Categories
Commentary

Daily Brief For September 22, 2022

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

Graphic updated 8:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

An easy read, today. For more complex, see the September 20 and 19 letters. Also, there will not be a letter published for Friday, September 23, 2022. See you next week, team!

Fundamental

Equity markets traded down, yesterday, on the heels of the Federal Reserve’s (Fed) decision to raise interest rates by 0.75% and “keep at it” for longer, eyeing a 1.25% jump, in sum, by 2023.

This puts the current target rate at 3.00-3.25%.

Separately, if the “keep at it” quote sounds familiar, that’s because it is. The Fed Paul Volcker’s memoir is titled “Keeping at It.”

Graphic: CME Group Inc’s (NASDAQ: CME) FedWatch Tool shows higher odds of a 75 to 100 basis point rate hike in November, along the lines of what the futures market was pricing heading into the event.

The Fed Chair Jerome Powell admitted there may be below-trend growth and the potential for unemployment to reach 4.4% next year, up from the current rate of 3.7%. Projected increases, as of yesterday, show interest rates at 4.4% by 2023, and 4.6% in 2023, before moderation in 2024 to 3.9%, as well summarized by Bloomberg.

Graphic: Retrieved from Bloomberg.

Moreover, economists suggest that raising rates to 4.5% would cost the economy nearly 1.7 million jobs while rates at 5% would bring that number to 2 million. A higher savings rate and increased funds at the state level would likely cushion the blow, however.

In response, the likes of Ark Invest’s Cathie Wood, who we quoted recently regarding her thoughts on why the Fed needs to lower the pace of tightening and/or cut, said:

“Most disappointing about the Fed’s decision today was its unanimity. None of those voting on the Federal Reserve is focused on the significant price deflation in the pipeline. The Fed seems to be making decisions based on lagging indicators and analogies.”

She adds that the Fed is setting the stage for deflation:

“The Fed is solving supply chain issues by crushing demand and, in my view, unleashing deflation, setting it up for a major pivot.”

Graphic: Initially retrieved from Bloomberg. Taken from Ophir Gottlieb who concludes costs are dropping, as observed via shipping, gasoline, manufacturing, cars, and rent measures.

Moreover, it’s the case that “[a]s rates rise and debt servicing costs increase, ‘many zombie institutions, zombie households, corporates, banks, shadow banks, and zombie countries are going to die,’” said economist Nouriel Roubini, who predicted the 2008 financial crisis. 

Prior to the Fed event, Roubini forecasted a 75 basis point hike in September, followed by a 50 basis point hike in November. The market is pricing more than what Roubini thought the Fed would probably do after Wednesday’s Fed meeting.

In his opinion, stay “light on equities and have more cash, … [as] equities and other assets can fall by 10%, 20%, 30%.”

Positioning

In short, unexpected was the post-event response. In recent times, post-Fed moves have been positive, driven by the “rebalancing of dealer inventory,” per Kai Volatility’s Cem Karsan.

That didn’t happen and let’s unpack why.

Basically, into the event, traders demanded protection and bid implied volatility (IVOL). The assumption is that counterparties, who are likely on the other end, have exposure to positive Delta and negative Gamma, which they hedge through negative Delta trades in the underlying.

Should fears have been assuaged, the supply of that protection once demanded, would have decreased IVOL (and options Delta), providing the markets a boost.

Graphic: Retrieved from SqueezeMetrics.

That didn’t happen. Instead, traders added protection, as shown by this SpotGamma graphic tracking changes in put open interest on the S&P 500 (INDEX: SPX).

Graphic: Retrieved from SpotGamma. Updated September 22, 2022.

This bid some basic measures of IVOL into the close.

Graphic: Retrieved from VIX Central. Updated September 21, 2022.

That’s as these particular options, which were added at much lower prices, as I explained in a SpotGamma note, recently, “are far more sensitive to changes in direction and IVOL.”

These options can go “from having very little Delta (exposure to direction) to a lot more Delta on the move lower,” quickly. “If we maintain that liquidity providers are short those puts, a positive Delta trade, then those liquidity providers [will sell] futures and stock, a negative Delta trade to stay hedged.”

Graphic: Retrieved from SqueezeMetrics.

Notwithstanding, it’s still the case that a “reload on fresh short-dated downside” flows heighten the risk of a “negative Delta squeeze … into month end,” said Nomura Holdings Inc’s (NYSE: NMR) Charlie McElligott. 

Therefore, “you have to consider a move up [to] $4,000.00 as part of your distribution of outcomes to the upside,” as that is near where “market makers are ‘long,’” as part of an impactful collar trade many are aware sits.

As an aside, some online conversation was sparked around placing cash into riskless trades for some small, but guaranteed, rates of return. In that conversation, Box Spreads were put forth as a solution to lend cash and earn a competitive interest rate.

For context, “Boxes allow market participants to create a loan structure similar to a Treasury bill. T-bills are ‘discount’ instruments that are purchased at a value less than the stated face value. Upon maturity, bills call for the return of the stated face value.”

