Anyone hoping this was going to be a quiet week for markets has been sorely disappointed and analysts are scrambling to keep up.
One person who is having no trouble whatsoever in that regard is Nomura’s Charlie McElligott, who is writing notes faster than I can read them on Tuesday – and that’s saying something.
First thing this morning, as Tech careened lower for a second consecutive day, McElligott noted that Monday’s Momentum unwind was a “1st %ile event dating back to 1983″ (US Equities Momentum factor). “The selloff of Momentum Longs (-4.5%) in particular was a 0%ile move,” he marveled.
Obviously, that was to the benefit of Value, something we documented in real time throughout Monday’s bloodbath.
As a reminder, the popular Momentum ETF had one of its worst days in history.
Charlie says “Uber-crowded longs in the US Software industry were apparently being liquidated, with GS’s basket of Software Cos trading 8x’s EV / Sales -10.0% on the day, an impossible -8.7SD move across all returns in its 2.5 yr history”.
In other words: Monday was insane.
He goes on to say that with NDX 30-day vol. now sitting at a nosebleed 35, “more mechanical VaR-down is coming for these longs.” That realized vol. figure is the highest since 2011.
Shortly after his morning assessment/Monday post-mortem, McElligott followed up with what he described as a “quick blast”, warning that “the market may be digesting a fresh wave of systematic selling in US Equities on top of the fundamental universe accelerating their VaR-down behavior.”
That is of course a reference to CTAs. “More locally troubling is that the systematic trend CTA model shows that we are flipping the long-term 6m window to a ‘sell’ and approaching a move to ‘MAX SHORT’ in SPX and NDX”, Charlie warns, adding that that “would mean -$37.8B SOLD in SPX under 2629 [and] -$24.8B in NDX SOLD under 6229.”
The good news is, thanks to the current volatility regime (i.e., things bouncing around everywhere), we’re also “easily within reach” of re-risking levels. Specifically, McElligott says “SPX would BUY over 2716 to get to +61.8% Long at +$8.8B notional / NDX would BUY over 6942 at +$5.8B to get back to +61.8% Long.”
Got all of that? Great.
This is your price action on violent factor rotations and systematic strats.
Welcome to modern markets.