Tag: Zoltan Pozsar

Categories
Commentary

Daily Brief For September 28, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 970+ that read this report daily, below!

Subscribe
Graphic updated 8:20 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.

Administrative

Apologies, team, if the quality was lacking these past few days. Extremely busy on my end and I look forward to some detailed letters in the near future! – Renato

Fundamental

“Great powers are waging hot wars involving the flow of technologies, goods, and commodities.”

That’s according to Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar who believes that the pillars forming the context for a low-inflation world are changing, and this is setting the stage for longer-lasting structural inflation.

In short, inflationary impulses are incoming from non-linear geopolitical and economic conflicts. 

Just yesterday, Europe was investigating attacks on pipelines from Russia; there were “major leaks into the Baltic Sea from two Russian gas pipelines at the cent[er] of an energy standoff.”

“The word sabotage springs to mind,” Javier Blas of Bloomberg, said. “In a single day, the conduits, which link Russia with Germany under the Baltic Sea, have suffered not one, not two, but three separate major leaks.”

Per reports by Refinitiv, seismologists nearby registered “powerful blasts” that “do not resemble signals from earthquakes.” Instead, the explosions likely correspond with hundreds of “kilos (kg) of dynamite.”

Graphic: Retrieved from Bloomberg. 

Given that Nordstream 1 and 2 are not operational, now, the “leaks are more likely a message: [if truly the culprit], Russia is opening a new front on its energy war against Europe.” 

Accordingly, gas prices were higher but “below this year’s peaks,” Refinitiv reported. Generally, across some benchmarks, prices read “more than 200%, higher than in early September 2021.”

Separately, the Bank of England (BoE) is delaying quantitative-tightening (QT) bond sales and opting to purchase longer-dated government bonds in an attempt to restore stability, which we discussed was at risk on Monday and Tuesday.

Graphic: Retrieved from Bloomberg. Credit Default Swaps (CDSs) are a tool for investors to offload credit risk to other market participants.

As a result, after a near-vertical drop (visible below) in Gilts and British corporate bonds (which impacted mortgage lending, for one), UK yields saw some of their biggest drops on record.

Graphic: Retrieved from Bloomberg. Updated September 26, 2022.

The actions over the past few days complicate the Monetary Policy Committee’s (MPC) objective to reach a return to 2% inflation in the medium term.

Graphic: Retrieved, initially, from Bank of America Corporation (NYSE: BAC). Via The Transcript. Interest rates “may be higher for longer” than expected.

At home, here, in the US, yields on the 10-year topped 4.00%. There is a heightened chance of a Federal Reserve (Fed) bump in rates that brings the target rate to 375-400 basis points, while the UK, in stemming its inflationary pressures, is expected to bump by double that amount.

The action to stem inflation is feeding through to demand. Apple Inc (NASDAQ: AAPL) said it would ease plans to boost iPhone production “after an anticipated surge in demand failed to materialize,” a Bloomberg report said. 

“The supply constraints pulling down on the market since last year have eased and the industry has shifted to a demand-constrained market,” said Nabila Popal, research director at IDC. 

“High inventory in channels and low demand with no signs of immediate recovery has OEMs panicking and cutting their orders drastically for 2022,” a fear we said ARK Invest’s Catherine Wood shared, not too long ago.

Positioning

The beginning of the week was characterized by a sideways-to-lower S&P 500 (INDEX: SPX) and implied volatility (IVOL) metrics, such as the Cboe Volatility Index (INDEX: VIX), rising.

Per IVOL the term structure, demand for options protections seems to be concentrated in options that are shorter-dated and far more sensitive to changes in direction and volatility.

That means for large shifts in price and/or volatility, hedging ratios (e.g., Delta) shift markedly, too. This prompts “hedging feedback mechanisms in both market directions,” per SpotGamma.

Graphic: Retrieved from VIX Central. Taken from The Market Ear. Updated 9/27/2022.

Moreover, the risks are skewed to the upside, SpotGamma added. 

“For pumped-up options far from the money to retain their value, there essentially needs to be an adverse move (in price and volatility). Should nothing bad happen, the probability of these options paying out will fade, as will their exposure to direction (or Delta). [In] re-hedg[ing] decreased exposure to Delta, liquidity providers [] may provide the market with a boost.”

Graphic: Retrieved from SpotGamma. SPX prices X-axis. Option delta Y-axis. When the factors of implied volatility (Vanna) and time change (Charm), hedging ratios change. The graphic is for illustrational purposes, only.

At the same time, there appears to be some “dealer disintermediation” amid “less incentive to make deep, tight markets” due to “capital constraints,” potentially, explained SqueezeMetrics, the creator of the DIX (Dark Pool Index).

