07.12.22 | Forecasting is dead. Dead.

10AM

There is so much that is atypical about this market … what’s driving it … what the market’s perceptions are and how those perceptions are weighted … truly a high velocity 3-dimensional chess game.

There is so much atypical … that anyone confidently predicting anything about how this auction market process will develop is misleading themselves, you, or both.  Historical references … a common tool for forecasting … is an almost absurd application in today’s environment.  Business cycle:  are we in late cycle or early cycle.  Positioning is different, based on those theses.  Inflation or stagflation?  Good arguments for both.  Again, positioning is different, based on those theses.

At most … at most, we *might* identify price levels where increased vigilance is warranted … where the market might be especially fragile … where small changes in information pose the risk of large changes in the auction.  But, here again, how many times, this year, have we identified key levels and analyzed prevailing sentiment …  only to watch the auction blow through those “high liquidity limit orders” and get overrun by large market orders … making those “key levels” appear a mirage?

Spend a lot of time analyzing structure and sentiment?  Unhealthy.  In a market where news-reading algorithms almost instantaneously shift price dynamics … in a market so heavily laden with huge allocations to index options … and which now trade overnight … turning on a dime, algorithmically.

So what’s a trader to do?

First, detach from any devotion to forecasting.  Ain’t gonna work.  Second, understand well the auction market process; for this market is no different, in that regard. Same-o, same-o.  And auction market theory is fundamentally not predictive … has proven there is no serial correlation in daily price moves … and is limited to … really … only one strategy (in-trend breaks out of balance areas).

Third, there will always be great value in understanding what factors dominate and contribute to intermediate-term trends … those factors that cause momentum.  Need momentum to make money.  Over the intermediate and long horizons, those forces count.

Fourth … if we truly have no ability to predict … zero … then we can only strive to trade in-trend … and effectively clip drawdowns (known as managing risk).

While the auction market process is a priori, I’m working on a trend indicator (shown above)… an adjunctive tool for today’s wild and crazy price dynamics.  At this writing, it needs additional work … just not ready for prime time.  When it is, I’ll figure something out in terms of sharing.  That gets really complicated and time consuming … so don’t hold your breath.  Quant camp?

But in the meantime, I would strongly urge detaching from any loyalty to forecasting … whatever historical norm or indicator you’ve used … and sharpen your understanding of the auction market process.

06.27.22 | Auction Market Analysis

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.

06.26.22 | Two Algorithms for Two Key Drivers

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.

06.26.22 | Does SPX June Quarterly Options Activity Agree with CNBC?

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.