“For example, one might buy a $1 million 90-day T-bill for $998,000. Ninety days later, the $1 million face or principal value is returned and the $2,000 discount is earned as interest. One may represent the rate on this transaction as a 0.80% or 80 basis point discount yield [= (360/90) x ($2,000/$1,000,000)]. The effective rate on a box represents a ‘discount yield’ similar to a quoted T-bill rate.”

Graphic: Retrieved from boxtrades.com.

IPS Strategic Capital’s Pat Hennessy explains that SPX boxes “typically yield[] 20-40 bps above [the] corresponding maturity risk-free rate.” Additionally, there are tax advantages to using the S&P 500’s 1256 contracts. 

For easier fills, use the “3K/4K line in an AM settled expiry,” Hennessy noted. “Helps if you know where the broker market is.”

Technical

As of 8:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $3,826.25 HVNode puts into play the $3,857.25 HVNode. Initiative trade beyond the latter could reach as high as the $3,893.00 VPOC and $3,936.25 ONH, or higher.

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

Any activity below the $3,826.25 HVNode puts into play the $3,770.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,722.50 LVNode and $3,688.75 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 21, 2022

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

Graphic updated 7:00 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

Short and to the point, today, after yesterday’s detailed letter on inflation, monetary policy action, and beyond. Good luck, everyone!

Fundamental

Ongoing is a “messy divorce” between large powers. We have talked about this in the past.

In the news was Putin’s mobilization of troops and renewed warning of a nuclear threat. This is a day after Biden said the US would defend Taiwan against China. In response, Mao Ning, the Chinese foreign ministry spokesperson, said this:

“The US remarks seriously violate the one-China principle … and send a severely wrong signal to the separatist forces of Taiwan independence. China strongly deplores and rejects it and has made solemn complaints with the US side.”

“We will do our utmost to strive for the prospect of peaceful reunification with the utmost sincerity, while we will not tolerate any activities aimed at splitting China and reserve the option to take all necessary measures.”

The aforementioned do more to shift “the pillars of the low inflation world” – de-globalization and populism – which the Federal Reserve (Fed) has a limited toolkit to solve for.

Pending is a large “L”-shaped recession to slow inflation, generate negative wealth effects, lower demand, and position for a recovery that will likely be “fiscally funded industrial policy.”

Shifting to today, the Federal Reserve is to step up its efforts to tame inflation by raising interest rates to the highest level since 2008. The consensus calls for up to a 75 basis point rate hike. 

Bloomberg economist Anna Wong, Andrew Husby, and Eliza Winger put forth:

“Powell will emphasize the committee’s determination to hold rates higher for longer. He will be more forthcoming in acknowledging the likely pain involved in bringing down inflation. He may opt not to say that the committee plans to downshift the pace of rate hikes.”

Positioning

Yesterday, we briefly talked about post-event moves which are often positive and driven by the structural “rebalancing of dealer inventory,” per Kai Volatility’s Cem Karsan.

“In the past four Fed Days, the benchmark index has climbed an average of roughly 1.4% on all days, with more than 2% gains on three of the four,” said Bloomberg’s John Authers. Adding, “the S&P 500 has averaged a gain of more than 1% on Fed Days over the last 10 meetings.”

Graphic: Retrieved from Bloomberg. Via the Bespoke Investment Group.

Basically, into the event, traders have demanded protection and bid implied volatility (IVOL).

Graphic: Retrieved from SpotGamma. 

Should fears be assuaged, the supply of that protection should decrease IVOL, this is what may provide markets a boost.

Graphic: Retrieved from SqueezeMetrics.

From thereon, the “second move and final resolution, if you wait for it, is usually tied to the incremental effects on liquidity (QE/QT).”

In the case of the latter, per The Ambrus Group’s Kris Sidial, “[o]utright tails in single stocks continue to be ‘cheap’ relative to what you are seeing in the broad market.”

“Market is discounting any sort of crash risk. Which seems reasonable granted that a lot of the current macro theme is geared towards a longer-term effect.”

Graphic: Retrieved from Bloomberg. Taken from Kris Sidial. “January 2022 was a time that was associated with really low vol (VIX = ~12). Consumer Staples Select Sector SPDR Fund (NYSE: XLP) 1M 80MNY tails today are only 4 vols over where they were during that time.”

Technical

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

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

Any activity above the $3,909.25 MCPOC puts into play the $3,936.25 ONH. Initiative trade beyond the ONH could reach as high as the $3,965.25 HVNode and $4,001.00 VPOC, or higher.

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

Any activity below the $3,909.25 MCPOC puts into play the $3,857.25 HVNode. Initiative trade beyond the latter could reach as low as the $3,826.25 and $3,770.75 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 20, 2022

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

Graphic updated 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. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

A hot topic over the past sessions is speculation on the Federal Reserve’s (Fed) next steps and the impact those steps may have.

Further, in the news, last night, aside from the prospects of another big hike, was “the biggest annual increase since 1994” in two-year Treasury yields. That’s in part due to recent upside surprises in inflation talked about yesterday and last week.

Graphic: Retrieved from Bloomberg. US Government Bonds 2 YR Yield and Fed Funds.

Per the CME Group Inc’s (NASDAQ: CME) FedWatch Tool, there’s a near-80% chance of a 50 to 75 basis point bump to the target rate, as the Fed looks to stem inflation.