This comes after months of high average readings in DIX (likely as market-makers assembled “basket[s] of S&P 500 stocks to create ETF shares, or to hedge away the exposure of a futures contract[s]”). Typically, high DIX readings are associated with stronger 1-month market returns, particularly when put flows are strong (i.e., lower Gamma exposure readings, like now).

Graphic: Retrieved from SqueezeMetrics.

Overall, the trend change is “suggestive of some second thoughts from the [buy-the-dip] crowd, and perhaps (likely!) some deleveraging from elsewhere,” SqueezeMetrics ended.

Technical

As of 8:20 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 $3,638.25 LVNode puts into play the $3,688.75 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,722.50 LVNode and $3,771.25 HVnode, or higher.

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

Any activity below the $3,638.25 LVNode puts into play the $3,610.75 HVNode. Initiative trade beyond the HVNode could reach as low as the $3,554.75 and $3,506.25 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.

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!

Subscribe
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 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!

Subscribe
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 8, 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!

Subscribe
Graphic updated 7:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. 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

Please pardon the light letter, team.

The Federal Reserve (Fed) Chair Jerome Powell will speak on monetary policy today at 9:10 AM ET. He is likely to embolden the tone set forth yesterday by the Fed’s Lael Brainard who said that higher rates for far longer seem necessary at this juncture.

The base case calls for a 75 basis point hike to interest rates this month, followed by 50 basis points in November, according to Goldman Sachs Group Inc (NYSE: GS) forecasts.

A quick check of the Eurodollar – which reflects the interest offered on U.S. dollar-denominated deposits held at banks outside of the U.S. (i.e., participants’ outlook on interest rates) – shows a peak in the overnight rate at 4.155% in February of 2023. From thereon, rate cuts are implied.

Graphic: Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim.

It’s the case that monetary policies implemented resulted in too many dollars (still) chasing too few goods. We spoke on supply side dislocations last week and put forth that, from a monetary perspective, the Fed, among its peers like the ECB, can only and will tighten to stem inflationary pressures that are (to remain) structural.

Graphic: Retrieved from Bloomberg. “The number of references to the word ‘shortage’ in the Fed’s latest Beige Book report edged higher after declining for three straight reports, according to a Bloomberg tally. Job markets remained tight and labor shortages weighed on several sectors. That plus continued supply-chain snarls hampered manufacturing, the Fed said.”

It is the case that the economy is on a path that is “L”-shaped (i.e., vertical drop in activity via recession, and flatline for a period of time as rates remain higher for longer to prevent a sharp rise in inflation, again).

Zoltan Pozsar of Credit Suisse Group AG (NYSE: CS) puts forth that policymakers now have to “generate a round of negative wealth effects to lower demand such that it becomes more in line with the new realities of supply.”

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.

Technical

Implied volatility (IVOL) is wound and markets are in an environment characterized by two-way ranges that are larger. Yesterday, we unpacked one way traders could have played the entry into this environment.

Further, as SpotGamma puts it well, a positive response to Powell’s remarks, into and through events such as the next update on consumer prices and the Federal Open Market Committee (FOMC) meeting, opens the door to IVOL compression and this would be “a boost for equities.”

Graphic: Retrieved from VIX Central.

That’s because the Delta risk counterparties are exposed to by holding short put options, for instance, reduces with falling IVOL. Accordingly, since the short puts carry less positive Delta, the counterparty reduces its negative Delta exposure via the underlying future or stock, which can support markets.

Graphic: Retrieved via SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator. S&P 500 volatility selling coincides with a drop in IVOL and a price rise in the underlying.

Technical

As of 7:15 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 $3,988.25 HVNode puts into play the $4,018.75 HVNode. Initiative trade beyond the latter could reach as high as the $4,064.00 RTH High and $4,107.00 VPOC, or higher.

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

Any activity below the $3,988.25 HVNode puts into play the $3,952.75 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,925.00 VPOC and $3,884.25 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: 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.

Categories
Commentary

Daily Brief For September 1, 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!

Subscribe
Graphic updated 8:15 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.

Fundamental

In the past weeks and days, China and Taiwan tensions have seemingly worsened. Headlines this morning include China “simulating attacks on U.S. Navy ships,” and “Taiwan shoots down drone showing risk of escalation with China.”

This is all the while the conflict between Russia and Ukraine continues to rage, bolstering the structural issues contributing to the longer-lasting inflation we discussed on August 3 (HERE).

In that August 3 letter, we cited Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar on his perspectives regarding the weakening of “the pillars of the globalized, low inflation world.”

Since then, Pozsar wrote another note titled “War and Industrial Policy,” published on August 24 (HERE), alleging a “messy divorce” ongoing between large powers like the US and China.

For instance, the note said: “Pentagon chief’s calls to China go unanswered amid Taiwan crisis.” 

Yikes! Let’s unpack what’s going on a bit, further.

