Vol Control Plunge Protection, Gamma Gravity & April’s ‘Impulse Turn’

If there’s “extra” equity supply out there due to any rebalancing away from stocks and into fixed income, vol control is doing its part to absorb it.

Put differently, to the extent the market “needs” a source of demand for stocks into month- and quarter-end, vol control is filling that void.

With a handful of large “down days” falling out of the sample, trailing one-month realized is poised to reset lower, thereby triggering a buy impulse in true “toggle” up fashion, as volatility dictates exposure levels.

This is a key piece of the puzzle, especially as it relates to what JPMorgan’s Marko Kolanovic pseudo-criticized on Thursday as an inadequately holistic view of the rebalancing narrative.

“Increasing numbers of portfolios rebalance based on volatility targets, which often results in flow opposite to those of fixed weights,” he said.

Read more: Marko Kolanovic: Don’t Fear The ‘Broadly Advertised’ Rebalancing Story

Nomura’s Charlie McElligott said Friday that on the bank’s model, the market saw $16.5 billion in buying from vol control Thursday.

That, he noted, was a 98.5%ile one-day change.

“We saw this likely vol control exposure add flow showing in our ‘small lots’ trade imbalance data, which turned meaningfully higher and countered the initial sell flows out of the gates yesterday,” he remarked.

Beyond that, dealer hedging, gamma gravity and the attendant push-pull is a powerful phenomenon in an illiquid market.

“Nasdaq (QQQ) ‘Short Gamma versus spot’… initially led to a sloppy overshoot move on the downside in the US morning, with NQ futs trading -2% from high-to-low at one point,” McElligott wrote Friday, recounting Thursday’s trade. “But it was the power of the Dealer ‘Long Gamma’ at the SPX 3,895 strike which seemingly pulled us out of that early hole,” he continued, adding that,

We know the 47k SPX 31Mar 3895 Calls which traded back on Dec 31st 2020 are the top leg of a PS Collar which the Street is LONG, dominating the OI—that simply meant “insulating flows” BUYING the weakness (yday was ~$4B of ES to buy for every 1% move lower), and which will only grow into next Wednesday, where historically this trade is rolled the morning of expiry each qtr

These are your modern markets. Please turn your attention to the (masked) flight attendant who will explain how to use a seatbelt. (Cue Seinfeld: “They show you how to use the seatbelt. Just in case you haven’t been in a car since 1965. ‘Ohhh, you lift up on the buckle? I was trying to break the metal apart. I was going to try to tear the fabric part of the belt. I thought if I could just get it started.'”)

On Thursday, while musing somewhat idly about bonds, I wrote that “it’ll be difficult to get a clean read on things until early next month, once all of this shakes out and March NFP gets digested.”

Similarly, McElligott said that after next Friday, “we’ll have made the turn into April, a new quarter, with pension rebalancing flows cleared and equities folks then needing to re-risk after the (expected) big bullish labor data releases as the market turns its focus back into spring ‘vaccine renormalization reflation + stimulus’ sentiment green shoots.”

That, in turn, could reignite the rotation in equities or, as Charlie put it, mark an “impulse turn back into a very + ‘cyclical value’ / – ‘secular growth’ dynamic yet again.”