Markets stocks

Gamma Gravity, Reversals And Reflation Fascination: Summarizing Holiday Musings From Nomura’s McElligott

Recapping key talking points....

“I’m not going to spin my wheels dissecting such an illiquid and ‘noisy’ year-end market”, Nomura’s Charlie McElligott said, in a Friday note.

Then, he proceeded to visually dissect anything and everything on the board.

We jest. It’s just that Charlie is a man who keeps himself constantly apprised of what’s going down (and up, for that matter) across markets, both at a granular level and with respect to the macro narrative. The very fact that he’s penning notes on December 27 in the first place is a testament to the notion that he is always “dissecting” markets, “noisy”, “illiquid” or otherwise.

Read more: Nomura’s Charlie McElligott Delivers 2020 Macro Outlook – ‘My View Is Much More Realistic’

In any event, Charlie endeavored on Friday to update some of his recent talking points, including the 1-month price reversal strategy he touted on CNBC earlier this month, and that we discussed in a wider context here.

He starts by noting that Nomura’s SPX sentiment indicator “shows enormous percentile reversals across all factor inputs” from the doldrums of December 2018, the worst final month to a year for stocks since the Great Depression, to this year’s holiday season trade, which has delivered more gains for already bloated benchmarks.


If you’re wondering what that usually means going forward, a backtest shows that when the bank’s sentiment index is in the 89th percentile, the median return for the S&P over the next 12 months is 11.5%

That’s in keeping with the “objects in motion” point we’ve made in these pages via various charts and musings (here and here, for example).

As for the gamma situation, there are just two words you need: “Gravity” (left side) and “choke-hold” (right side):


On the reversal strategy, remember that it’s actually a call on a “reversal of the reversal”, where that means Q4 represented a reversal of the vaunted “slow-flation” trade both in rates and stocks in favor of higher yields, Value and Cyclicals, while January could see reflation optimism faded via renewed outperformance of the “old” favorites (i.e., Duration Sensitives, Secular Growth, Defensives and Min Vol). A favorable (i.e., bullish) seasonal for 10-year Treasury futs helps make the case.

We won’t delve any further into that (we’ve covered it before and implementing it precisely requires access that most readers likely do not have), but we would note that generally speaking, the majority of the returns (on the factor that Charlie uses, anyway) have been front-loaded to the first week of the new year.

More germane for our purposes – i.e., from a big-picture perspective – is the third point McElligott makes when recapping the rationale behind the call. To wit:

A macro-view that the sudden narrative “paradigm- shift” back-into a world of higher growth and reflation-like thematic position for 2020 has likely “over-shot” and that in 2020, I actually expect US Rates / USTs to hold firm and NOT sell-off as many are anticipating.

That’s a view that anyone can debate and, if appropriate, incorporate into their own strategy for the new year, whether or not you intend to try and play for a tactical reversal in the early days of January.


3 comments on “Gamma Gravity, Reversals And Reflation Fascination: Summarizing Holiday Musings From Nomura’s McElligott

  1. George says:

    This is a market where it pays to be skeptical about everything ….especially and including individuals who are totally convinced about anything…….In other words Jack be nimble or don’t play…….20-20 Hind site rules….

    • yeah, but I mean, at this point, you have to accept that whatever happens from here (bigger bubble, crash or somewhere in between), the last 10 years happened. That is, there’s this pernicious tendency among too many netizens to delude themselves into believing that gains aren’t gains. “Castles in the sky” or “house of cards” really aren’t apt metaphors for one very simple reason: These gains are realizable. That is, if you’re sitting on a 500% gain in the Nasdaq over the course of the bull market, you can realize that gain right now. You can sell it all, buy gold with it and the swim in that gold like Scrooge McDuck. Or you can buy real estate with it. Or whatever other hard asset you want to buy. I’m not advocating that, I’m just making a simple point that when people say things like “it’s all ephemeral”, etc., the reality is that it’s not if you sell before the bubble bursts. If you log those gains and buy a Ferrari in cash, that Ferrari isn’t going to disappear from your garage if there’s a crash. I think it’s important that people understand that. Sometimes, it’s almost like people have come to believe that the only real gains are gains from shorting something. I said the same thing about Bitcoin at $19k… namely that while my personal view was (and still is) that Bitcoin is patent nonsense and will eventually go to zero, if you bought it low and sold it high, all the sh*t you were able to buy with those profits isn’t going to up and vanish just because it later crashes. Ultimately, my point is simple: the “castles in the sky” description of gains in financial assets is only accurate if you don’t lock in those gains. If you do, gains are just gains. And no amount of crazy ranting from bear blogs about how you “shouldn’t” have made that money because central banks “shouldn’t” be allowed to inflate bubbles can take those gains away from you.

      There are lots of people who are poorer right now than they otherwise would be from not internalizing the above, and when it comes to Bitcoin, I’m one of them. I knew that crazy sh*t was probably going to take off, but I didn’t buy it on principle. Bad on me.

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