Basically, it’s the case that powers like Russia became “rich selling cheap gas” to countries like Germany who became “rich selling expensive stuff produced with cheap gas,” the note says.

Per Andreas Steno Larsen, now, countries like Germany are in a precarious position. 

It’s possible that the country “will likely make it through winter unless Russia 1) halts the gas flow completely and 2) the winter is extremely severe.”

No matter what, the “Germany economy will take a hit, … [and], given current forward prices, we are looking at CPI numbers well above 10% y/y. In France and Spain, that picture is even worse with numbers above 15% y/y.”

To dampen the impact of this inflation, countries like Denmark have resorted to “handing checks out almost randomly,” which does less to take from “inflationary pressures down the road.”

Graphic: Via Andreas Steno Larsen. “German energy component of CPI is only getting worse.”

In short, via de-globalization and populism, “the pillars of the low inflation world are changing,” per Pozsar and, the recourse, now, is a fight via asset price deflation, put forth on August 3.

In other words, de-globalization and populism have prompted an “inward shift of supply curves across multiple fronts (labor, goods, and commodities).” Accordingly, the economy is on a path that is “L”-shaped (i.e., vertical drop in activity via recession, and flatline for a period of time as rates remain higher for longer to prevent a sharp rise in inflation, again).

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.

As Pozsar summarises: “we [have] to generate a big, “L”-shaped recession to slow inflation down; we [have] to generate a round of negative wealth effects to lower demand such that it becomes more in line with the new realities of supply.”

Separately, a Minsky Moment looms, Pozsar said.

“Minsky moments are triggered by excessive financial leverage, and in the context of supply chains, leverage means excessive operating leverage: in Germany, $2 trillion of value added depends on $20 billion of gas from Russia…that’s 100-times leverage – more than Lehman’s.”

Moreover, it is the case that, ultimately, after inflation is reduced, a “recovery [will be driven by] fiscally funded industrial policy” that: 

(1) Re-arms (to defend the world order); (2) re-shores (to get around blockades); (3) re-stocks and invests (commodities); (4) re-wires the grid (energy transition).

Graphic: Text retrieved from Kai Volatility’s Second Quarter (2022) Market Commentary And Outlook. Annotated by Physik Invest’s Renato Leonard Capelj.

With that in mind, Pozsar ends that there will likely be a commodity supercycle that is part of a new regime, Bretton Woods III. Read the full note, here, and/or listen to the below podcast.

Positioning

As of 6:35 AM ET, Thursday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.42%. Gamma exposures falling, at an increasing pace, may add to ranges and pressure.

Graphic: Created by Physik Invest. Data by SqueezeMetrics.

As discussed thoroughly in our August 31 (HERE) and August 18 (HERE) letters, our analyses had us structuring spreads against the $3,700.00-$3,500.00 area in the S&P 500 (INDEX: SPX).

Graphic: Retrieved from Cboe Global Markets Inc (BATS: CBOE). Updated August 17, 2022.

To quote the August 18 letter, it was “beneficial to be a buyer of options structures to protect against (potential) downside (e.g., S&P 500 [INDEX: SPX] +1 x -2 Short Ratio Put Spread | 200+ Points Wide | 15-30 DTE | @ $0.00 or better).”

This trade is near-finished and it is time to monetize (i.e., closing and converting a position to cash) as there is a risk of losing the Deltas built up this decline on a fast move higher, should one probably occur here, soon, with the S&P 500 trading into a key support zone we outlined.

Graphic: Retrieved from VIX Central. Compression in implied volatility would solicit positive delta hedging flows (vanna), and this could provide markets with a boost.

In short, it is beneficial to be a seller of those options structures (e.g., S&P 500 [INDEX: SPX] -1 x +2 Ratio Put Spread | 200+ Points Wide | 15-30 DTE).

Note: Trades Renato has personally taken remain to be unpacked in subsequent commentaries. Both the mistakes and successes, as well as what to do better.

Technical

As of 8:10 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 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 $3,943.25 HVNode puts into play the $3,987.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,064.00 RTH High and $4,107.00 VPOC, or higher.

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

Any activity below the $3,943.25 HVNode puts into play the $3,909.25 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $3,867.25 LVNode and $3,829.75 MCPOC, 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

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.

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 August 15, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 800+ that read this report daily, below!

Subscribe
Graphic updated 7:30 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. 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

According to Goldman Sachs Group Inc (NYSE: GS) Prime Services, this is the third largest short-covering rally in three years.

Graphic: Retrieved from The Market Ear. Via Goldman Sachs Group Inc.

The rally, as discussed in past commentaries, is, in part, the result of “volatility-target funds” and “trend-following funds” getting back into the market as volatility falls, sentiment and data on jobs improve, as well as cooler-than-expected inflation figures.

Graphic: Retrieved from Stenos Signals. “Unless SMEs are lying, inflation has peaked for now … Will it change the market psychology?”

