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Nomura’s McElligott Talks Possible ‘October Surprise,’ Near-Term Outlook Following Tech Rout

It may look like value is suddenly en vogue in September with laggards like the Russell 2000 poised for their best relative performance versus the Nasdaq 100 in years, but the reality might be more mundane or, if that’s not quite right, call it “mechanical”.

“The last few days… look pretty ‘gross-down-ish‘”, Nomura’s Charlie McElligott writes, in a Friday note, adding that from a risk management perspective, “books trad[ing] through VaR limits” on the heels of this month’s tumult “need to be reduced”.

Given that, McElligott says that what “optically looks like a ‘Value over Growth’ trade is really about the mechanical realities of partially reducing your longs and covering a portion of your shorts”.

Read more: September Tech Correction Turns World Upside Down

As far as the dynamics discussed here earlier this month, one-month realized leapfrogged three-month as the tech swoon developed.

“The switch we anticipated from Vol Control moving from the 3m- to 1m- realized as their allocation input has been a critical shift in flows”, McElligott says.

In essence, this short-circuited a friendly latent buying impulse. Recently, the vol-control universe has served as a drag, mechanically deleveraging.

This “almost daily” source of buying “has now turned [into] a local incremental ‘seller’ with -$18.3 billion over the past two weeks since the vol shock event”, McElligott writes.

But, there were some dip buyers. Hedge funds were buying tech, software, and momentum shares earlier this month, according to Goldman and Morgan, and the latest EPFR data showed a massive inflow into equities over the last week.

Specifically, $26.3 billion flowed into stocks, the biggest haul since March of 2018, following the VIX ETN extinction event.

That came alongside a big outflow from cash.

Looking ahead, coming out of quad witching, McElligott notes that “Nasdaq / QQQ options positioning is telling us that the Nasdaq is open to a MUCH larger trading range, with a staggering collapse in $Gamma and $Delta off the move lower”.

It’s worth watching $270 on QQQ, he says, as that strike “probably needs to and probably will be well defended [Friday] by market makers short this monster in size, but we need to look out for a potential break below $270 in QQQ as a trigger point for where things could get sloppy to the downside into next week”.

As far as the outlook for October, Charlie notes that protracted Beltway bickering and the attendant stalemate around another virus relief package has prompted many market participants to perhaps write off the possibility of more fiscal stimulus in the very near-term.

That, he suggests, “could be caught flat-footed, with a few folks believing that this year’s election ‘October Surprise’ might not be vaccine-related, but instead, potentially about a stimulus ‘deal’ getting done”. In turn, such a “surprise” would set the stage for a big (league) pro-cyclical rotation and bear steepener.

Of course, that’s not a sure thing. But then again, nothing is.


10 comments on “Nomura’s McElligott Talks Possible ‘October Surprise,’ Near-Term Outlook Following Tech Rout

  1. joesailboat says:

    Virus numbers are set to escalate come Nov. which will surprise many so congress may hit panic mode and fiscal at election may happen. We do have the old buget to pass also…..sooner.

    • runamok says:

      Numbers are starting their ascent in Europe, a region, as we knoiw, that is well ahead of the U.S. with regard to pandemic timeframes. Europe rates today are the U.S. in 30 to 60 days. I agree it could be a panic moment in the U.S. Capitol Building. Then again, they don’t care enough about the scarring currently happening in the economy, so not if more deaths and illness will inspire them.

  2. Flaaron says:

    Don’t forget the possible China retaliation variable.
    Watching VIX closely.

    • Tom says:

      I expect a relatively muted response from the Chinese government. We are so close to the election that the Chinese will likely wait to see the outcome before deciding on a long to medium term course.

      As an aside, though not a conspiracy theorist by nature, I would not be entirely surprised if an “understanding” between Trump and Xi has been in place for some time now.

  3. John Banjo says:

    This year I’m expecting several October surprises. With Trump I would not rule out daily October surprises.
    Cosmos help us … For one the author of the Anonymous Op Ed from a year ago is expected to reveal himself – my two cents is on Dan Coates, btw.

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