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

This is all the while the Fed will let their Treasuries mature and, “instead of using the proceeds to buy another Treasury,” they will “buy nothing and reduce their balance sheet,” explained the Damped Spring’s Andy Constan.

Accordingly, “to pay that bond off, the US Treasury has to issue a bond,” and this bond will need to be “bought by the private sector” which has “to sell something to buy the bond, and that starts at the riskiest asset,” like crypto, watches, and cars, for instance.

Let’s unpack this further, below.

The transmission mechanism of quantitative easing (QE) and tightening (QT) is very weak “to economic activity but very strong to financial markets.”

In a detailed explainer, initially quoted in the September 16 letter, we learned “QE creates new reserves on bank balance sheets. The added cushion gives banks … more room to lend or to finance trading activity by hedge funds, … further enhancing market liquidity.”

Therefore, QE (QT) will mildly inflate (deflate) the economy as asset owners are pushed further out (in) on the risk curve. In practice, with QE, owners get pushed from Treasury to corporate bonds, bonds to equities, equities to crypto, and, finally, homes, watches, cars, and beyond.

With QT, as put forth, earlier, the reverse happens.

As Joseph Wang, author of Central Banking 101, said, in short, with QT “consumers have less wealth to spend” and this means that drops in financial markets and the tightening of “financial conditions impact the real economy,” negatively, albeit not as harshly as a rise in interest rates.

Unpacking further, with the Treasury set to increase issuance, thus boosting the government’s checking account, or Treasury General Account (TGA), “the level of reserves in the banking system declines, or the level of RRP could also decline,” Wang added.

This is as all of the above are liabilities to the Fed. Therefore, money comes out of the economy, via a fall in reserves, and this is put into the government’s checking account (TGA boost).

The linked reduction in bank deposits and reserves bolsters “repurchase agreement rates and borrowing benchmarks linked to them,” per Bloomberg. This, then, may play into “an additional tightening of overall financial conditions,” as mentioned, earlier.

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

Here’s a provision.

It’s the case that the Fed believes it needs a certain level of reserves for the proper functioning of the financial system (~$2 trillion). Wang explained that in 2019, banks dumped a lot of their reserves into repo to earn some extra return. 

When QT was about to end, there was less money in their reserves which preceded a spike in rates and a blow-up among those who needed the money the most, as explained here.

Graphic: Retrieved via Bloomberg.

“The Fed saw the system breaking at around 8% GDP and thinks that is where the limit is,” he added. “This suggests, going forward, the Fed is going to have to do something to top up the reserves in the banking system, and they have tools to do that.”

What’s the result, then?

These tools include capping the RRP, “forcing money out into the banking system,” as well as modifying the supplementary leverage ratio (SLR), making it “cheaper for banks to maintain a large balance sheet.”

Together, this, ultimately, may increase “the capacity of banks to make loans [and] create credit, so that is financial easing.”

As Wang said in another work best: These “easing effects may even overwhelm the tightening impact of a marginally longer QT.”

So, what can we expect? 

In terms of timelines, Wang puts forth that economic data will likely prompt a mid-2023 cut in rates, which is in line with what the futures market is pricing.

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

Before then, traders are pricing nearly 225 to 250 basis points of rate increases. Based on where rates are at, now, some argue the market may still be too expensive.

Graphic: Retrieved from Bloomberg via Michael J. Kramer. “What is amazing is how expensive this market is relative to rates. The spread between the S&P 500 Earnings yield and the 10-Yr nominal rate is at multi-year lows.”

Positioning

We’ve talked about this before but what is expected, after Wednesday’s Fed update, is a move that is “structural,” as Kai Volatility’s Cem Karsan has put it before, and “a function of inevitable rebalancing of dealer inventory post-event.”

“The second move and final resolution, if you wait for it, is usually tied to the incremental effects on liquidity (QE/QT).”

Should participants’ fears with respect to the pace of tightening, for one, be assuaged, then it is likely that the protection demanded heading into the meeting, that’s bidding measures of implied volatility (IVOL), is supplied. This likely provides a boost.

From thereon, markets are more at the whims of macro-type positioning on rising rates and the withdrawal of liquidity.

Technical

As of 6:20 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $3,909.25 MCPOC puts into play the $3,936.25 ONH. Initiative trade beyond the ONH could reach as high as the $3,964.75 HVNode and $4,001.00 VPOC, or higher.

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

Any activity below the $3,909.25 MCPOC puts into play the $3,885.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,857.25 and $3,826.25 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 19, 2022

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

Graphic updated 6:45 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

Slow start to the week with some color on statements made in last week’s detailed newsletters, like the one published on September 16, 2022. 

As an aside, some updates are coming to this letter’s format and you will be in the loop on what those are and why, shortly.

Fundamental

This is the season for volatility. The S&P 500’s (INDEX: SPX) monthly realized volatility, over a period spanning 1928 to 2021, has historically been high during this part of the year.

Graphic: Retrieved from The Market Ear. Via Goldman Sachs Group Inc (NYSE: GS).

