yield is not all too concerning. 

Graphic: S&P 500 performance when 10-year Treasury yield slides via The Market Ear.

Obviously, that’s just one data point. Another consideration is the unwind of certain stimulus measures, like quantitative easing (QE) which shifts the returns distribution right.

Graphic: Impact of QE on S&P 500 returns via The Market Ear

Knowing the above, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,365.75 low volume area (LVNode) pivot puts in play the $4,378.75 minimal excess overnight high (ONH). Thereafter, if higher, the $4,398.50 and $4,417.50 Fibonacci price extensions come into play.

In the worst case, the S&P 500 trades lower; activity below $4,365.75 puts in play the $4,343.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,314.75 HVNode and $4,291.00 untested Point of Control (POC).

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

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

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

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

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in call strikes at and below the price in the cash-settled S&P 500 (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), yesterday. Noting, yesterday and over the past few weeks, there’s been increased activity in long-dated put options. 

News And Analysis

Economy | Yellen sees U.S. companies pushing back global tax deal. (BBG)

Energy | OPEC+ impasse risks price war as demand keeps surging. (REU)

Politics | Biden team mulls digital trade deal to counter China in Asia. (BBG)

Politics | Biden to warn companies of risks of operating in Hong Kong. (FT)

Markets | Boeing cutting 787 production on new structural problems. (REU)

Markets | Goldman dealmakers’ bumper quarter counters trade slump. (BBG)

Markets | JPM fell amid climbing expenses, loan growth expectations. (BBG)

Economy | PBOC said monetary policy unchanged despite RRR cut. (BBG)

FinTech | FTX deal provides institutions new access to crypto market. (BBG)

What People Are Saying

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For July 12, 2021

Market Commentary

U.S. equity index futures sideways overnight.

  • PBOC cut RRR, tax talk, and virus.
  • Ahead: WASDE, Fed speak, G20.
  • SPX, RUT, DJI weak. NDX firmed.

What Happened: U.S. stock index futures auctioned within prior range alongside news the ECB would revise forward guidance and maintain asset purchases until “at least” March of 2022. 

Additionally, the People’s Bank of China made a 50 basis-point cut to the reserve ratio at most banks given a weakened economic outlook. At the same time, G20 finance ministers are meeting over a global tax agreement and some concerns were raised over the spread of COVID-19 variants.

Ahead is the WASDE crop report for July and Fed speak by Neel Kashkari. Later, Janet Yellen will meet with finance ministers in Brussels. 

Graphic updated 6:55 AM ET.

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

Adding, last week, U.S. stock index futures auctioned sideways to higher, only after enduring a brief liquidation alongside anxieties surrounding the spread of COVID-19 variants, as well as an evolution in monetary policy. 

Expectations into the middle of July call for a supported S&P 500; thereafter, the window for fundamental dynamics to take over is opened

According to SpotGamma, “[t]he week after [options] expiration the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Graphic: Volatility before and after OPEX, via SpotGamma.

These expectations of increased volatility line up with the busy earnings season, kicked off by banks reporting second-quarter results this week. Additionally, a focus for participants in the coming days are some releases on consumer, producer, and import prices, as well as industrial production, consumer sentiment, and retail sales.

For today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the high volume area (HVNode) pivot at $4,341.75 puts in play the $4,353.25 low volume area (LVNode). Trade beyond that signpost could reach as high as the $4,365.50 overnight high (ONH) and $4,373.00 Fibonacci extension.

In the worst case, the S&P 500 trades lower; activity below $4,341.75 puts in play the $4,314.75 HVNode. Initiative trade beyond that signpost could reach as low as the $4,291.00 untested Point of Control (POC) and $4,256.75 HVNode.

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

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

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

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in call strikes at and below the price in the cash-settled S&P 500 (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. Noting, over the past few weeks, there’s been increased activity in long-dated put options.

News And Analysis

Economy | Global tax overhaul gains steam as G20 backs new levies. (NYT)

FinTech | Once Robinhood ‘house money’ gone, trading to lose allure. (NI)

FinTech | On crypto exchanges, the trades do not always add up right. (BBG)

Markets | Dealmakers see M&A rush, then chills, on antitrust progress. (REU)

Economy | China’s rate cut points to weaker than expected economy. (BBG)

FinTech | Square CEO doubles down on crypto, adds hardware wallet. (FL)

Economy | Recovery diminishes risks for reducing pandemic support. (Moody’s)

Energy | Oil prices loom over Biden’s bid to throttle drilling right sales. (BBG)

Economy | ECB’s Lagarde foresees a July policy shift, 2022 transition. (BBG)

What People Are Saying

About

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

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

 Disclaimer

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

Categories
Commentary

Weekly Brief For July 11, 2021

Market Commentary

Key Takeaways: U.S. equity index futures diverge in their attempt to discover fair prices for two-sided trade. 

