‘Tremors’ And The ‘Inevitable’ Aftershock Rally

“Hedge fund deleveraging ‘events’ spur central bank liquidity and sometimes massive rallies [or] bubbles,” BofA’s Michael Hartnett wrote, in the latest edition of his popular weekly “Flow Show” series.

The reference, of course, was to last week’s “tremor” (as he called it), when triple-digit upside moves in a handful of misfit stocks played havoc, sending the broader market to its worst week since October.

The idea that the Fed might be forced to intervene to prevent GameStop from becoming systemic speaks to how fragile modern market structure really is. Sure, the squeeze was dramatic. And no, it wasn’t just confined to GameStop. And also, no, folks don’t generally stress test their books for “neon swans,” as it were.

Nevertheless, you’d like to think the mighty US financial system wouldn’t even notice a 400% rally in shares of something like GameStop. As I’ve put it dozens of times over the past several sessions, “it’s just GameStop” — not exactly Lehman. Or AIG. It should have been a quaint, idiosyncratic event, not front-page news. A “tempest in a teapot” (as Jamie Dimon once referred to the infamous “London Whale” trades), not the national scandal it became.

Mercifully, it’s over. Or mostly over. “As expected, the equities ‘pain trade’ was indeed higher,” Nomura’s Charlie McElligott wrote Friday. “Gamma gravity buil[t] into the higher SPX strikes in SPX/SPY consolidated options, as funds rush to slap back on upside exposure after the VaR-event of the prior week, which forced mechanical deleveraging in gross- and net- and effectively got them ‘de facto short the market’,” he added, calling this week’s rally “inevitable after there was no systemic risk spillover.”

I mentioned Thursday evening that FANG+ left last week where it probably belongs — in the dustbin of history. Tech favorites were on track for a 7%+ weekly advance.

McElligott noted that the grab for upside exposure and optionality is no longer confined to thematic plays on the reflation trade. Somewhat ironically, the “tremor” and subsequent across-the-board sigh of relief this week, seemingly catalyzed a bid for “crash up” hedges. “Now, we’re finally seeing SPX upside Call Skew register a pulse, as 1m SPX 1m jumps from just 0.3%ile after last Friday to today’s 43.7%ile,” Charlie said.

The latest EPFR data showed a record inflow for tech, alongside a huge inflow to silver, with the latter largely reflecting the Reddit/retail crowd’s ludicrous ambitions of cornering the precious metals market.

Commenting, BofA’s Hartnett wrote that the “client zeitgeist in the past two weeks has unambiguously been to buy the FAANMG underperformance.”

That speaks to the bull’s resiliency, as do flows into credit. Last week saw the largest inflow into investment grade in 22 weeks, at $12.6 billion on EPFR’s data.

Lipper data out Thursday evening showed IG funds taking in $6.15 billion in the week to February 3. High yield saw its first sizable inflow in weeks.

For Hartnett, the outlook is a bit tenuous. On Thursday, he compared the first half of this year to 1999 and 2018. “Higher stocks now coinciding with higher yields, a higher dollar, and higher vol are discounting growth and inflation,” he said, adding that “once Wall Street inflation [is] visible on Main Street, asset prices [are] likely to correct significantly.”

BofA’s pseudo-famous “Bull & Bear Indicator” now sits at 7.5. 8.0 would trigger a sell signal.


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