Adding to the volatility are uncertainties with respect to the macro environment. For example, last week we discussed the implementation of contractionary monetary policies for reducing inflation and growth. 

Read the Daily Brief for September 16, 2022, for detail on rates, quantitative tightening (and its impact on lending and market liquidity), as well as positioning and beyond.

Given the lagging data policymakers input into their decision-making, versus what non-lagging indicators are showing the likes of Catherine Wood and Elon Musk, “deflation is in the pipeline,” and the Fed may hike into a “deep recession,” as BlackRock Inc (NYSE: BLK) strategists put.

Per Andreas Steno Larsen, in the latest Consumer Price Index (CPI) report, which had traders pricing increased odds of a 100 basis point hike to interest rates, shelter costs did much of the “heavy lifting.”

Graphic: Retrieved from Bloomberg via Michael J. Kramer. Based on where rates are at, the market may still be too expensive.

The MoM shelter costs were up in excess of 0.7%. Notwithstanding, the “[c]ost of shelter is the most lagging variable in the basket,” all the while the “shelter index in the CPI basket lags the housing price development by up to 18 months.”

As a result, this means drops in rents and home prices could “take more than a year for the CPI methodology to” account.

Graphic: Via Morgan Stanley (NYSE: MS) research.

These aforementioned comments, coupled with reports issued by the National Federation of Independent Business, boost the cases of those claiming inflation has peaked, such as Musk and Wood. 

Steno Larsen puts forth that “most analysts and newsletter-sellers … missed the most important inflation print of the week, namely the NFIB price plan survey” which bolsters the case for prices reaching their “new highs in YoY terms.”

Graphic: Retrieved from Andreas Steno Larsen.

Positioning

Pointing readers back to the September 16, 2022 letter for contexts on the positioning. 

Further, it is essentially the case that “2022 is a put-weighted regime [and] returns are negative into options expiration (OPEX) and positive after,” explained SpotGamma on Sunday.

The impact of OPEX is so staggering that “flipping to cash” the week of expiry nets far better returns than holding S&P 500 without any adjustments.

More on this, later!

Graphic: Retrieved from SpotGamma and Saqib Iqbal Ahmed.

Technical

As of 6:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $3,857.25 HVNode puts into play the $3,909.25 MCPOC. Initiative trade beyond the MCPOC could reach as high as the $3,935.00 VPOC and $3,964.75 HVNode, or higher.

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

Any activity below the $3,857.25 HVNode puts into play the $3,826.25 HVNode. Initiative trade beyond the latter could reach as low as the $3,770.75 HVNode and $3,722.50 LVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Considerations: A feature of this 2022 down market was responsiveness near key-technical areas (that are discernable visually on a chart). This suggested to us that technically-driven traders with shorter time horizons were very active. 

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

That’s changing. The key levels, quoted above, are snapping far easier and are not as well respected. That means other time frame participants with wherewithal are initiating trades. 

Those are the participants you should not fade.

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 16, 2022

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

Graphic updated 6:50 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

A longer note so stick with me!

Updates are pending for the above dashboard. Exciting! Beyond this, the newsletter is getting a revamp in other parts. If you have any feedback on what should be changed, please comment!

Also, I am going to refer everyone to a conversation between Joseph Wang and Andy Constan, as well as some updates Cem Karsan of Kai Volatility made (HERE and HERE). That is, in part, a primer for what we will be talking more about, soon.

Fundamental

Talked about yesterday was the prospects of contractionary monetary policy reducing inflation and growth. BlackRock Inc (NYSE: BLK) strategists, even, put forth that a “deep recession” is needed to stem inflation. In short, “there is no way around this,” they claim.

Graphic: Retrieved from The Market Ear. FedEx Corporation (NYSE: FDX) sold 20% on warning about the global economy.

From thereon, we talked about how rates rising would “bring private sector credit growth down,” as well as “private sector spending and, hence, the economy.”

Based on where rates are at, the market may still be too expensive.

Graphic: Retrieved from Bloomberg via Michael J. Kramer. “What is amazing is how expensive this market is relative to rates. The spread between the S&P 500 Earnings yield and the 10-Yr nominal rate is at multi-year lows.”

On the other hand, some argue inflation peaks are in. ARK Invest’s Cathie Wood suggests “deflation [is] in the pipeline, heading for the PPI, CPI, PCE Deflator.” 

Tesla Inc’s (NASDAQ: TSLA) Elon Musk added that he thinks the Federal Reserve (Fed) may make a mistake noting “a major Fed rate hike risks deflation.” Musk suggested the Fed should drop 0.25%, basing his decision on non-lagging indicators, unlike the Fed.

That’s not in line with what CME Group Inc’s (NASDAQ: CME) FedWatch tool shows. Through this tool we see traders pricing an 80% chance of a 0.50-0.75% hike, all the while quantitative tightening (reducing Fed Treasuries and mortgage-backed securities holdings) accelerated on September 15. 

UST and MBS will roll off (which could turn into “outright sales”) at a pace of $95 billion per month, now, increasing competition for funding among commercial banks, and bolstering borrowing costs, as explained, below.

