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Commentary

Daily Brief For October 7, 2021

Market Commentary

Led by the Nasdaq 100, equity index futures were higher. Commodities and bonds were mixed.

  • Relief of worries over debt, energy.
  • Claims and credit data, Fed speak.
  • Positioning suggests risk to upside.

What Happened: U.S. stock index futures continued higher overnight alongside ease in angst over debt and energy worries.

Ahead is data on jobless claims (8:30 AM ET), Fed speak by John Williams (8:40 AM ET), Fed speak by Loretta Mester (11:45 AM ET), as well as consumer credit data (3:00 PM ET).

Graphic updated 6:20 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. 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. 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: As of 6:20 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open outside of prior-range and -value, suggesting a heightened potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on negative intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by trade above the level of a key volume-weighted average price (VWAP).

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

Thereafter, equity index futures, led by the Nasdaq 100, continued higher overnight, leaving behind a multi-session balance area (between the $4,363.25 and $4,278.00 HVNodes).

This trade is significant because it marks a rejection, or a willingness to not transact at lower prices. We’re carrying forward, though, the presence of poor structures (e.g., Wednesday’s advance away from session value on a taper of volume, and minimal excess lows which suggest a lack of commitment to take prices lower).

Gap + 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) has occurred.

At the same time, gaps ought to fill quickly. Should any gap not fill, that’s a signal of strength; do not fade. 

Therefore, the objective is to 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.

Further, the aforementioned trade is happening in the context of a traditionally volatile October, as well as narratives surrounding adjustments to monetary policy, debt ceiling complications, and energy crises.

These themes support fear and uncertainty; for instance, Nordea believes there are “4 macro reasons why 2022 should be noisier than 2021: liquidity, growth slowdown, cost/margin problems and the risk of the Fed put looking very different if inflation indicators stay elevated.”

However, the Senate is nearing a deal to raise the debt ceiling, relieving the threat of imminent default; this was a likely development given that “lawmakers [knew] that voting against raising the debt ceiling would have enormous economic costs,” Moody’s noted.

Also, on the energy crisis front, Russia offered to export record volumes of fuel to Europe as winter approaches fast.

Given these developments, Tracie McMillion, head of global asset allocation strategy at Wells Fargo & Co’s (NYSE: WFC) Investment Institute said the following on Bloomberg: “We have several things that we are watching right now – certainly the debt ceiling is one of them and that’s been contributing to the recent volatility, … but we look for these 5% corrections to add money to the equity markets.”

Adding, prior to yesterday’s advance, this newsletter noted that indices were best positioned for a vicious rebound as near-term downside discovery metrics likely reached a limit

Graphic: ​​On October 5, 2021, according to SqueezeMetrics, “Net Put Delta (NPD) and the customer Vanna-Gamma Ratio (VGR) [] settled in a *bullish* place. Risk to the upside.”

After consolidating for numerous sessions, participants resolved the developing balance area (between the $4,363.25 and $4,278.00 HVNodes) on new information that warranted a directional move. 

In other words, the overnight session confirmed the bull thesis

We note, amidst a decline in top-of-book depth, as well as back and forth entry (exit) into (from) short-gamma, we limit our expectations based on some of the recent realized volatility.

In a quote highlighted by The Market Ear, Bank of America Corporation (NYSE: BAC) explained: “last Thursday was the 24th time since 1928 that the S&P experienced two or more 3-sigma shocks in 10 trading days, … [and] only in 3 of 23 episodes (and 1 in the last 50yrs) did the S&P surpass the prior month’s peak in the month following the second shock.”

Moreover, for today, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,377.00 overnight point of control (O/N POC) puts in play the $4,410.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,437.75 micro-composite point of control (MCPOC) and $4,481.75 high volume area (HVNode), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,377.00 O/N POC puts in play the $4,363.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,332.25 LVNode and $4,278.00 HVNode, or lower.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 7:10 AM ET.

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.

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

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.

News And Analysis

NFT game wants you to spend real money buying fake shares.

Senate is poised to pull nation back from default brink, for now.

Global banks retain competitive advantage amid big obstacles.

Russia offers to ease Europe’s gas crisis with strings attached.

Digitalization of markets: how digital bonds can disrupt market.

U.S. utilities and regulators gear up for electric vehicle outlook.

ECB studies a new bond-buying plan for when crisis tool ends.

S&P on navigating a pathway to a low-carbon global economy. 

Rivian’s electric truck gets all attention but fate tied to Amazon.

What People Are Saying

About

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

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

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