There was confusion (feigned and otherwise) to start the week around what I called the “missing calamity.”
A margin call for the history books and the attendant unwind of positions built atop what Bloomberg described as one the world’s biggest “hidden” fortunes, failed to trigger any index-level tumult coming off a weekend dominated by headlines promising broad-based chaos.
For my part, I was characteristically flippant: Sometimes you blow up.
If you’re wondering why the Archegos drama has (so far) failed to manifest in broader selling pressure and index-level mayhem, Nomura’s Charlie McElligott said Tuesday that “a remarkable week of forced deleveraging drama has been unable to shake the market-insulating grip of Dealer ‘long gamma.'”
The “flip” (i.e., neutral) line for spot is is 3,850 in the S&P, according to Charlie, who also flagged the “offsetting ‘dispersion’ impact of the Value / Growth rotation and long-term ‘Momentum’ unwind.”
And don’t forget about the “background” bid from the vol control universe, which continues to add exposure as big down days fall out of the one-month sample, and trailing realized moves lower.
That’s crucial. I mentioned it here around a half-dozen times last week.
On Monday, McElligott estimated a vol control add of around $17 billion of US equities, another 98th%ile one-day change. Last Thursday witnessed a similar impulse (see the linked article, above).
“The net one-week exposure change [is] a walloping +$28.3 billion,” McElligott said.
Notably, if spot stays a semblance of “well-behaved” (i.e., trades in a reasonable range), this vol control “add” impulse should continue, albeit at a slower clip.
There is a risk, though. As McElligott wrote Tuesday, the vol control “plunge protection” (if you will) might be in jeopardy due to the rapidity of the move lower in one-month realized.
That signal “has come in so fast that our model is likely to flip to the three-month realized vol window in coming days, as we use the higher of the two as the trigger signal,” he said.