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

According to Bank of America Corporation (NYSE: BAC), since 2010, nearly 50% of the moves in market price-to-earnings multiples were explained by quantitative easing (QE), the inverse of QT, through which the Fed (or central banks, in general) creates credit used to buy securities in open markets, MarketWatch explains.

Graphic: Retrieved from the Federal Reserve Bank of Richmond. “The Fed Is Shrinking Its Balance Sheet. What Does That Mean?”

The “purchases of long-dated bonds are intended to drive down yields, which is seen enhancing appetite for risk assets as investors look elsewhere for higher returns. QE creates new reserves on bank balance sheets. The added cushion gives banks, which must hold reserves in line with regulations, more room to lend or to finance trading activity by hedge funds and other financial market participants, further enhancing market liquidity.”

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via MarketWatch.

The liability side of the Fed’s balance sheet is what “matters to financial markets.” 

Thus far, “reductions in Fed liabilities have been concentrated in the Treasury General Account, or TGA, which effectively serves as the government’s checking account” to run the day-to-day business.

Given that we’re talking about balance sheets, here, Fed liabilities must match assets. Thus, a rise in the TGA must be accompanied by a decline in bank reserves (which are liabilities to the Fed). This, as a result, decreases the room banks have to “lend or to finance trading activity by hedge funds and other financial market participants, [which] further [cuts into] market liquidity.”

With the Treasury set to increase debt issuance, boosting TGA, it will effectively take “money out of the economy and put[] it into the government’s checking account.” The linked reduction in bank deposits and reserves bolsters “repurchase agreement rates and borrowing benchmarks linked to them, like the Secured Overnight Financing Rate,” per Bloomberg.

Graphic: Retrieved from the Federal Reserve Bank of New York. “The Secured Overnight Financing Rate (SOFR) is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities.”

Adding, this may play into “an additional tightening of overall financial conditions, in addition to the increase in the main fed funds rate target that the central bank intends to continue boosting.”

This will “put more pressure on the private sector to absorb those Treasurys, which means less money to put into other assets” that may be riskier, like equities, said Aidan Garrib, the head of global macro strategy and research at Montreal-based PGM Global.

Positioning

As of 6:50 AM ET, Friday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.44%. Net gamma exposures decreasing may promote generally more expansive ranges.

Graphic: Via Physik Invest. Data retrieved from SqueezeMetrics.

Given where realized (RVOL) and implied (IVOL) volatility measures are, as well as skew, it is beneficial to be a buyer of options structures.

This is as there’s been a lot of speculation, particularly on the downside (put options), setting the stage for a more volatile and fragile market environment, says Kai Volatility’s Cem Karsan.

“On the index level, people are not well hedged,” a departure from what the case was heading into and through much of 2022. It’s the case that heading into 2022, traders were well hedged. Into and through the decline, traders’ monetization of existing hedges, as well as counterparty reactions, “compressed volatility” realized across US equities, as explained on July 15, 2022.

This made for some attractive trade opportunities seen here.

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

Now, given that the go-to trade is to sell stock and puts, short interest has grown, as have other risks, associated with this activity; essentially people are “los[ing] faith in convexity and risk premia’s ability to work,” as a result of “poor performance of vol,” and, the reaction to their “pain and financial loss,” is setting the stage for tail risks heading into the Q1 and Q2 2023.

The sale (purchase) of the front (back) expirations will bolster market pinning; as SpotGamma puts forth, “the positive impact of put closers and rolls, as well as decay,” is easing the market drop. However, this “positioning likely compounds drops and adds to volatility,” in the future.

To quote: “Though the removal of put-heavy exposures can boost markets higher, too add, the positive impacts are dulled via the demand for put exposures at much lower prices.”

Graphic: Retrieved from SpotGamma.

These particular options, which are at much lower prices, “are far more sensitive to changes in direction and IVOL,” as I explained in a SpotGamma note. These options can go “from having very little Delta (exposure to direction) to a lot more Delta on the move lower,” quickly.

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

“If we maintain that liquidity providers are short those puts, a positive Delta trade, then those liquidity providers [will sell] futures and stock, a negative Delta trade to stay hedged.”

Graphic: Via Banco Santander SA (NYSE: SAN) research.

Technical

As of 6:50 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

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

Any activity above the $3,909.25 MCPOC puts into play the $3,935.00 VPOC. Initiative trade beyond the latter could reach as high as the $3,964.75 HVNode and $4,001.00 VPOC, or higher.

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

Any activity below the $3,909.25 MCPOC puts into play the $3,857.25 HVNode. Initiative trade beyond the latter could reach as low as the $3,826.25 and $3,770.75 HVNodes, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Considerations: A feature of this 2022 down market was responsiveness near key-technical areas (that are discernable visually on a chart). This suggested to us that technically-driven traders with shorter time horizons were very active. 

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

That’s changing. The key levels, quoted above, are snapping far easier and are not as well respected. That means other time frame participants with wherewithal are initiating trades. 

Those are the participants you should not fade.

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.

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.

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 15, 2022

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

Graphic updated 7:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

Apologies – yesterday the above graphic was not properly updated. The sentiment reading was incorrect, as were a couple of other figures. Separately, a lighter note, today, followed by more in-depth stuff currently being worked on in the coming sessions. Thanks!