“The machines seem hell-bent on pushing the financial conditions easing trade,” said Dennis DeBusschere, the founder of 22V Research. 

“Machines are eating the words from the Fed speakers for breakfast.”

Graphic: Retrieved from Bloomberg. “The issue is the giant pool of systematic funds that moves in and out of the market based on how turbulent prices are. With peace at hand of late amid a four-week rally, so-called volatility-target funds and similar strategies such as risk parity are buying between $2 billion to $4 billion of stocks per day, according to an estimate by JPMorgan Chase & Co.’s Kate Gandolfo.”

Notwithstanding, JPMorgan Chase & Co (NYSE: JPM) estimates overall CTA exposures remain subdued. To incite ultra-impactful “buy signals” the S&P 500 would have to rise to $4,400.00.

This “would prompt CTAs to step up buying” and, potentially, turn “‘max long’ on stocks, buying probably $100 billion to $200 billion across various trend-following strategies.”

Graphic: Retrieved from Yardeni Research Inc.

Though the S&P 500 has yet to retake the $4,400.00 level, likely to remain as support until the end of the week, at least, are options hedging flows, which we talked about last week. 

“That can last perhaps another 100 days if volatility stays low,” JPM’s Kate Gandolfo suggested.

For context, at least at the index level, customers are short call, long put against their equity. In a rising market, the call side solicits increased hedging on the part of counterparties. 

If counterparties are long the call, and the market is rising (falling), they must sell (buy) underlying to re-hedge. This can further contain realized volatility and support the market.

To act on this information, you are best off shrinking your timeframe and using if/then statements to put on trades. For instance, if the market rises past the downtrend line in the S&P 500, then the 2022 equity bear market is over. We should bias ourselves long, at that point.

Graphic: Retrieved from Bloomberg. Drawn on by Physik Invest.

Accordingly, over a larger horizon, its growth impulses, as well as the availability of credit and liquidity determine whether a market’s movements have legs.

Accordingly, “in the 1970s, the peak in inflation proved THE timing to load up on risk assets, but the missing link is a bottoming growth cycle,” Andreas Steno Larsen explained.

“The swiftly weakening growth cycle may rather be the EXACT reason why inflation has started to fade.”

The likes of Campbell Harvey, PhD, Kai Volatility’s Cem Karsan, among others, share a similar belief. 

In fact, Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar sees inflation as a longer-lasting structural issue as “the pillars of the low inflation world – [de-globalization and populism] – are changing.”

As Crossmark Global Investments’ Victoria Fernandez puts it well, “We have probably reached peak inflation, but the stickiness of the inflation that remains (i.e., rents) keeps pressure on the Fed and therefore the markets.”

Graphic: Retrieved from The Macro Compass.

“We expected a summer rally due to better-than-expected earnings, but we aren’t satisfied that this is sustainable. A soft landing is still achievable, but we still anticipate volatility with so many unknowns out there.”

Graphic: Retrieved from Callum Thomas’ Weekly S&P 500 ChartStorm. The “seasonal/cycle outlook is for a lower low or retest of the lows over the next three months as we are in the worst two months of the year and are smack dab in the *Weak Spot* of the 4-Year Cycle”

Positioning

Please refer to our detailed Daily Brief for August 12, 2022. We shall add to this narrative in the coming sessions.

Technical

As of 7:30 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, 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 $4,253.25 HVNode puts into play the $4,275.75 LVNode. Initiative trade beyond the LVNode could reach as high as the $4,303.00 Weak High and $4,337.00 VPOC, or higher.

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

Any activity below the $4,253.25 HVNode puts into play the $4,231.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,202.75 RTH Low and $4,189.25 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.

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.

Categories
Commentary

Daily Brief For August 3, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 700+ that read this report daily, below!

Subscribe
Graphic updated 9:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. 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

Our August 1 letter assessed, mainly, the impacts of a burgeoning economic war that is hot as well put by a recent note authored by Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar.

Read: Dr. Pippa Malmgren’s “A Hot War In Cold Places,” which was quoted by Credit Suisse’s Pozsar. Additionally, check out our archives for more analysis of Malmgren’s perspectives.

“Great powers are waging hot wars involving the flow of technologies, goods, and commodities,” the big “contributors to inflation,” a longer-lasting structural issue, Pozar puts forth.

Further, it is the case that “the pillars of the low inflation world are changing,” and geopolitics are the factors bolstering longer-lasting uncertainty and risk premia.

What was the case, before?

Previously, central bankers were waging wars “against deflationary impulses coming from the globalization of cheap resources (labor, goods, and commodities),” which we covered before.

Now, central bankers have a more difficult task stemming inflationary impulses coming from a complex and non-linear economic war between the U.S., China, and Russia that will do more, long-term, to “weaken the pillars of the globalized, low inflation world.”

