Categories
Commentary

Daily Brief For November 29, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher as participants looked to take back nearly all of Friday’s shortened holiday trading range. 

According to some metrics, the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, experienced one of its most illiquid days, Friday.

At the same time, the CBOE Volatility Index (INDEX: VIX) closed up nearly 50% while the VIX futures term structure settled in backwardation amidst a re-pricing of tail-risk, so to speak.

Moreover, ahead is data on Pending Home Sales (10:00 AM ET).

Graphic updated 5:50 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Despite the lackluster intraday breadth and divergent market liquidity metrics, the worst-case outcome occurred, Friday, evidenced by downside expansion of range and separation of value.

Coming into the session, the experiences associated with ‘Volmageddon’ came to mind; the VIX was up nearly 40.00%, a concern given the exuberance of past weeks and options positioning, as well as a decline in correlations, and unsupportive breadth.

Tempering the fall were divergences; the Russell 2000 was down nearly 4.00% before Friday’s U.S. open while the S&P 500 was off about 2.00% or so, buoyed by the Nasdaq 100 which was only down about 1.00% amidst an 8% dip in the ten-year yield.

The divergence persisted with the S&P 500 closing firmly below its 20-day simple moving average, a visual level often acted on by short-term, technically-driven participants who generally are unable to defend retests.

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

Context: A resurgence in the COVID-19 coronavirus as an improvement in macroeconomic conditions prompts a hawkish shift from the Federal Reserve (Fed). 

“Many risky asset tailwinds in 2021 are turning into at least mild headwinds in 2022,” Nordea says. “Economic growth should decelerate, liquidity conditions are deteriorating, profit margins should be under pressure from rising costs and question marks regarding the Fed/ECB put will arise due to elevated inflation indicators. To us, this spells higher volatility.”

Moreover, for the past two years, almost, equities rallied amidst an acceleration in growth, which is typically correlated with equity outperformance over bonds.

Graphic: Accelerating growth correlates with equity outperformance over bonds.

At the same time, there’s been an insatiable appetite for stocks, according to Bloomberg, with investors pouring “almost $900 billion into equity exchange-traded and long-only funds in 2021 — exceeding the combined total from the past 19 years.”

This appetite for risk fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA) with customers, at least in the past weeks, opting to aggressively sell puts and buy calls heading into the November monthly options expiration (OPEX).

Graphic: Per The Market Ear, participants were hating on downside protection for weeks.

Unfortunately, (1) after OPEX, the absence of sticky and supportive hedging flows freed the broader market for directional resolve, and (2) according to SpotGamma, in light of recent exuberance, “participants [were] underexposed to downside put protection.”

Graphic: Customers took on significant leverage in their purchase and sale of options, via SpotGamma.

What this meant was that after OPEX’s unpinning and increase in correlation, fundamental contexts were to matter more.

Therefore, the Fed’s “increased openness to accelerat[e] the taper pace” and hike rates, alongside fresh travel restrictions on a new COVID-19 variant, as well as holiday illiquidity, resulted in a rough re-pricing of tail risk as participants sought after those highly “convex” options which had counterparties exacerbating underlying price movement.

Graphic: According to Bloomberg, markets price “a full quarter-point rate hike into the June Fed meeting with a second by September and a third by December.”

To elaborate, in short, was volatility to pick up, those participants (who were once exuberant) were likely to reach for protection forcing dealers to reflexively hedge in a destabilizing manner. 

Dealers is the term used to describe those participants that take the other side and warehouse customer options risk, at least in the case where orders can’t be matched between customers.

With that, as volatility rose and customers demanded protection, counterparties hedged by selling into weakness. The conditions worsened when much of the activity was concentrated in shorter-dated tenors where the sensitivity of options to direction is higher if we will.

Graphic: VIX term structure. Backwardation signals an entry into an unstable environment.

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

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

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

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

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

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

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

Charts To Watch

Graphic: (NYSE: SPY). (S~$460 and $453). S is for support.
Graphic: (NASDAQ: QQQ). (S~$389 and $381). S is for support.
Graphic: (NYSE: IWM). (S~$222 and $216). S is for support.

What People Are Saying

Definitions

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

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

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

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

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

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

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

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

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For November 22, 2021

What Happened

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

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

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

What To Expect

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The tone is to change, soon.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Definitions

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

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

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

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

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

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

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

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

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For November 12, 2021

What Happened

Overnight, equity indices were flat-to-up while commodities and bonds were sideways to lower.

The prevailing narratives include the prospects of a Russian invasion of Ukraine, COVID-19 resurgence in the U.S., concerns over the pace of inflation and its impact on the economy, China developer debt payments, and the like. Your typical doom and gloom stuff!

Ahead is data on job openings, University of Michigan consumer sentiment, and five-year inflation expectations (10:00 AM ET).

Graphic updated 5:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

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

This activity, which suggests participants’ willingness to position for directional resolve, comes alongside the presence of poor structure, a dynamic that adds to technical instability.