Fundamental

First – going to refer everyone to yesterday’s letter, a conversation between Joseph Wang and Andy Constan, as well as some updates Cem Karsan of Kai Volatility made. That is, in part, a primer for what we will be talking more about, soon.

Next – we have futures markets pricing rate a peak in the overnight rate at ~4.6% in February of 2023. From thereon, rate cuts are implied.

Graphic: Via Charles Schwab Corporation’s (NYSE: SCHW) TD Ameritrade thinkorswim. Observed is the Eurodollar, the interest offered on U.S. dollar-denominated deposits held at banks outside of the U.S. (i.e., participants’ outlook on interest rates).

It’s becoming the consensus that “[f]or hikes to reduce inflation, they need to hurt growth,” Jean Boivin and Alex Brazier of BlackRock Inc (NYSE: BLK) explained.

“There is no way around this,” they add. “We estimate it would require a deep recession in the U.S., with around as much as 2% hit to growth in the U.S., and 3 million more unemployed, and an even deeper recession in Europe.”

It’s the impact of rising rates and quantitative tightening (the latter which will compound the impacts of the former) that are part of the toolkit used to cool the sticky inflation.

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

Ray Dalio, of Bridgewater Associates LP, said that rates rising “toward the higher end of the 4.5% to 6% range … will bring private sector credit growth down, which will bring private sector spending and, hence, the economy down with it.”

Accordingly, equity prices could plunge upwards of 20%, as a result.

Graphic: Retrieved from Bloomberg via Michael J. Kramer. “What is amazing is how expensive this market is relative to rates. The spread between the S&P 500 Earnings yield and the 10-Yr nominal rate is at multi-year lows.”

Further, per Bloomberg’s John Authers, it’s the case that “[a]ll major global synchronized crises ended with moderate inflation and low growth; that hasn’t been reached yet.” Separately, a peak in inflation “doesn’t come close to guaranteeing equity gains.”

The pivot will come when there’s a “sustainable path to 2% (not 3 or 4%) inflation” and a “fed funds that is greater than CPI for a few quarters,” explained Alfonso Peccatiello of The Macro Compass.

“The timing mostly depends [on] the MoM CPI ahead,” he added, pointing to a graphic that suggests “there is no ‘pivot’ earlier than mid-2023, and it could well be later. Looking at the SOFR curve, that’s also what’s roughly priced in.”

Graphic: Retrieved from Bespoke Investment Group via Alfonso Peccatiello.

Positioning

Ahead of a multi-derivative expiry, markets are trading sideways to lower. Demands to protect equity downside (with puts), compounded macro-type selling earlier this week.

Now, with traders well hedged, Kai Volatility’s Cem Karsan put forth that there is a “race to monetize,” which is lending to “relatively flat” trade and “lack of follow-through.”

Graphic: Retrieved from Pat Hennessy. “Every large down move in SPX this year (quantified by <= -2 Zscore) has been followed by a relatively flat day/lack of follow through. Any ideas as to why this is?”

From hereon, as we said, a lot of the exposure demanded is short-dated. Should that exposure not be rolled forward in time, and allowed to expire, “SPX/ES dealers [who] are well hedged,” will unwind their hedges which may drive bullishness “through OpEx,” added Karsan.

Notwithstanding, this “has [the] potential to drive a tail post” OpEx. In [the] tech/meme market melt-up of 2020-2021, positioning was [the] exact opposite.”

Technical

As of 7:45 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $3,965.75 HVNode puts into play the $4,001.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,018.75 and $4,069.25 HVNodes, or higher.

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

Any activity below the $3,965.75 HVNode puts into play the $3,925.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,867.75 LVNode and $3,829.75 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 14, 2022

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

Graphic updated 8:00 AM ET. Sentiment Neutral if expected /ES open is inside the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

A sell-off spurred by a higher-than-expected Consumer Price Index (CPI) hit nearly all assets.

Graphic: Retrieved from Bloomberg.

Expected was an 8.1% rise year-over-year (YoY) and a 0.1% fall month-over-month (MoM). Core CPI (excludes food and energy) was to rise by 6.1% YoY and 0.3% MoM, respectively.

Officially, the headline number rose to 8.3%. The core CPI rose 6.3% YoY and 0.6% MoM, meaning the March peak remains (6.5% YoY, then).

It’s the case, essentially, that “[a]ll measures came in above forecasts. Shelter, food and medical care were among the largest contributors to price growth,” per Bloomberg.

Graphic: Retrieved from Bloomberg.

The data, which “illustrates a strong labor market and weakening consumer spending,” in total, bolsters the case for interest rates to rise by “three-quarters of a percentage point.”

Bloomberg’s Anna Wong and Andrew Husby add: “[W]ages have now become the top driver of inflation. With Fed officials already highly concerned about a potential wage-price spiral, the central bank is likely to keep hiking in the first half of 2023.”

Graphic: Retrieved from Bloomberg.

The selling hit growth and technology, hard. These areas are far more responsive to changes in rates as there is promise embedded in their stock prices, too. When rates rise, prices are hit as the value of future earnings looks far less attractive versus higher-yielding or less-risky assets.

