The last time things were this placid, Janet Yellen was presiding over the short vol bubble.
Ironically, considering well-known pitfalls associated with this time of year, August is on track to be “one of the calmest months on record,” as Bloomberg put it, in an article published just after the closing bell sounded on another somnolent summer session.
As discussed at some length in “Melt-Up, Crash Down, Crash Up,” the S&P hasn’t had a 1% move in either direction in nearly a month. So far in August, swings (a misnomer in this context) on the world’s risk asset proxy par excellence have averaged just 0.5% (figure below).
It’s almost as if Yellen is back in charge — oh, wait.
Jokes aside, there’s a reason for this. On the fundamental side of things, earnings are obviously robust, and it certainly helped that July’s CPI data didn’t deliver another “shocker.” But, as Nomura’s Charlie McElligott noted, “options positioning matters a ton here.”
“With major US indices parked near all-time highs and ongoing large sellers of Gamma into a melt-uppish OpEx cycle, a theoretical -5% over 1-2 day move seems conceptually ‘outrageous’ in an S&P tape which has experienced a whopping total of three single days where we were down more than 2% year to date,” he went on to say, noting that “the daily-ish strangle seller [is] just slaying us with market-choking insulation.”
The figure (below) is a bit dated, but it speaks to Charlie’s point that we’ve been “grinding into the SPX 4,450 strike… and into next Friday’s OpEx there’s a ‘pull’ building up at the 4,500 strike,” a dynamic that’s “providing a ton of gravity.”
In the “melt-up” article (linked above) there’s quite a bit of color on how the current stability might breed instability in the near-term, but I also noted that investors’ predisposition to dip-buying would likely render any downdraft fleeting.
The uninterrupted string of weekly inflows into equity funds remained… well, uninterrupted last week, and the stockpile of sideline cash is still ~$1 trillion above pre-pandemic levels (figure below).
“Households, the largest aggregate owners of US equities, should rank as the largest buyers of stocks this year given unusually large cash balances and the low yields in cash and fixed income markets,” Goldman’s David Kostin wrote Friday.
And don’t forget the corporate bid. “Strong earnings and recent buyback announcements suggest the strength of repurchases will continue and imply upside risk to our buyback forecast,” Kostin went on to say, in the same note, adding that “if the H1 pace of buybacks continues in H2, it would imply total 2021 S&P 500 buybacks of roughly $800 billion.” The bank’s current forecast is $726 billion.
Taken together, all of the above helps explain rosy forecasts and current tranquility.
One clear risk is the Fed. Jerome Powell isn’t exactly known for “finesse” and Jackson Hole is just around the corner. Someone Bloomberg cited for the linked article (above) summed it up, noting that at least until the September FOMC meeting, “there’s not much to really move things for the market and for volatility in particular.”
Note the “in particular” disclaimer. It’s always the exogenous shocks that get you.
