On Tuesday, towards the tail end of his daily note, Nomura’s Charlie McElligott cautioned that while CTAs were still ‘100% Long’ (based on his QIS model) after failing to trigger late last week, there was some risk of systematic sell flow from trend followers in the event of a break and close below 2,875.
Given that – and given Tuesday’s close – Charlie is out with a quick update on Wednesday, noting that the model was “technically triggered”, which means a flip from ‘100% Long’ to ‘-23% Short’.
The 1-year look-back window is the “most heavily weighted across model tenors at ~62%”, McElligott notes, adding that it “itself flipped ‘short'”. As you can see from the visual, that is exceedingly rare going back eight years.
(Nomura QIS)
The good news is, the model would cover and pivot back to the previous “100% Long” on a close above 2,890. In other words, we’ve entered what Charlie often describes as the “chop zone”, with some systematic strats caught between tightly-clustered trigger levels.
(Nomura QIS)
As he mentioned on Tuesday, there’s still some likely rebalancing flows (SPX++ ostensibly) to deal with given the extreme MTD outperformance of bonds over stocks.
Additionally, dealers’ gamma positioning would flip positive around 2,920 (helping to tamp down vol. if we can get there), and Charlie flagged the likely rolling of in-the-money calls (entailing net buying of Delta into expiry) and buybacks accelerating into the Q3 blackout window in mid-September as catalysts for a US equity rally into the third week of next month.
That said, he’s also on the record documenting a series of factors which could contribute to stocks fading in the back half of September. One of those factors is, unsurprisingly, the risk of the ECB and the Fed disappointing lofty expectations for rate cuts and dovish forward guidance.
Charlie’s model is exciting reminds me of tuning a race car….lol