So: 

  • Deflation, on globalization (and outward supply shifts), was fought with asset price inflation. 
  • Inflation, on de-globalization (and inward supply shifts), is fought with asset price deflation.

Exacerbating the de-globalization pulse on popular sovereignty, which I had the honor of talking on with Andy Constan, recently, are “wealth gains sapping labor force participation” and trends such as ESG, among other things. 

“It’s a mess: it’s easier to deal with the politics of wage setting than it is to ‘grow’ people – even in The Matrix, that’s possible only over time. Until then, we are stuck with a labor shortage, and President Biden’s top labor lawyer is the anti-Reagan: she’s encouraging the unionization of workers from Amazon to Starbucks…as opposed to firing them,” Pozsar explains.

For context, among the factors that helped Chairman Volcker stem inflation were new energy investment and the weakening of unions.

Accordingly, in a move from “generating demand structurally to soak up an excess supply of cheap stuff, to curbing demand structurally to adjust to shortages,” the prevailing tightening effort is not cyclical, as in corresponding to a business cycle. It’s structural.

It requires the sharp, “inward shift of supply curves across multiple fronts (labor, goods, and commodities),” putting the economy on an “L”-shaped path (i.e., a vertical drop in activity via recession, and flatline for a period of time as rates remain higher for longer to prevent a sharp rise in inflation, again).

Market participants, because of this, should be thinking about how deep (i.e., long-lasting) a recession is needed to curb inflation (rather than if a recession will happen at all); necessary is the purge of the “Super Size Me” mentality, Pozsar explains, and slow “interest-rate sensitive parts of the economy (housing and durables),” as well as reduce “demand for labor in services, … a function of the level of wealth across a range of assets (housing, stocks, as well as crypto).

“[W]hat the Fed is telling us when it flat-out dismisses two-quarters of negative GDP growth is that it isn’t focusing as much on the rate-sensitive parts of the economy as it did in the past,” Pozsar well summarizes, adding that 5-6% rates are not out of the realm of possibilities.

“Instead, it is focusing much more on the services economy and the labor market, which still remain strong. And therein lies the cautionary tale for the market.”

Looking out further in time, after inflation has been stemmed, the question is how the economy accelerates, again, and achieves stable growth. That depends on the West developing its own supply of things so “that ‘L’ becomes ‘L/’ and … that recovery [will be driven by] fiscally funded industrial policy.”

Graphic: Retrieved from Bloomberg. “Interest rates may be kept high for a while to ensure that rate cuts won’t cause an economic rebound (an ‘L’ and not a ‘V’), which might trigger a renewed bout of inflation,” Pozsar wrote in his note. “The risks are such that Powell will try his very best to curb inflation, even at the cost of a ‘depression’ and not getting reappointed.”

Positioning

Regarding the topic of liquidity – money available for circulation – which was discussed in-depth Tuesday, August 2, below is an updated chart of our Liquidity Tracker. Conditions are mostly unchanged.

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.

Moreover, in terms of options-related positioning, as of 8:50 AM ET, Wednesday’s expected volatility, via the Cboe Volatility Index (INDEX: VIX), sits at ~1.21%. Net gamma exposures increasing may promote tighter ranges.

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

The reason why? 

Well, as discussed in-depth Tuesday, prevailing policy narratives are likely to bolster risk premia “everywhere else,” and that does more to support our recent positioning analyses and the case for an “untethering” in equity implied volatility (IVOL), “one of the most supportive things into the decline,” per statements by Kai Volatility’s Cem Karsan.

Basically, given the macro risk, IVOL is likely at a lower bound (as validated by the S&P 500 trading higher and downside skew holding a bid) and, per The Ambrus Group’s Kris Sidial, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”

Through downside protection (e.g., butterfly and back spreads) you can position yourself to monetize on the sort-of non-linear repricing in volatility we’re alluding there is potential for. The bid in skew is helping those structures maintain their value better, essentially.

Graphic: Time-lapse skew on the S&P 500 (INDEX: SPX) for Tuesday, Monday, and one week ago. Retrieved from Interactive Brokers Group Inc’s (NASDAQ: IBKR) Trader Workstation.

Technical

As of 6:30 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, 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 $4,117.75 MCPOC puts into play the $4,149.00 VPOC. Initiative trade beyond the VPOC could reach as high as the $4,164.25 RTH High and $4,189.25 LVNode, or higher.

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

Any activity below the $4,117.75 MCPOC puts into play the $4,073.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,040.75 and $4,015.25 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.

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.

Categories
Commentary

Daily Brief For July 18, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

Subscribe
Graphic updated 6:30 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.

Fundamental

Positivity across most products we monitor in this letter. This is alongside participants’ paring of bets on more aggressive Federal Reserve (Fed) action. It was just last week, right after the CPI dump, that participants were pricing a near-50% chance of a 100 basis point rate hike in July.

