What’s behind the “tranquility” that sees the VIX loitering below its 2019 average and finds SPX grinding higher on the way to a prospective seventh consecutive weekly gain?
Well, for one thing, Donald Trump hasn’t said anything overtly crazy. Or, wait. That’s not true. Let me rephrase. Donald Trump hasn’t said anything to suggest that he’s on the brink of imperiling the rally by totally deep-sixing the trade talks.
It’s true the president has been coy about whether he will or won’t support tariff rollbacks, but he’s been careful (or what counts as “careful” for him) about characterizing the trade discussions as “moving along”, “going very well”, etc. Meanwhile, Larry Kudlow has struck and upbeat tone and the extension of the Huawei reprieve is seen as a nod to the desirability of keeping the peace, even as the White House attempts to navigate congressional demands for a harder line both on Chinese tech and Hong Kong.
At the same time, third quarter earnings were better than expected on balance. Although corporate profit growth did flatline, it didn’t contract as much as feared. Throw in some decent data stateside and the return of the buyback bid and you’ve got yourself a decent macro narrative for the grind higher.
But drilling down into the technical factors (i.e., the actual mechanical drivers of the price action) one finds a number of likely contributors to the bid for stocks.
“It does seem evident that a mix of 1) historically +++ seasonality in SPX has aligned with 2) clients rolling-out upside and 3) Overwriters covering short strikes as part of an overall impulse ‘higher'”, Nomura’s Charlie McElligott writes on Tuesday, on the way to noting that spot is “pinned” thanks to a handful of key strikes, with the gravity from 3150 and 3100 getting an “assist” from 3125 and 3130 (see visual):
Charlie also flags the $44 billion leveraged fund net short in SPX futures, which he notes “is clearly being squeezed by relentless Asset Manager BUYING”. On the latter, the net long is now above $140 billion, in the 99th percentile going back 13 years.
And then there’s possible “grabbing” for upside exposure from the long/short crowd, whose beta to US equities is now in the 0th percentile going back to 2003.
Finally, in a testament to the dynamics discussed at length in the interview with Erik Townsend’s MacroVoices podcast, McElligott flags VIX ETNs trimming what was a 99th percentile ‘net long’ vega position, which provides a second-order bullish catalyst for stocks.
In the same vein, Charlie points to the impact of the VIX ETN futures roll into settlement, noting that this “would mark the 8th month in a row where VIX has hit local lows either the day into or the day of expiry as the ETNs sell UX1 to buy UX2, punishing front VIX future in the process”. That, he reiterates, is “another equities ‘slingshot’ boost”.
Again, all of this is playing out against a backdrop defined by a (rare) dearth of news flow.
And while one would assume the dynamics outlined above (e.g., return of the corporate bid out of blackouts, gamma gravity promoting “stickiness” in spot, etc.) reduce the chances of some errant headline triggering the “lit-match-to-dry-kindling” effect, one shouldn’t underestimate the potential for myriad geopolitical powder kegs to throw things asunder.