“Multiple compression will continue as long as we have sticky inflation,” said Marija Veitmane of State Street Corp (NYSE: STT). “Profits will crater. We still see a lot of downside on equities.”

Beyond risk assets, rising interest rates increase the cost of financing leaving households with less money to spend (or more hesitant to spend money), and this leads a decline in demand. Accordingly, business profits and economic growth may decline, too.

Graphic: Retrieved from Danielle DiMartino Booth.

A conversation between Joseph Wang and Andy Constan, which we shall unpack in coming letters, deserves a listen. At its core, financial markets sold, primarily, on the “flow” of liquidity this year. Read the coming letters for more.

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

Positioning

Traders sought shorter-dated equity put (downside) protection, in size, heading into Tuesday’s decline. Prior to the market open, Tuesday, we said that some “‘massive hedging activity’ feels ‘unsettling’” given what the “reaction to that protection entails should markets drop lower and [implied volatility] increase, accordingly.”

Graphic: Retrieved from SqueezeMetrics. Learn the implications of volatility, direction, and moneyness.

From thereon, options were repriced as markets sold and IVOL increased.

As I well put in a SpotGamma note last night, “it’s the case that [out-of-the-money] options went from having very little Delta (exposure to direction) to a lot more Delta. If we maintain the assumption that liquidity providers are short those puts, a positive delta trade, then those liquidity providers sold futures and stock, a negative Delta trade.”

In short, options out of the money are highly sensitive to changes in direction and IVOL, which there was a lot of, yesterday. Those options quickly went from having little value to a lot of value. If you’re short that exposure, and don’t want to lose money, you have to sell something, and the latter is what compounded the selling.

From hereon, as we said, a lot of the exposure demanded is short-dated. Should that exposure not be rolled forward in time, and allowed to expire, “SPX/ES dealers [who] are well hedged,” will unwind their hedges which may drive bullishness “through OpEx (options expiration),” says Kai Volatility Cem Karsan.

Notwithstanding, this “has [the] potential to drive a tail post” OpEx. In [the] tech/meme market melt-up of 2020-2021, positioning was [the] exact opposite.”

Technical

As of 8:10 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

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

Any activity above the $3,952.00 VPOC puts into play the $3,952.75 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,001.00 VPOC and $4,069.25 HVNode, or higher.

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

Any activity below the $3,952.00 VPOC puts into play the $3,884.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,857.25 and $3,826.25 HVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 13, 2022

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

Graphic updated 7:45 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

Today, traders get inflation updates. These will help drive perceptions regarding monetary policy.

Expected is an 8.1% rise year-over-year (YoY) and 0.1% fall month-over-month (MoM). In July, these numbers were 8.5% and 0.0%, respectively.

Core CPI (which excludes food and energy) is expected to rise by a rate higher than in July, 6.1% YoY and 0.3% MoM, respectively.

Mattering most is core inflation, which the Fed has more control over. If lower than expected, that may warrant some appetite for risk.

Graphic: Retrieved from Bloomberg.

Notwithstanding, prior to July’s release, the average movement in the S&P 500, after CPI, was -1.27%. Still, though, the expectation is that August data will show improvement.

“The market has concluded that both the ECB and even the Fed, despite their protestations otherwise, are both being viewed as data-dependent,” Peter Tchir of Academy Securities said. 

“I cannot see any scenario where the market doesn’t decide that CPI is heading the right direction and … [this] should allow markets to continue to enjoy the strength.”

Graphic: Retrieved from Bloomberg. “Stronger evidence that a wage-price spiral can indeed be avoided came from Monday’s publication of the New York Fed’s latest Survey of Consumer Expectations.”

At this point, in spite of the prospects of inflation continuing to cool, expectations regarding Fed (Federal Reserve) action remain sticky with the fed funds futures pricing a peak in rates of 4%.

Graphic: Retrieved from Bloomberg.

Unchanged, all else equal, this means markets have accounted for the rise in interest rates and their impact on valuations. From hereon, further de-rating is not out of the question, particularly if inflation continues to rise and/or growth fears materialize, as some like Fitch Ratings believe.

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

According to Fitch, a decline in corporate profits is likely to speed up in the coming quarters, and this will highlight economic slowing (below-trend GDP growth) that leads to a 2023 recession.

Graphic: Retrieved from Bloomberg, via Bank of America Corporation (NYSE: BAC). “Bank of America … remains ‘fundamentally and patiently bearish.’”

To quote CFO Dive, “Downward revisions to consensus expectations for earnings next year ‘will likely accelerate as monetary tightening continues to reduce inflation and growth slows.’”

Thus far, the economy has shrunk 0.6% in the second quarter, after slumping 1.6% in the first, which is “the common definition of a recession” despite the continued growth of the economy as shown by other metrics like “nonfarm employment, consumer spending, industrial production, and weekly hours worked.”

Positioning

As of 7:45 AM ET, Tuesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.24%. Net gamma exposures increasing may promote some market stability.

It’s the case that there is this trend in demand for equity downside put options protection. This is evidenced by figures of open interest, volume, as well as bid implied volatility (IVOL) metrics like the Cboe Volatility Index (INDEX: VIX).

