When commenting on yesterday’s somewhat puzzling, low-volume levitation, we noted that it was not so much a broad market rally, which it certainly was if rather muted, but the biggest short squeeze since at least the Trump election victory 2 years ago.
To be sure, there was also a massive positioning (and career-risk) imbalance because as Nomura’s Charlie McElligott writes, as funds of all types were practically forced to “take-up nets” and “buy” the year-end rally thesis – after “loving” the still “growth-y” NAHB sentiment and IP data – they boosted too fundamentally following the critical earnings beats from bellwethers LRCX, NFLX and ASML over the past 24 hours. This echoes a point McElligott has vocally made in recent months, namely that “if you think SPX rallies into year-end, you then too MUST have a positive view on Tech / Growth.”
Additionally, after last week’s rout which slammed vol-targeting funds such as risk parity, CTAs and variable annuities, many were still caught in a deleveraging phase as they moved to realign their risk exposure to the next level of the VIX, while as Kolanovic explained last week, there was also residual pressure from dealers who were still hedging gamma exposure in the options market.
Commenting on yesterday’s sharp reversal, McElligott writes in his latest daily note that while the move in stocks was impacted by said gamma options-hedging, that wasn’t the primary driver as they have simply gotten “too expensive” (there was no “upside grab” yesterday) but instead “the move then was driven by “active hedging” in futures and ETFs to “manage funds’ exposure-levels.”
So between dealer gamma hedging, a reversal in vol-targeting selling, and a general scramble for P&L by the badly underperforming active investor community, the Nomura X-asset strategist writes that the entire spectrum of the trading universe came for U.S. stocks yesterday:
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