Two-Week Retrospective and Key Levels

[10:30 AM, Monday, June 27]

What Drove Friday’s Up-Auction

St. Louis Fed President James Bullard suggested that concern over a US recession were overblown.  The University of Michigan’s measure of long-term consumer inflation expectations came off of its 14-year high.  Taken together, investors saw a lower probability of steeper rate hikes in the future.

Identifying Upside/Downside Targets

Fair value is defined as the price level that attracts the greatest volume of trading.

Following a gap up on Friday, trading carried through to the upside … marking a single print buying tail and a “P” shaped profile … with the market rotating into the close, just shy of 3900.

In an uptrending market, an upper range extension that holds argues for continuation of trend.

Today’s Auction

At this writing, today’s business is likely to test 3900.  If accepted, trading above this level would suggest strength.  Should  price break above Friday’s balance area, buyers will have gained control … after a 3-week down auction.

A trending market moves from balance to imbalance … pauses to consolidate … and moves again … until the trend is complete.

Volatility-based Algorithm Shown Here

The driving forces behind price movement today are uncertainty, information flows, and forced rebalancing in derivatives markets.   Acting as independent variables, their impact on the auction market process often materializes at different times.

Within this setting, we employ two ensemble type timing models:

1) gamma exposure as a measure of ex-ante skewness, and
2) a proprietary volatility signaling algorithm as a negatively predictor of future delta-hedged option payoffs.

Our volatility-based model for timing S&P 500 entries and exits is shown above.   Note that the algorithm has only signaled two “SELL” signals since March 29.

Postscript

AI-enabled equity trading algorithms dominate today’s financial markets.   Equities trading has become so replete with information that knowing how to code and how to game an algorithm is as important as understanding the ebbs and flows of the markets themselves.

While we leave timing signaling to the algorithm, we do the heavy lifting – quantitative modeling, research and pragmatism.

Notes

• Anticipating curve inversion in 2-10’s and 5-30’s
• 5-30’s have better carry
• 10-year Treasury follows growth and should go down (Slow growth is a curve flattener … and flatter yield curves are likely.)

Will Rebalancing Push Equities Higher?

“JPMorgan’s Marko Kolanovic sees a case in which stocks could surge 7% in the week ahead, based on rebalancing alone.” (CNBC)

CNBC added, “With the S&P 500 down more than 13.7% for the second quarter and 17.9% for the year so far, investment managers will have to boost stock holdings to regain asset allocation levels.”

Friday’s Options Activity Differs

Investors sell ITM calls when they anticipate near-term downside moves.   On Friday … focusing on large lot positions, ITM calls SOLD exceeded OTM calls BOT (speculative) by a factor of 15:1.

For single transactions >$1M, again … ITM calls sold far exceed those bought.

Integrating Options Order Flow with DeMark Sequential

Thurs, between 12:43 and 13:43, a series of machine orders, increasing in position size … executed as price declined.   Four strikes shown above.   (FWIW, this was seen in realtime and tweeted.)

The 3700 strike saw ~$450M in premium sold.   Those $35 puts could be covered for $4 at Friday’s close.

Intraday DeMark signals align perfectly … signaling the entry on Thursday and exit on Friday.