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

Context: The aforementioned trade is happening in the context of a lot of big-picture dynamics such as the growth of derivatives exposure and tail risk, the heightened moneyness of nonmonetary assets, trends in seasonality, buybacks, earnings growth, inflation, and more.

Graphic: “Whenever the market has been up 20%+ YTD through to October (like e.g. THIS YEAR), it has *always* had an up month in November (albeit with a n=8). Basically I would say it speaks to the momentum in the market, which despite the September stumble seems pretty much alive and well.” – Callum Thomas

On the topic of inflation, the October consumer price index (CPI) is worrisome, according to some. 

“We think it is time to rethink positioning related to inflation,” Citigroup Inc (NYSE: C) strategists led by Scott Chronert wrote in a note. “A focus on sectors and industry groups negatively correlated to inflation provides a contrarian opportunity.” 

Citi sees value in consumer and health-care stocks, as a result of negative correlations to CPI.

Despite the hot prints, the CPI doesn’t paint the entire picture; it’s too soon to change rate-hike calculations, according to the Federal Reserve’s Mary Daly. 

Graphic: U.S. inflation, expected Fed rate increases via Bloomberg

That thinking brings me back to recent comments made by Ark Invest’s Cathie Wood.

Mainly, Wood feels that inflation is on its way out with a decline in the velocity of money and increased moneyness of nonmonetary assets.

A prime example of this is inflation in housing; “Ivy Zelman of Zelman Research came out this week. She made a fantastic call on the housing bubble and bust starting in 05-06, and she was right, just a little early. She is very concerned that the housing prices we’re seeing right now are not sustainable,” because of speculation, as well as iBuying and private equity. 

“This is unsustainable … and I’m wondering if even the housing market inflation is going to give way, here,” Wood added. 

For now, with more of the same – bullishness in the face of moderating monetary policy, strong retail participation, seasonality, and buybacks supporting the valuations we’re at, now – what other narratives are there to add (or roll forward)?

Given my interest in the options market – because option volumes are comparable to stock volumes and related hedging flows, as a result, represent an increased share of volume in underlying stocks – I’m in the camp of “the market is fragile, given current positioning.”

According to SpotGamma, single-stock exuberance of the past weeks fed into the S&P complex, itself, evidenced by a lack of interest in put options at lower strikes; the S&P 500 options strike with the largest negative gamma – delta sensitivity to underlying price – failed to roll higher, while the strike of the option with the largest positive gamma did. 

This came as investors marked the S&P 500 up to the $4,700.00 strike, at which positive gamma – delta sensitivity to underlying price – is highest. 

“As volatility continues to decline, the gamma of those options, which are now at the money, ought to increase, forcing counterparties to supply more liquidity,” SpotGamma explained.

Therefore, coming into this week, $4,700.00 was expected to be a magnet (or resistance) into that aforementioned pre-monthly options expiration (OPEX) weakness.

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. 

This was unless (1) volatility declined markedly, “a tailwind for the S&P complex as options slid[ing] down their term structure would cause dealers to continue covering their hedges in an asymmetric manner,” or (2) more capital was committed to options at higher strikes. 

Neither happened.

Instead, the CBOE Volatility Index (INDEX: VIX) was higher, with demand coming in across the front area of the VIX futures term structure. This suggested a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

Pictured: SqueezeMetrics highlights implications of volatility, direction, and moneyness. The left orange marker is reflective of a basic reaction to call-buying (as observed during the rise of meme stocks). The right orange marker reflects a reaction to put-buying (as observed during the COVID-19 sell-off).

The implications of customers now covering their levered, long-delta exposure and demanding out-of-the-money hedges may have the effect of forcing counterparties to hedge in a manner that exacerbates underlying price movement to the downside (e.g., Tesla).

With that single-stock exuberance still reflected by positioning in the S&P, itself, as SpotGamma said: “This sets us up for what may be a volatile pre- and post-OPEX week.”
Graphic: S&P 500 (INDEX: SPX) options activity for Thursday, November 11, 2021. SHIFT shows increased volume of put options in strikes prices at and below current prices.

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

Balance-Break Scenarios: A change in the market (i.e., transition from two-time frame trade, or balance, to one-time frame trade, or trend) ought to occur on a break of day-session balance.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,647.25 high volume area (HVNode) puts in play the $4,673.00 untested point of control (VPOC)

Initiative trade beyond the VPOC could reach as high as the $4,695.25 micro composite point of control (MCPOC) and $4,711.75 regular trade high (RTH High), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,647.25 HVNode puts in play the $4,619.00 VPOC

Initiative trade beyond the VPOC could reach as low as $4,590.00, a prior balance area high (BAH), and $4,574.25 HVNode, or lower.

To note, a breach of Wednesday’s low likely puts the S&P 500 in a short-gamma environment.

Those participants that take the other side of options trades will hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma, they buy into strength and sell into weakness, exacerbating volatility. 

When dealers are long-gamma, they buy into weakness and sell into strength, calming volatility.

--

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

What People Are Saying

Definitions

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

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

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

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

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.