That is no longer the case. The odds are 60-40 in favor of a 50 to 75 basis point hike.

Graphic: Via CME Group Inc’s (NASDAQ: CME) FedWatch Tool.

A quick check of the Eurodollar (FUTURE: /GE) curve, a reflection of participants’ outlook on interest rates, we see a peak of the Fed-rate-hike cycle – the terminal rate – near DEC 2022.

Below, we see the overnight rate expected to peak near 3.915% by late 2022.

Graphic: Via Charles Schwab Corporation-owned (NYSE: SCHW) TD Ameritrade’s Thinkorswim.

For context, the price of /GE reflects the interest offered on U.S. dollar-denominated deposits at banks outside of the U.S. With that, they’re “expressed numerically using 100 minus the implied 3-month U.S. dollar LIBOR interest rate,” per Investopedia. This means that at current DEC 2022 prices (96.085), this reflects an implied interest rate settlement rate of 3.915%.

Read: The shift from the Eurodollar to SOFR is accelerating as “SOFR adoption cracked 50%.”

The U.S. Dollar (INDEX: DXY), though it is generally far stronger on pressures (e.g., recession, geopolitics) elsewhere, eased.

Read: Why the U.S. Dollar is booming and creating a possible doom loop and Sunak takes the lead in the voting for U.K. Prime Minister, as well as China weighs mortgage grace period to appease angry home buyers and the ECB case for a half-point rate hike just won’t go away.
Graphic: Via Bloomberg.

Further, it is policy adjustments that are inflicting damage on some inflated areas of the market like crypto and private equity.

Recall that prevailing monetary policies made it easier to borrow and make longer-duration bets on ideas with a lot of promise in the future. Central banks, too, underwrote losses of this regime and encouraged continued growth. This had consequences on the real economy and asset prices which rose and kept deflationary pressures at bay.

As well put forth in our May 18, 2022 commentary, the recent market rout is a recession and the direct reflection of the unwind of carry. Capital was “misallocated” and the Fed’s move to control price stability is “completely unreasonable” as they’re not in a position to do it “without bringing down the markets,” per Kai Volatility’s Cem Karsan.

Read: Kris Abdelmessih’s Moontower #148 on prevailing macroeconomic perspectives.

A prospective hit in demand is in the context of improvement among supply chains, as Citigroup Inc (NYSE: C) economists explain. 

Graphic: Via Bloomberg.

“The bad news is that this looks to be occurring on the back of a slowing in the global consumer’s demand for goods, especially discretionary goods, and thus may also signal rising recession risks.”

Graphic: Via Bloomberg. “Carmakers registered the fewest new vehicles in the European Union since 1996 as persistent supply chain snarls and record inflation afflict the industry. New-car sales in the EU and four other states tracked by the European Automobile Manufacturers’ Association fell 17% to 1.07 million last month, according to a statement. Volkswagen AG was the hardest-hit major carmaker, with registrations dropping 24% from a year ago.”

It is the case that as the “Fed is pursuing demand destruction through negative wealth effects,” it will, ultimately, pivot because “central banks can only deal with nominal [and] not real chokepoints,” according to Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar.

Read: Despite stronger than expected retail sales, inflation adjustments point to a leveling-off.

The “risk of recession, whether it is real or merely implied by an inversion of the yield curve, won’t deter the Fed from hiking rates higher faster or from injecting more volatility to build up negative wealth effects.” 

“Rallies could beget more forceful pushback from the Fed – the new game.”

Watch: Quantitative Tightening is the direct flow of capital to capital markets.

Positioning

Please check out the Daily Brief for July 15, 2022. There we summarized, well, the implication of the macro landscape and options positioning.

The summary was that with commodities not offering protection, one has to be concerned if “the flock move[s],” per The Ambrus Group’s Kris Sidial and, ultimately, “if you wanted to go out and hedge, the opportunity is still there in the equity space.”

This is as markets are in a window of “non-strength,” says Karsan in the video below.

Technical

As of 6:30 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 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 $3,909.25 MCPOC puts into play the $3,943.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,982.75 LVNode and $4,016.25 HVNode, or higher.

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

Any activity below the $3,909.25 MCPOC puts into play the $3,857.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $3,829.75 MCPOC and $3,800.75 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.

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, former 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 July 8, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

Subscribe
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. 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 light few letters after what it seems were like weeks of heavy content to discuss.

Further, prices at the pump are falling on an “unseasonal” drop in consumption, all the while the biggest bulls have tempered their outlooks on the market citing inflation and the implications of geopolitical tensions.

Graphic: National average gas prices posted by AAA.

An overseas slowdown affecting China likely solicits stimulus. Reported was China’s Ministry of Finance considering the sale of special bonds with proceeds used to pay for infrastructure and boost a slowed economy increasingly in the clear from Covid.