  • Ahead: Economic data and earnings.
  • SPX, RUT, DJI firm. NDX tad weaker. 

What Happened: Last week, U.S. stock index futures auctioned sideways to higher, only after enduring a brief liquidation alongside anxieties surrounding the spread of COVID-19 variants, as well as an evolution in monetary policy. 

The liquidation, though, was not unwarranted. For weeks broad market indices, led by the Nasdaq 100, rose on narrowing breadth and tapering volumes.

Graphic: Breadth metrics from JPMorgan Chase & Co (NYSE: JPM), via The Market Ear.

Then, during the unraveling, a meaningful divergence was observed with the Nasdaq 100 trading relatively weak. This came as rates on the 10 Year T-Note rebounded after testing trend support near 1.25%.

Graphic: In line with projections future inflation is easing, the yield curve flattened while bond yields fall substantially, via Bloomberg

Technical factors – issuance, short coverings, a fading reflation trade, and peak growth – are to blame for lower Treasury yields.

“Technical factors appear to be pushing rates lower and this should be temporary as current 10-year Treasury yield of 1.3% is well below its economic fair value,” Moody’s Corporation (NYSE: MCO) strategists wrote July 8. 

Through an ordinary least squares regression using an estimate of monthly real U.S. GDP, CPI, the current effective fed funds rate, the Fed’s balance sheet as a share of nominal GDP, and a Fed bias measure via fed funds futures, Moody’s comes up with an implied “economic fair value” of 1.6% and 1.65% for the 10-year yield.

Going into year-end, on the heels of the strongest and quickest recovery in history, Moody’s sees the 10-year rising to 1.9% as the Fed announces its intent to taper in September. Once monthly asset purchases have been reduced to zero, “the Fed will reinvest proceeds from maturing assets to ensure its balance sheet doesn’t contract, which would be contractionary monetary policy. [L]ook for the first-rate hike in the first quarter of 2023.”

With that, Goldman Sachs Group Inc (NYSE: GS) suggests “[e]xpectations of higher interest rates and higher corporate tax rates by year-end are the primary reasons [to] forecast that the S&P 500 will trade sideways during the next six months.” Supporting that view are earnings estimates, the inventory positioning of participants, as well as early July seasonality metrics.

Graphic: Seasonality metrics via the Capital Market Outlook by Merrill.

Risks Ahead: As discussed in prior commentaries, after mid-July, the window for fundamental dynamics (e.g., a shift in preferences from saving and investing to spending, monetary tightening, seasonality, or a COVID-19 resurgence) to take over is opened. 

Why? Coming into the options expiration (OPEX) cycle, which starts on the third Friday of each month, associated hedging forces make it so there’s more liquidity and less movement. In other words, the market tends to pin. 

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

Thereafter, according to SpotGamma, “[t]he week after expiration the market tends to experience its largest intraday volatility which corresponds to the reduction in large options positions, and the hedging associated with them.”

Graphic: Volatility before and after OPEX, via SpotGamma.

Considerations: Ahead are some releases on consumer, producer, and import prices, as well as industrial production, consumer sentiment, and retail sales. Also, big banks kick off the earnings season with reports on second-quarter results.

Moody’s notes: “data on inflation, retail sales and industrial production could alter … estimate[s] of second-quarter U.S. GDP, which [are] currently tracking 8.2% at an annualized rate.”

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the $4,341.75 high volume area (HVNode) pivot.

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

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

In the best case, the index trades sideways or higher; activity above $4,341.75 leaves in play the $4,363.50 regular trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the Fibonacci-derived price targets at $4,373.00 and $4,398.50. 

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.

In the worst case, the index trades lower; activity below $4,341.75 puts in play the $4,312.25 HVNode. Thereafter, if lower, the $4,291.00 untested Point of Control (POC), $4,285.75 micro-composite HVNode, and $4,239.25 HVNode come into play.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in call strikes at and below the price in the cash-settled S&P 500 (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. Noting, over the past few weeks, there’s been increased activity in long-dated put options.

News And Analysis

Markets | Lower stress capital buffers a credit negative for many U.S. banks. (Moody’s)

Economy | A faster recovery boosting prices, but runaway inflation unlikely. (Fitch)

Economy | Is the Fed “tempting FAIT” by assuming inflation is just transitory? (BLK)

Economy | The Fed’s dot plots are not enough in a quantitative easing world. (S&P)

Economy | China’s fading ‘first-in first-out’ rebound sending a global warning. (BBG)

Markets | Commodity boom dwarfs oil spat as emerging markets set to win. (BBG)

Economy | Unpacking several paths to higher-than-expected interest rates. (Fitch)

FinTech | Meet Unbound, a new decentralized cross-chain liquidity protocol. (VV)

Travel | Richard Branson, Virgin Galactic pull-off key test for space tourism. (BBG)

What People Are Saying

About

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

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

Disclaimer

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