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

About

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

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

Disclaimer

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

Categories
Commentary

Daily Brief For November 11, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher, recovering much of yesterday’s fast-paced liquidation.

To note, overnight price changes aside, the Nasdaq 100 is trading weak, in comparison to the S&P 500, a dynamic most noticeable in underlying breadth metrics, and the like. 

Ahead, there are no material economic releases.

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

What To Expect

Coming into Tuesday’s session, participants knew that the S&P 500 had already undergone somewhat of a lackluster liquidation, Tuesday.

Those behind some of the downside velocity we saw were most likely short-term, momentum-driven participants who had poor location (i.e., those that respond to probes at visual references and lack the wherewithal to withstand major changes in tone).

To note, given the context – weak intraday breadth and market liquidity metrics bolstering an expansion of range below the volume-weighted average price (VWAP) anchored from the Federal Open Market Committee (FOMC) announcement, last week – the poor structure intact from the advance in past weeks remains a concern.

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

Context: Yesterday, I talked in-depth on the implications of high leverage and risk by short-term speculators’ record call buying and put selling. 

To recap, so long as implied volatility remained bid (and stock prices continued rising) – the result of inadequate liquidity – counterparties to highly speculative trades exacerbated upside volatility in their efforts to hedge. 

As implied volatility backed off, counterparties supplied an increasing amount of their underlying hedges, calming the pace of upside price discovery.

When the high-flying stocks (like Tesla, which is a large S&P 500 index constituent) finally made the turn, the bulk of customers’ short puts (long calls) quickly rose (declined) in value, trading in-the-money (out-of-the-money). 

Due in part to short-term speculators lacking the wherewithal to stay in their margin-intensive positions, as the price fell, put buying (covering of shorts, too) took liquidity and destabilized the market.

Graphic: SqueezeMetrics unpacks implications of short put options on the limit order book.

According to SpotGamma, the exuberance of the past weeks fed into the S&P complex, itself, evidenced by a lack of interest in put options at lower strikes. In other words, the S&P 500 options strike with the largest negative gamma – delta sensitivity to underlying price – failed to roll higher, while the strike of the option with the largest positive gamma did. 

With implied volatility declining into the S&P’s price rise, last week (a dynamic that, at least in recent history, leads into increased call selling, more dealer hedging, and liquidity, as well as further realized volatility suppression), associated hedging at those strikes pressured prices.

The upside was resisted and we pinned. 

Coming into this week, however, CBOE Volatility Index (INDEX: VIX) was higher, with demand coming in across the front area of the VIX futures term structure. This suggested a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

Graphic: Charting the CBOE Volatility-Of-Volatility Index (INDEX: VVIX) and the CBOE Volatility Index (INDEX: VIX). Though both were higher, expectations of the volatility of volatility rose. Participants are reaching for those highly “convex” options which have counterparties reacting in a manner that exacerbates underlying price movement.

The implications of customers now covering their levered, long-delta exposure and demanding out-of-the-money hedges has the effect of forcing counterparties to hedge in a manner that exacerbates underlying price movement to the downside. 

This was the concern. This is what we’re starting to see.

Typically, the period leading up to the monthly options expiration (OPEX) is weak (at least in recent times) and so this trend of lower price and higher intraday volatility may persist up until that event clears counterparties’ gamma exposure and frees the market to move, more.

That’s when fundamental context likely plays a more important role. 

According to a Barclays (NYSE: BCS) note featured by The Market Ear, earnings are a tailwind.

“Amid a potentially higher macro volatility regime, we expect earnings to remain a tailwind for equities in ’22. Given our economists’ forecast of above-trend GDP growth of 4.5%, our base case gives 14% EPS growth for Europe, vs. the IBES estimate of 7%. Sticky supply bottlenecks are a threat, but margins typically expanded when global growth was above 3%, while ULCs should remain low. With comps less easy now, sector contributions to EPS growth should be more balanced between Cyclicals and Defensives, but still higher for the former.”

At the same time, in the face of inflation rising at the fastest rate since 1990, we have strong retail participation, seasonality, and buybacks to support the valuations we’re at, now.

Graphic: Inflow mania continues, via The Market Ear.

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

In the best case, the S&P 500 trades sideways or higher; activity above the $4,657.75 low volume area (LVNode) puts in play the $4,673.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,695.25 micro composite point of control (MCPOC) and $4,711.75 regular trade high (RTH High), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,657.75 LVNode puts in play the $4,619.00 VPOC. Initiative trade beyond the VPOC could reach as low as $4,590.00, a prior balance area high (BAH), and $4,574.25 high volume area (HVNode), or lower.

To note, a breach of the prior day’s low likely puts the S&P 500 in a short-gamma environment. When dealers are short-gamma, they buy into strength and sell into weakness, exacerbating volatility. When dealers are long-gamma, they buy into weakness and sell into strength, calming volatility.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Note the low-volume structure beneath current prices. There is the potential for a cave-fill to widen the area deemed favorable to transact at by an increased share of participants. Learn about the profile.

What People Are Saying

Definitions

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

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

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

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

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

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

Disclaimer

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