Graphic: Retrieved from Bloomberg.

“They’re buying protection against a crash at a pace unlike anything the market has ever seen,” said Jason Goepfert, chief research officer at Sundial. This is as Nomura Holdings Inc’s (NYSE: NMR) Charlie McElligott says more traders are taking shots amid “hawkish global central bank escalations,” and tightening measures of liquidity, among other things.

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

Goepfert adds that the “massive hedging activity” feels “unsettling.” That has to do with what the reaction to that protection entails should markets drop lower and IVOL increase, accordingly.

Graphic: Retrieved from SqueezeMetrics. Learn the implications of volatility, direction, and moneyness.

Notwithstanding, should nothing bad happen, the activity, which is structured in soon-to-expire options, will quickly fall out of favor (as will the probability of those options paying out). Liquidity providers, on the other side of those trades, will reduce their negative Delta (short futures and stock) hedges which may further add support to markets.

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

The concern is that soon after this big options expiration passes, new fear and demand for protection may feed into another bout of weakness as traders rush to re-protect and liquidity providers add pressure in their hedging, accordingly.

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

Technical

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

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

Any activity above the $4,127.00 VPOC puts into play the $4,189.25 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,231.00 VPOC and $4,253.25 HVNode, or higher.

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

Any activity below the $4,127.00 VPOC puts into play the $4,071.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,018.75 HVNode and $3,991.00 VPOC, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 12, 2022

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

Graphic updated 7:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Administrative

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

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

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

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

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

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

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

Fundamental

Let’s get into it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Graphic: Retrieved from Bloomberg.

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

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

Positioning

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

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

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

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

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

Technical

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

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

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

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

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

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

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

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

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

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

About

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

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For September 9, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 850+ that read this report daily, below!

Graphic updated 8:00 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. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

Fundamental

As much as it may be a so-called chart crime to overlap past market environments and project or forecast what may happen, it’s quite eerie that today’s path of returns appears similar to that of 1394-1937, 2005-2008, and 1997-2001, for example.

Graphic: Retrieved from Deutsche Bank AG (NYSE: DB).

Moreover, this time around, it’s the case that markets have fallen on participants’ pricing of higher interest rates and quantitative tightening (QT). 

Graphic: Retrieved from The Market Ear. Via Guggenheim Partners.

Some argue there is more to go on the pricing of a potential economic slowing happening here, in the U.S., abroad in China, and beyond.

Graphic: Retrieved from Bloomberg. “Earnings are related to the economic cycle, but not tightly, and expectations for next year are intertwined with macroeconomic concerns.”

Notwithstanding, and we will end the fundamental section with this, today, Credit Suisse Group AG’s (NYSE: CS) Jonathan Golub puts forth the following: 

“Although revisions are negative, projected EPS growth rates remain positive for the remainder of 2022-23. While 3Q growth has fallen to 4.7%, EPS should expand 9-10%, assuming similar beats as experienced in 2Q. Historically, earnings hold up best when inflation is elevated. Many investors are interpreting the recent decline in estimates as a harbinger to recession. Our work shows that in high inflationary periods (1973, 1980, 1981) earnings peak just 2 months prior to a recession’s onset. With EPS growth projections still positive, revisions would have to fall much more to signal an economic contraction.”

Positioning

Referring traders to a recent case study (HERE) on how to play this market environment, as well as the impacts of implied volatility (IVOL) compression September 8 (HERE).

After a period of sideways-to-lower, markets are rebounding, boosted by IVOL compression and traders’ re-positioning ahead of potential including inflation and monetary policy updates.

Notwithstanding, as Kai Volatility’s Cem Karsan well explained to Charles Schwab Corporation’s (NYSE: SCHW) TD Ameritrade Network, traders must look out for the “window of real risk.”

The energy for a downside move “is significant” after this year’s decimation of “skew and volatility,” he said. “Hedging for convexity is in the 5th percentile.”

This is because participants hedged heading into the decline, and sold skew as the markets explored lower. After the current period of volatility supply passes, Karsan added, and markets were to trade lower, there is the risk of a reach for protection and a fatter tail.

Graphic: Merrill Lynch Options Volatility Estimate (INDEX: MOVE), a measure of volatility for the US Treasury market, versus the Cboe Volatility Index (INDEX: VIX), a measure of volatility for the equity market, diverged this year. This is, in part, due to the supply of volatility in equities.

Should nothing happen, then the unwind of the recent speculation amongst “family offices and institutions front-running the speculative hedges that are more than 50 units,” will add support.

Graphic: Retrieved from SentimenTrader on September 7, 2022.

Technical

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

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

Any activity above the $4,069.25 HVNode puts into play the $4,107.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,136.75 MCPOC and $4,189.25 LVNode, or higher.

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

Any activity below the $4,069.25 HVNode puts into play the $4,018.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,991.00 VPOC and $3,952.75 LVNode, or lower.

Click here to load today’s key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

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

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

Graphic: Updated 9/8/2022. The daily chart of the SPDR S&P 500 ETF Trust (NYSE: SPY).

Definitions

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

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

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

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

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

About

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

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

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

Disclaimer

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