Graphic: Shared by Alfonso Peccatiello. “the pace of real-economy money printing (not bank reserves…) going on in the 5 largest economies in the world. It’s a good leading indicator for economic growth & the performance of several asset classes. It just printed below the GFC lows.”

Moreover, as talked about yesterday, inflation may have peaked. Inventories are pointing to a looming supply gut.

Graphic: Via Bloomberg.

Accordingly, the Federal Reserve (Fed), just as it was slow to end stimulus late last year and early this year, maybe slow in moderating its efforts to de-stimulate.

Graphic: Retrieved from Axios. “The glut of cash being parked at the Fed is reflective of policies that have already run their course, especially with quantitative tightening underway.” But, “it’s a representation of how much too far the Fed went in easing,” says Thomas Simon, an economist at Jefferies Financial Group (NYSE: JEF).

Minutes from the last Federal Open Market Committee (FOMC) meeting revealed a rate hike up to 75 basis points in July would be appropriate, per Moody’s Corporation (NYSE: MCO).

A strong jobs report would likely prompt the Fed “to raise rates even more aggressively as they pursue their goal to raise the unemployment rate,” explains Bryce Doty of Sit Fixed Income.

“As [the Fed] seek[s] to destroy demand, they are also destroying supply. As a result, inflation will persist longer and the economy will be even worse.”

This is pursuant to calls by the Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar who put forth, earlier this year, that the “Fed is pursuing demand destruction through negative wealth effects,” as the “central banks can only deal with nominal [and] not real chokepoints.”

Graphic: Via JPMorgan Chase & Co (NYSE: JPM). Taken from The Market Ear. “A stronger dollar, lower equity prices, and higher mortgage rates will weigh on demand growth [and] Over time weaker output demand should lead to weaker labor demand Don’t fight the Fed as this is what Fed wants (slower growth).”

Ultimately, the “risk of recession, whether it is real or merely implied by an inversion of the yield curve, won’t deter the Fed from hiking rates higher faster or from injecting more volatility to build up negative wealth effects.”

“Rallies could beget more forceful pushback from the Fed – the new game.”

Graphic: Via Bloomberg.

Positioning

Data shows net gamma exposure increasing which may increasingly feed into smaller ranges and a positive drift amid shorter-dated volatility sales and a pick up in call demand, particularly in some of the larger index weights.

Graphic: Via SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator for Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL). Rising orange and blue lines point to call buying and put selling, both of which have bullish implications.

The creep in volatility realized (RVOL), versus that which is implied (IVOL), coupled with “a flattening in the downside fixed strike skew, while the upside wings [are] more smiley,” per JPMorgan Chase & Co (NYSE: JPM), makes it so we can put on more complex structures.

Graphic: Via S&P Global Inc (NYSE: SPGI). As explained by SpotGamma, “30-day realized SPX volatility is now trading above the VIX, something that generally shows after major selloffs wherein IV “premium” needs to reset to calmer/higher equity markets.”

For instance, ratio spreads continue to work well for low- or no-cost exposure to the upside. 

Graphic: Via Option Alpha.

Likewise, if one thought volatility, though at a high starting point particularly at the money (ATM), was due for a repricing, they would look for exposure to the downside via something such as an inverse ratio (or backspread). 

This is as the ATMs, unlike those further out of the money (OTM), are less convex in vega.

Graphic: Via Option Alpha.

Technical

As of 6:30 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 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 $3,943.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,982.75 LVNode and $4,016.25 HVNode, or higher.

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

Any activity below the $3,909.25 MCPOC puts into play the $3,867.25 LVNode. Initiative trade beyond the LVNode could reach as low as the $3,831.00 VPOC and $3,800.25 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.

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, former 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 June 28, 2022

The daily brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 300+ that read this report daily, below!

Subscribe

What Happened

Overnight, equity index futures rotated higher, along with commodities. Implied volatility was bid. Bonds were lower. 

In the news were some changes to China’s COVID policies, the European Central Bank’s (ECB) intent to follow its peers and raise interest rates in July by 25 basis points, and the Group of Seven (G-7) leaders are talking about geopolitics and placing limitations on Russia. 

At home, mortgage lenders are turning “desperate” as soaring rates roil their industry. Some are bracing for a 20% reduction in business as 30-year mortgage rates level out below 5.75%.

Pursuant to some of our analyses last week, Scion Asset Management founder Michael Burry suggested a “supply gut at retail is the bullwhip effect.” More on this, later.

Ahead is data on trade in goods (8:30 AM ET), S&P Case-Shiller U.S. home price index (9:00 AM ET), consumer confidence index (10:00 AM ET), as well as updates by Federal Reserve (Fed) members (8:00 AM ET and 12:30 PM ET).

