Nomura’s Charlie McElligott needs you to know something on Thursday.
Actually, he needs you to know a lot of things, but mainly, he needs you to understand that on Wednesday, his famous CTA model pivoted back to short in the Russell and “almost ticked to the exact handle as per the Nomura QIS model’s ‘sell trigger’ estimates.”
For going on two weeks, McElligott has been busy detailing the setup for what he’s variously called a “March surprise” and part of the thesis involves a potential pivot point for CTAs as trigger levels are pulled mechanically higher. That’s related to the weight of the 1-year window in his model.
As those sell trigger levels are pulled higher, the risk of CTAs becoming mechanical sellers theoretically increases, given that the closer the trigger levels are to current levels on benchmarks, the less stocks would have to fall to start tipping dominos. As Charlie puts it in a new Thursday note, “even a smallish pullback in Equities could then see the multi-month ‘Max Long’ U.S. Equities position at risk of seeing this very leveraged and ‘unemotionally’ rules-based strategy turning OUTRIGHT SELLERS, as these breakpoints move higher / closer to ATM.”
That dynamic, McElligott worries, might end up conspiring with options expiry and three quarters of the S&P being in the blackout window to bring about a swoon for US equities.
Read more on the ‘Ides of March’ risk
Well, as it turns out, Charlie’s Tuesday warning about pivot points for the Russell looks pretty prescient now and he really – really – wants to talk about it.
“Tuesday morning I showed the model’s projected forward drop-off data across US Equities futures, where I specifically noted the imminent nature of the CTA position in Russell 2000 already technically below the ‘SELL PIVOT’ level”, he reminds you, before getting into the specifics, noting that “if ‘day 0’ was Tuesday, ‘day 1’ – yesterday – only needed to cross through that 1563 level to see the prior ‘Max Long’ inflect to an outright ‘Short’ position again.”
Here is the snippet from the Tuesday piece which Charlie has “red-edited” in order to “walk” you through the logic:
So there’s that. And here’s this:
Considering Charlie’s annotation, you probably don’t need any further explanatory color, but just in case, he reiterates that from 1,563 “it was ‘lights-out,’ with Systematic Trend / CTAs / Momentum models quite evidently again turning ‘SHORT’ (-80% position now) in Russell 2000 futures.”
As ever, this is not a static model and it’s possible that we’ll oscillate between de-leveraging and re-leveraging levels at least in the near-term, which could make for a “noisy signal” and some “re-flipping”, to quote McElligott. But the point is, this is a real thing and it looks like more evidence in favor of the idea that the QIS model has a lot of predictive value.
After delivering a multi-point explanation for Wednesday’s price action (which he says was a “crescendo of overlapping dynamics” including the above-mentioned CTA VWAP selling and a “willingness from Asset Managers to ‘lock-in’ profits and sell futures”) Charlie asks a simple question and he asks it loudly. To wit, verbatim from his Thursday note:
Okay…so now what?!
I don’t know! And neither does anybody else. But McElligott’s got some ideas and they revolve around the developing “Ides of March” scenario as discussed in the linked posts above.
As far as the CTA triggers go, Charlie notes that “both S&P and Nasdaq positioning remains ‘+100% Max Long’ currently with still ‘strong’ price- and vol- signals, and above ‘sell triggers’ in this very near-term.” But in case you’re still not getting the message, the point here is that these sell trigger levels are likely to get pulled higher, potentially above spot. Here are updated visuals on S&P and Nasdaq futs in that regard:
Ok, so that brings us to the other two catalysts for the potential “March surprise.”
Turning to options expiry, McElligott again reminds you of the “trade UP into, trade DOWN out of” seasonality and reiterates that this is particularly germane now considering “extreme delta %iles and meaningful Gamma in the market.”
He also notes that current levels on the S&P put us right on the edge of the dreaded “flip”, the other side of which entails market moves being amplified as gamma positioning becomes a potential accelerant.
Finally, on the blackouts, just note that 75% of S&P corporates will be in their window by March 19.
And there’s more, you guys. I swear to God there’s more. Charlie’s Thursday missive is another dizzying romp across almost every imaginable systematic flow dynamic with the potential to impact markets. In addition to everything laid out above, he delivers key levels for 17 key assets, additional color on options dynamics around the Nasdaq, a quick analysis of latest developments in the VIX complex and on and on.
But the overarching point here is that the Russell example is an illustration of how the pivot point/trigger level dynamic can play out. That’s critical coming as it does ahead of a possible flip in those levels for the S&P, which is obviously a bellwether for other risk assets across the globe.
That, ahead of the key options dynamics described above and all conspiring with corporate blackouts.
Any questions? If so, I can promise you Charlie has an answer – or two – or two dozen.