Categories
Commentary

Daily Brief For March 23, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Graphic updated TIME AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. Sentiment Risk-On if expected /MES open is above the prior day’s range. Sentiment Risk-Off if expected /MES open is below the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MNDClick here for the economic calendar.

Administrative

A shorter letter today, so there may be some holes we patch later. Take care!

Fundamental

The Federal Reserve (Fed) bumped its target rate up 25 basis points to 4.75-5.00% and opened the door to more hikes, barring market-induced financial tightening, as this letter put forward yesterday morning.

“The events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would, in turn, affect economic outcomes,” Fed chair Jerome Powell commented, adding that credit tightening significantly means monetary policy “may have less work to do.”

Further, before the recent collapses of a few financial institutions, including SVB Financial Group, the market was pricing a 50 basis point hike.

The below CME Group Inc’s (NASDAQ: CME) FedWatch Tool shows the market’s expectations on March 8. Note the 5.50-5.75% terminal (peak) rate.

Graphic: Retrieved from CME Group Inc’s (NASDAQ: CME) FedWatch Tool via The Daily Brief for March 8, 2023.

“Absent SVB, the Fed would have likely raised 50 basis points,” TS Lombard’s Steve Blitz said. “SVB did happen, however, and so this FOMC, ever anxious about facing a recession (rising unemployment), is more than happy to let ‘tighter credit conditions for households and businesses … weigh on economic activity, hiring, and inflation.’ As for financial instability, they believe they have the tools to keep a few poorly managed banks from imploding the whole sector.”

The updated summary of economic projections (SEP) or dot plot shows the FOMC expecting rates to end 2023 above 5.00%.

Graphic: Retrieved from Bloomberg.

This is far higher than what the markets are pricing. Powell’s go-to measure for spotting economic troubles suggests steep cuts are also coming sooner than later.

Graphic: Retrieved from Bloomberg. “Frankly,  there’s good research by staff in the Federal Reserve system that really says to look at the short — the first 18 months — of the yield curve. That’s really what has 100% of the explanatory power of the yield curve. It makes sense. Because if it’s inverted, that means the Fed’s going to cut, which means the economy is weak.” — Fed Chair Powell on March 21, 2022.

Anyways, given that what was expected happened, markets responded positively. If interested in why that is the case following important events as of late, see the Daily Brief for 2/1 and 2/2

Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via Bloomberg. “Viewed through the lens of implied volatility — or expectations of how much an underlying asset will swing in the future — zero-day options aren’t particularly cheap in reality. The gap over the S&P 500’s realized volatility, something in derivatives parlance known as volatility risk premium, is typically three times higher than longer-dated contracts, according to BofA.” The compression of “will naturally lead to a buyback” that supports the market, Kai Volatility’s Cem Karsan says.

It was Treasury secretary Janet Yellen who took the market lower. Yellen said she has “not considered or discussed anything having to do with blanket insurance of guarantees of deposits,” and markets did not like that.

Graphic: Retrieved from Bloomberg.

The likes of Pershing Square’s Bill Ackman responded he “would be surprised if deposit outflows don’t accelerate.” Adding, Federated Hermes’ Steve Chiavarone thought it was “astounding” Yellen and Powell would give contradictory messages.

“Powell essentially said that all deposits are safe; Yellen said, ‘Hold my beer.’ You would have thought that they would have coordinated,” responded Federated Hermes’ Steve Chiavarone.

To keep it brief, we’ll end with references to letters for 3/20 and 3/21, noting that the conditions for weak equity markets are present. The S&P 500 forward earnings are declining, the yield curve is inverted, unemployment is below average, manufacturing PMIs are below 50, and 40% of banks are tightening lending, Morgan Stanley (NYSE: MS) strategists explain.

Technical

As of 8:55 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET) in the S&P 500 will likely open in the middle part of a positively skewed overnight inventory inside the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,994.25. 

Key levels to the upside include $4,004.25, $4,017.00, and $4,026.75.

Key levels to the downside include $3,977.00, $3,959.25, and $3,946.75.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold, barring an exogenous development.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for some time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

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


About

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on TwitterLinkedInFacebook, and Instagram. Find Capelj on TwitterLinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.

Categories
Commentary

Daily Brief For March 16, 2023

Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.

Graphic updated 7:15 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MNDClick here for the economic calendar.