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

What To Expect

Fundamental: Though badly timed, last year ARK Invest’s Cathie Wood said inflation would be on its way out due in part to inventory build-ups and their impact on commodity prices.

Graphic: Via Societe Generale SA (OTC: SCGLY).

At the time, she asked whether the velocity of money was depressed given pent-up savings and demand for assets, putting forth disappointing GDP updates (which grew, mostly, on the back of inventories) and slightly negative retail final sales as support for her broader thesis. 

Recall happenings in real estate – the iBuying debacle – late last year. Wood said this: 

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

Participants were extending moneyness to nonmonetary assets, given monetary policies and an environment of debt and leverage that ultimately cuts into asset price volatility. Ultimately, these trends bolster the risks of carry when volatility does rise and the demand for money pushes deflation, particularly in asset prices.

Read: Daily brief for May 18, 2022.

Graphic: Via the Investment Company Institute. Taken from Joseph Wang. “Investors are selling everything for cash.”

With bank deposits to drain about $1 trillion or so by year-end, that volatility is happening, now, as investors “continue to lower their selling prices to compete for the cash they want.”

Scion Asset Management’s Michael Burry nods at the “supply gut” in retail. Like Wood, he thinks that it is a deflationary pulse that manifests disinflation in consumer prices, prompting the Fed to reverse itself on rates and quantitative tightening (QT).

Read: DC’s Chartbook #16 on the “fundamental evolution in the global money markets.”

Graphic: Via Societe Generale SA (OTC: SCGLY).

That’s as Credit Suisse Group AG’s (NYSE: CS) Zoltan Pozsar, who gained much attention this year on his bold market commentary, said the Fed is likely to change course as it “can only deal with nominal [and] not real chokepoints.” This is as “nominal balance sheet and liquidity trends will, at some point, clash with the realities of a garden variety of supply chain issues.”

Graphic: Via @BarnabeBearBull. “[L]ast week 18 Central Banks tightened their monetary policy (12% of all monitored CBs), including 4 of the top 9. Strongest move in a while.”

Positioning: Incredible is the still-depressed volatility skew we’ve talked about ad nauseam on.

Graphic: Via JPMorgan Chase & Co (NYSE: JPM). Taken from The Market Ear. “Overwriting longs and using the premium to buy downside protection is relatively cheaper now.”

It’s the strong supply of volatility. Participants are hedging, buying into volatility that is closer to current prices, and selling (skew) that which is farther out. 

The counterparts are long that volatility further out, which they may sell into declines, and all of this, together, “results in vol underperformance on market declines,” per Sergei Perfiliev.

Graphic: Via Physik Invest. Taken from TradingView. The top is S&P 500 (INDEX: SPX). The second, from the top, is the Nations SkewDex (INDEX: SDEX), a clearer measure of options skew. The second from the bottom is the Cboe Volatility Index (INDEX: VIX). The bottom is the Cboe VVIX index (INDEX: VVIX), a naive measure of skew.

For that reason, the volatility that the markets are realizing (RVOL) is heightened and, at times, in excess of that implied.

Graphic: Via Goldman Sachs Group Inc (NYSE: GS). Taken from The Market Ear. “SPX 6-month realized volatility is at a level rarely seen outside of major crises; current 6-month implied volatility has been exceeded in just 3 periods since 1940.”

As said, yesterday, given these dynamics, it makes sense to lean toward owning volatility, rather than selling it. A “higher starting point” in IVOL, and a still-present right-tail (from the positioning for a bear market rally), make it so we may position, for less cost, in short-dated structures with asymmetric payouts (call and put side), precisely as we’ve been talking about for half-a-year.

Graphic: Via Pat Hennessy. “[T]he performance of short-dated 1×2 put ratios in SPX this year. Despite being short the tail, the grind lower has been well captured by this trade structure.”

In the near term, from a positioning perspective, the front-running of quarter-end repositioning flow is (and is expected), in part, to add to the equity market upside.

Graphic: Taken by Physik Invest from Interactive Brokers Group Inc (NASDAQ: IBKR) on 6/24/2022. Multi-expiry skew in the Invesco QQQ Trust Series 1 (NASDAQ: QQQ). Notice the v-shape in the shorter maturity and smirk in the longer maturity. Here’s what that means.

Technical: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the mid-to-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; activity above the $3,909.25 MCPOC puts in play the $3,943.25 HVNode. Initiative trade beyond the HVNode could reach as high as the $3,982.75 LVNode and $4,016.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $3,909.25 MCPOC puts in play the $3,885.75 ONL. Initiative trade beyond the ONL could reach as low as the $3,821.50 LVNode and $3,793.25 Ledge, 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.

Balanced (Two-Timeframe Or Bracket) Trade The Status Quo: Rotational trade that denotes current prices offer favorable entry and exit. 

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

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

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.

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, 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.