Judging by Wednesday morning’s action, U.S. traders are roughly as enthusiastic about using Netflix’s blockbuster quarterly report as an excuse to extend Tuesday’s sharp rally as I am about watching Netflix’s incessant barrage of original streaming content. That is: Not all that enthusiastic.
IBM obviously isn’t helping matters, but the bottom line appears to be that folks are still anxious after last week’s harrowing bout of volatility. Ever-present geopolitical risk is also a drag, as Brexit woes and the Italian budget drama cast a pall over more evidence of robust corporate profits in the U.S.
Lack of follow-through after Tuesday’s surge is reminiscent of February, when the market struggled to calm down after the record VIX spike, oscillating between large gains and outsized losses for the better part of two months before finally settling back down after the regulatory jitters that threw tech for a loop in late March faded from everyone’s short memories.
If you’re wondering what drove yesterday’s rally and you’re looking for a more granular read than what you might have gotten on Tuesday afternoon, Nomura’s Charlie McElligott has you covered on Wednesday.
“The move in U.S. Equities yesterday was NOT PURELY about the options-market/ ‘gamma’ as the primary driver,” McElligott writes, adding “the move was driven by active hedging in futures and ETFs to manage funds’ exposure levels.”
That said, he notes that “options dealers are still short enough gamma to impact market flow, so there was absolutely some delta hedging into the close.” As for CTAs, Charlie says yesterday’s rally catalyzed some “incremental buying” to the tune of ~$6.8 billion in S&P futs. He also flags buying from “everybody who NEEDED TO TAKE UP NET EQUITIES EXPOSURES from last week’s lowest levels of the year” (all-caps in the original).
As for the Long/Short crowd who JPMorgan’s Nikolaos Panigirtzoglou says might have de-risked the most this month, McElligott notes that despite the monumental move to the upside, “hedge funds only saw a very modest lift”, an unfortunate state of affairs (for them anyway) attributable to their shorts rallying more than longs.
Here’s a fun bullet point list from McElligott that documents that latter point:
- Largest 2d move in “Default Risk” factor shorts (+7.0%) since 2010
- 3rd largest 2d move in “ROE” factor shorts (+8.4%) since 2010
- Largest 1d move in “Sales-to-Price” factor shorts (+3.5%) since Nov 2011
- 3rd largest 1d move in “EBITDA / EV” factor shorts (+4.2%) since Nov 2011
- Largest 1d move in “Book-to-Price” factor shorts (+2.7%) since Aug 2015
- Largest 1d move in my HF Most Shorted basket since Feb 2018
- Largest 1d move in GS Most Shorted basket since Nov 2016
- Largest 1d move in Citigroup High Short Interest basket since Apr 2015
In any event, the key takeaway in all of this is that the rotations and Momentum unwind that characterized last week’s mayhem simply can’t be “allowed” continue, lest this entire thing should fall apart. Here’s an excerpt from something I posted on Tuesday:
It is clear (to me anyway), that the market can’t handle this rotation. There’s just too much leadership concentrated on one side of the equation.
And here’s McElligott from the same note cited above:
This reiterates a critical point I’ve been making over the past week marketing while pitching the tactical “constructive Equities” call over the next 1m-3m: IF you think SPX rallies into year-end, you then too MUST have a positive view on Tech / Growth.