Administrative

As previously indicated, through the end-of-this week, newsletters may be shorter due to the letter writer’s commitments. Take care!

Fundamental

Based on the 30-Day Fed Funds (FUTURE: /ZQ), traders expect the Federal Reserve (Fed) to continue its tightening campaign with a 25 basis point rate hike at the next Federal Open Market Committee (FOMC) meeting. Following this, traders expect one more 25 basis point hike that brings the terminal or peak rate to 5.00-5.25%.

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

Earlier this week, traders were pricing out hikes on financial institutions’ liquidity issues (e.g., SVB Financial Group) and data, including producer prices and retail sales, “moving in the right direction,” said Vital Knowledge’s Adam Crisafulli.

Graphic: Retrieved from Bloomberg via Gavekal Research/Macrobond. Recall that the Fed believes in needs a certain level of reserves for the proper functioning of the financial system (~$2 trillion). In 2019, banks dumped a lot of their reserves into repo to earn some extra return. When QT was about to end, there was less money in their reserves which preceded a spike in rates and a blow-up among those who needed the money the most, as explained here. Read the Daily Brief for September 20, 2022, for more.

Now, with fear of contagion ebbing on authorities’ commitment to preventing an “all-out systemic crisis,” explains Bloomberg’s John Authers, traders are again expecting a 5.00-5.25% terminal or peak rate.

Read: Credit Suisse Group AG (NYSE: CS) protection reaches prohibitively expensive levels as banks rush into CDS after big shareholders hesitate to boost their stake. Switzerland was forced to step in with a $54 billion lifeline to stabilize the crisis.

Graphic: Retrieved from Bloomberg via Holger Zschaepitz.

Adding, as Unlimited’s Bob Elliott puts it, “in the [Global Financial Crisis], credit risk spread rapidly. Today, there is very little [credit default swap] impact” or carryover.

Read: Daily Brief for October 4, 2022, for calculating CDS market-implied probability of default.

Graphic: Retrieved from Alexander Campbell.

Positioning

Following measures of US Treasury yield volatility implied by options (i.e., bets or hedges on or against market movement) adjusting higher, equity market volatility strengthened as observed by measures of convexity (e.g., Cboe VIX Volatility Index or VVIX). The Daily Brief for March 14 talked about this in detail.

Graphic: VVIX chart retrieved from TradingView.

For this protection to keep its value and continue to perform well, realized volatility or RVOL must shift higher substantially and stay elevated. That’s not really happening to some big extent, at least in the equity market. Consequently, put structures such as bear put spreads in the S&P 500 (INDEX: SPX), for example, are not performing.

Graphic: Retrieved from Alpha_Ex_LLC. “Easy to argue that rate vol is leading and in this context, one could suggest VIX has room to rise from here.” However, it would “take a lot for the MOVE to sustain itself at this level.”

This information, coupled with falling implied volatility or IVOL, the passage of nearing derivatives expiries, and the strength of products like the Nasdaq 100 (INDEX: NDX) relative to others like the Russell 2000 (INDEX: RUT), has your letter writer leaning optimistic. Though it may be too early to position for strength, one may consider it the way it was explained in the Daily Brief on March 14.

Graphic: Retrieved from Tom McClellan. “The direct message is that the SP500 options traders who drive the VIX Index are feeling more fearful than the VIX futures traders believe is merited.”

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 lower part of a balanced overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.

The S&P 500 pivot for today is $3,904.25. 

Key levels to the upside include $3,921.25, $3,946.75, and $3,970.75.

Key levels to the downside include $3,891.00, $3,868.25, and $3,847.25.

Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.

Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures (bottom middle).

Definitions

Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for a period of time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.

If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.

POCs: 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.

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

The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market. 

Separately, Capelj is an accredited journalist with past works including interviews with investor Kevin O’Leary, ARK Invest’s Catherine Wood, FTX’s Sam Bankman-Fried, North Dakota Governor Doug Burgum, Lithuania’s Minister of Economy and Innovation Aušrinė Armonaitė, former Cisco chairman and CEO John Chambers, and persons at the Clinton Global Initiative.

Connect

Direct queries to renato@physikinvest.com. Find Physik Invest on TwitterLinkedInFacebook, and Instagram. Find Capelj on TwitterLinkedIn, and Instagram. Only follow the verified profiles.

Calendar

You may view this letter’s content calendar at this link.

Disclaimer

Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.