What Breaks The Market Calm?

Strictly speaking, a market that goes nowhere is a non-story, almost by definition.

But if a rangebound market stays rangebound for a prolonged period, the sideways drift itself becomes a story.

The same questions that get asked during strong directional moves are subsequently applied to a market that spends “too long” going nowhere. It’s the “Whys” and the “Whats.” “Why are things stuck in neutral?” “What’s preventing a breakout?”

Both US equities and rates have crossed the undefinable threshold beyond which “going nowhere” is a headline in its own right (figure below).

There are myriad explanations for why things are stuck in suspended animation (outside the meme stock carnival, anyway). For all the hype around inflation overshoots, the incoming data has cooled a bit on balance stateside and two consecutive NFP misses have served as something of an offset for CPI when it comes to the Fed narrative.

For stocks, a similar dynamic is in play. After all, it’s all about anticipating the Fed, so jobs disappointments are acceptable as long as they’re not too disappointing. May’s headline NFP print fit that description. Good enough to keep the recovery narrative intact, but not good enough to inject any urgency into the taper talks.

Beyond that, familiar dynamics are helping to keep stocks “pinned.” Nomura’s Charlie McElligott reiterated as much in a Monday note, on the way to outlining a few “catalysts for movement” on the horizon.

“US Equities index / ETF options positioning sees us currently in a substantial ‘Delta accumulation’ phase, as funds are using upside options as ‘cheap beta,’ with $Delta rank for SPX / SPY options now an ‘extreme’ 93%ile since 2014 and QQQ at a very solid 85%ile,” he said, noting that the prevailing “‘long Gamma / long Delta options market stabilizer is boosted by full-throttle corporate buyback[s] ahead of the upcoming earnings season blackout.”

In addition, he cited the “white-hot” inflows into equities and the ongoing “slow-bleed in VIX ETN Net Vega, as ‘long vol’ positions initially monetized after the CPI overheat ‘shocker’ have now been given up.”

Note that while the pace of equity inflows has moderated (more on that here), $71 billion still flowed into global stock funds over the past four weeks. Not exactly a pittance.

So, is it hopeless? Are we doomed to meander, narcoleptic, from now until Jackson Hole?

Maybe. But maybe not.

McElligott on Monday flagged the potential for “something pretty ‘real’ into the Friday of next week’s Op-Ex cycle turn,” when he sees a “potential window for a pivot [as] much of [the] $Gamma and $Delta is set to roll off and be de-risked.” Front-month accounts for more than 80% of the SPX/ SPY Delta and 90% of the QQQ Delta, Charlie noted.

That should open the door to a wider distribution of outcomes, just as the “background” vol control bid peaks. For now, vol control will likely keep adding exposure as the “insulated” environment keeps benchmarks well-behaved. But once Op-Ex provides the market with a “greater ability to move thanks to reduced Dealer hedging flows,” vol control re-leveraging could go into reverse “requiring a smaller incremental daily change as a catalyst,” McElligott wrote. If buybacks fade into corporate blackouts, that too would remove a vol-dampening catalyst.

In any event, amid an abundance of media coverage documenting the current sideways drift, I thought it was worth noting that there’s hope for those who like a little action but aren’t particularly keen on riding the AMC train or refreshing a Dogecoin quote page all day while waiting on Elon Musk to tweet something.