- 29 ноября 2018, 19:34
- ZeroHedge. Alternative view on facts
While ahead of yesterday's Powell speech, a number of clients and fund managers that Nomura's Charlie McElligott speaks with "voiced intent to cut their risk exposures sharply or even outright SHORT a G20 “handshake deal” relief rally in Equities, under the belief that there would be a grinding move lower thereafter with the impossible trade granulars like subsidies for SOEs and Tech IP seeing no chance of being “worked out” in the near- or even medium- term" the Powell speech changed that calculus, because the previously more nuanced “Fed tone shift” was "abruptly crystalized as something firmer: rationale now goes from the aforementioned “willingness to run restrictive” to now suddenly almost AT the neutral rate—which can be seen as suggesting fewer rate hikes in the eyes of some, or more aggressively, a de facto rate CUT vs where expectations had reset over the past month."
This prompted many to conclude that the "Powell Put" is struck much higher than the prior 2400-ish level perceived by market, also revealing what the "breaking point" to the Fed is as was made clear by the recent message tweak. Also, in addition to the "Powell Put", yesterday's speech gave traders confidence there is now a "floor" for equities as McElligott explains in his latest note:
Into the risk of a +++ G20 outcome, the “floor” for Equities then too has moved higher into year-end, which too then means that there may be less patience to wait out a dip to buy, and instead could accelerate “grabby” behavior ESPECIALLY with G20 “relief”
And yet, there was something strange about yesterday's rally: as McElligott highlights, looking under the surface of yesterday's furious rally which at one point saw the highest TICK print since the February VIX crash, the thematic- and factor- behavior experienced within yesterday's ramp "certainly did not communicate a renewed belief in an “extension of the cycle” despite reducing concerns surrounding running restrictive policy."
As the Nomura x-asset strategist explains, it was possible that in light of the yield curve steepening that traders would expect to see "Value" (longs) rally vs "Growth," on account of the heavy “Cyclical” lean within the “Value” universe.
Instead however, it was the growth market neutral funds screaming higher vs Value market neutrals sharply lower, "as from the long side, traders went back to “renting” the names they know best over the past few years—THE SECULAR GROWERS which DO NOT REQUIRE A ‘HOT’ ECONOMY TO ‘WORK’—in order to squeeze last drops of blood from the stone in the market across Tech / Cons Disc / Biotech."
There was another problem with yesterday's rally: it took place just as many active investors shifted positioning going into year end:
And just as hedge funds turned net short...— zerohedge (@zerohedge) November 28, 2018
McElligott confirms as much, reminding clients that as he stated prior to Powell yesterday "the local “pain-trade" remains "Equities higher", as nobody was set-up to capture a gap to the upside, for the following reasons: per Nomura's analysis and Street prime broker data, Equities hedge funds sat ~ 1y+ low in both nets- and grosses (something Goldman made a big point of in its latest quarterly hedge fund positioning report).
Additionally, equities market neutral fund performance showed a beta to the S&P at just 57th %ile, thematically shifting more “Defensive” from prior status quo “Growth” / “Momentum” overweight. Macro funds were also recently “tapping” on Equities, with beta to SPX at just 8th %ile; EEM 1st %ile; Eurostoxx 4th %ile; and Nikkei 32nd %ile. Finally, per Nomura's CTA Trend model, the SPX trade position size (estimated dollar exposure) was just 19% yesterday vs ~50% allocation at the start of October
Separately, Bloomberg's Andrew Cinko notes several other reasons why yesterday's rally was unlikely to sustain - especially with the major risk event, this weekend's G-20 meeting between Trump and Xi still looming - the main of which is that as BMO strategist Russ Visch notes, the big rally came without being preceded by a surging VIX index or spiking equity put/call ratios. "Those are typically seen as the lows are being put in, before a whoosh higher" according to Visch.
Additionally, as we discussed yesterday, the TICK index print of over 1,600 just as Powell's comment hit the tape, would likely limit gains in the very short term.
With all that in mind, what are the latest key quant buy/sell levels?
As McElligott lays out, last Friday’s WoW change in consolidated S&P options net (negative) Delta was an "enormous" negative $490BN, "which told you that this re-adjustment (chasing) was happening real-time after that much delta disappeared last week."
And sure enough, the updated options change through yesterday shows that the net negative Delta shrunk massively, and is now just -$140B.
Additionally, Nomura also saw Gamma biased to the upside as well at $15.3B for every 1% change and ~$25.4B at a 2% move, along with as much as $4.6BN of Gamma at the 2750 strike.
As a result, yesterday's gap up move could create a "force-in" risk by the fundamental Equities community which as has been the case for the past month has been "synthetically short gamma" as a result of the net-down gross-down on the hedge funds side, or market neutrals who had begun rebalancing more defensively / took-down Growth and Momentum exposure, or even Macros who "gutted their beta to global equities in recent weeks."
There is similar squeeze risk from the systematic CTA Trend community, which yesterday lunged to re-leverage week to date, adding $26B in SPX Tuesday and potentially another $16BN if the S&P moves toward or above 2769, to go "Max Long" updated through this morning’s model inputs. Finally, in the past 24 hours we also saw sharp covering of shorts in Russell, Nasdaq, Nikkei and DAX.
Putting all this together, the Powell-led "force-in" over the last few days accelerates into the G-20 weekend, with the S&P now +110 handles from last Friday’s lows, but as McElligott cautions, the higher stock market then emboldens Trump's belief that "the selloff was always about the Fed and not China trade wars" which then brings us back to square one.
As the Nomura strategist concludes, client concerns now turn to Trump then perversely pushing even more aggressively on his demands for the Chinese - believing that he’s playing with “house money” - and, ironically, resulting in a NEGATIVE G20 outcome, which would promptly see "forced longs" needing to again tap with CTA “sell levels” triggered under 2706 and systematic trend turning again “Max SHORT” under 2648 (-$90B).
In short, enjoy the rally while you can: after this weekend if Trump is Trump, the downward slide in the market may return... with a vengeance.