I was going to leave well enough alone on Friday when it comes to whether the technical selloff on Wednesday and its less dramatic sequel on Thursday together presage something ominous into year-end.
But reader feedback over the last few hours suggests an appetite for “more cowbell” (as it were) and I can certainly understand why folks might be feeling a bit anxious about the outlook, especially given the fact that market participants are now more attune than ever to the risks posed by liquidity vacuums and, relatedly, forced de-risking from systematic/programmatic strats.
On Friday afternoon, JPMorgan’s Marko Kolanovic – the market’s go-to guy when it comes to assessing the impact of technical flows – released a short, straightforward note that suggested ~70% of the technical unwind was in the books. You can read some excerpts from his note here.
Obviously, opinions are going to vary on whether we’ll get some aftershocks from the Wednesday/Thursday rout and in his piece, Marko does caution that slower-moving vol.-targeting strats are likely to de-risk further over the coming days. But one key point is this:
Flows that may counter selling are buybacks, fundamental buyers attracted by cheap valuation (P/E below historical average), as well as fixed weight portfolio rebalances (e.g. pensions rebalancing on triggers).
While systematic flows are an increasingly important part of the overall market narrative, other things matter too, and don’t forget that buybacks remain the largest source of U.S. equity demand.
There seems to be some misinformation circulating on Friday afternoon.
Three readers have asked whether it’s true that banks have materially altered their constructive view on the S&P into year-end based at least in part on what happened this week. I’m not sure where that idea originated, but the answer is “no”. As far as I can tell, nobody is throwing in the towel on 2018 based on two days of technical selling pressure.
Allow me to elaborate using a series of examples that should definitively shoot down any misinformation you might have been fed on Friday.
On Thursday, we cited some excerpts from a note penned by Nomura’s Charlie McElligott who said that on Nomura’s estimates, CTAs de-risked in equities to the tune of some $88 billion on Wednesday. Here are the actual bullet points from a section in his Thursday note called “Cumulative flow numbers across options greeks and systematic CTA in SPX futures”:
- CTA levels from here—2719 break would see further reduction down to just “9% Long” and would trigger an additional selling of $57B S&P futures
- From the perspective of MUCH slower-moving Risk-Parity (using a 2Y window), the change on global bond vol continues to generate a negligible selling-down in U.S. Equities at just a -$600mm of SPX deleveraging yesterday from Risk-Parity per our model
- SPX and NDX optionspositioning is serious, with SPX net Delta move -$459.2B at a 0.1%ile move since 2013 (was only -$55.4B the day prior)
- SPX Gamma now at $24.2B per 1% move with 2800 and 2750 lines mattering the most
- QQQ positioning walloped, net Delta hits -$32.7B (which is 0%ile net delta since 2013 (and was -$14.1B the day prior)
- QQQ Gamma actually cut in half down to $489mm per 1% move with most of the delta at 180 / 170 / 175 strike
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