As if on cue.
Earlier on Wednesday morning, I gently reminded folks that Marko Kolanovic’s October 30 call for a “rolling squeeze higher” following October’s positioning cleanse has shaped up pretty well so far:
SPX up 6% since Kolanovic said rolling squeeze higher was imminent.
— Walter White (@heisenbergrpt) November 7, 2018
Fast forward exactly 35 minutes, and Kolanovic was out with his latest note, and he kicks it off by reminding you that last week, he “pointed out how many investors are positioned for a ‘rolling bear market’ and are exposed to the risk of a ‘rolling short squeeze’ into year-end.”
You might recall the rationale for Marko’s October 30 call. In addition to hedge fund exposure diving (and hedge fund shorting jumping to the highest levels since 2015), the systematic crowd had de-risked materially through the end of last month.
“Systematic investors are near the bottom of their exposure – volatility targeting strategies’ equity holdings are similar to February lows, and many CTAs are outright short or out of equities”, Kolanovic wrote last week, adding that “a ~10% decline from the peak and markets turning negative for the year triggered all kind of institutional stops, driving the sell-off deeper.”
Essentially, Marko argued that re-risking from systematic strats combined with rebalancing by the fixed weight crowd and a renewed corporate bid (as the buyback blackout period rolled off ) could squeeze the market higher.
Over the past week, Nomura’s Charlie McElligott has variously argued that re-risking by CTAs combined with macro funds making upside trades served to push the market higher, leaving hedge funds and asset managers to scramble for exposure, creating a source of synthetic short gamma in the market.
The point is, between re-risking, re-leveraging and a forced grab for exposure, November’s rallies have seemingly been amplified.
In his Wednesday note, Kolanovic reiterates his view that the market will grind higher into the end of 2018 and he suggests folks will be forced to participate.
After observing that this month looks like the “strongest buyback month on record”, Marko notes that “short convexity of market makers is rapidly declining and may turn long” which, if it plays out, “will bring back intraday reversion as opposed to momentum.” That would tamp down realized vol., a scenario he says could effectively fool market participants into believing that “buy the dip” is still en vogue. That, despite the fact that the two pillars of the “Goldilocks” macro narrative (synchronized global growth and still-subdued inflation) which underpinned the low vol. regime (and hence made BTD viable) are crumbling amid a downturn in global PMIs and rising inflation stateside.
Kolanovic continues, adding that with realized vol. set to decline, vol.-targeters should “start rebuilding positions into year-end” which may add an incremental ~$1 billion of inflows per session.
On the CTA front, Marko says 1M price momentum will turn positive next week, as it marks the “the 1M ‘anniversary’ of the crash”, a development which “may lead to CTA inflows or short covering.”
Finally, he says that with the “Blue Wave” tail risk (and by that I assume he means what other folks dubbed the “Blue Tsunami”) now out of the picture, the risk of “impeachment, [and] repeal of tax reform” is lifted, which should bolster sentiment.
Between all of the above and the fact that, as documented here and everywhere else, split governments have generally been positive for equities, the near-term outlook is good.