“CTAs/Managed Futures Funds continue to look like the largest source of demand behind the Equities squeeze/rally”, Nomura’s Charlie McElligott writes, in a Monday note.
It’s a similar message to that delivered by JPMorgan’s Nikolaos Panigirtzoglou, who thinks there’s “plenty” of room for stocks to run further, even as he points to CTA “overextension” in US equities.
On McElligott’s model, the market has seen an aggregated $403 billion notional of futures covering since March 9, which Charlie reminds you marked the “Max (notional) Short”.
The visual illustrates the following from the model:
- +$18.6B of Global Eq futs bot vs 1d ago
- +$76.8B vs 1w ago
- +$88.4B vs 2w ago
When it comes to the momentum chasers and trend followers, last week was “a big deal for cross-asset trend signal inflections”, McElligott notes, flagging “a number of high-profile moves per the Nomura QIS CTA model”.
“The overall position across all Equities futs [is] now essentially ‘neutral’… for the first time since March 4th on this mix of covering plus [an] outright ‘long’ in SPX”, he adds.
Looking at the vol.-control universe, McElligott observes around $1 billion worth of S&P buying last week, with nearly half of that coming on Friday.
This is, of course, a consequence of realized being dragged lower, pulling the vol.-control universe back into the game, where that means re-leveraging in mechanical, lagged fashion. It comes on the heels of an epic de-leveraging during the rout, which saw this cohort with “nothing left to sell”. Indeed, the exposure rank currently is still in just the 2nd percentile, McElligott writes.
As a reminder, vol.-targeting exposure tends to exhibit an “escalator up/elevator down” dynamic. This re-leveraging always has a “finally” feel to it, while purges sometimes feel like a nauseating “whoosh”.
“It’s the ‘buy impulse’ here that matters”, Charlie writes on Monday. “The slow drag lower of trailing realized volatility is… finally dictating a lagged re-leveraging back into Equities exposure”.
So, who’s not “feelin’ it” (colloquially speaking)? If you’ve been following along over the past two weeks (or even this morning, really), you already know the answer: It’s fundamental investors. Both mutual fund and hedge fund long/short beta to the S&P is still bumping along at depressed levels.
After a lengthy discussion of recent factor volatility tied to some truly epic moves that have left many to ponder the unthinkable (i.e., that a pro-cyclical, Value-over-Growth rotation can somehow get traction in the midst of a veritable depression), McElligott flags “very important” sequencing for this month.
“There might be ‘two trades’ based around the first two weeks of June”, he says. One is the risk-friendly, bullish equities trade into serial/quarterly June options expiration, before the last two weeks of the month possibly “being more defensively postured”, he writes.
In that respect, McElligott says it will be “increasingly critical” to watch the greeks in order to discern whether the virtuous dealer long gamma positioning has the potential to “unshackle” post expiry, opening the door to messy action in stocks or, as Charlie euphemistically calls it, “a broader distribution of outcomes [and] a wider range thereafter”.
Needless to say, there are no shortage of macro and geopolitical catalysts which could force stocks to “realize” just such a “broader distribution” in the event some of the technical “glue” illustrated in the visuals rolls off.