Stocks may end up “trapped” again, where that means consigned to a rangebound grind, likely higher, especially if market participants are correct in the (seemingly consensus) notion that Jerome Powell “wouldn’t dare” go so far as to explicitly telegraph an imminent taper unveil “in” Jackson Hole on Friday.
Following “Pavlov’s stick save,” US equities were back near records Tuesday, on what looked like another self-fulfilling prophecy in the making.
“The US equity vol ‘gamma hammer’ just keeps laughing their way to the bank… as dealers get stuffed on more short-dated gamma to the tune of ~$200mm a clip via shorted strangles, which in aggregate is now somewhere over +$2B in gamma dealers are long,” Nomura’s Charlie McElligott said Tuesday. That leaves stocks insulated, as dealers need to buy weakness.
Demand for “crash” against constrained supply is still throwing off what Charlie described as “completely bastardized” extremes in longer-dated downside. Meanwhile, nobody wants exposure to “crash up,” apparently — McElligott noted that SPX 1m Call Skew is now in the 8%ile.
During last week’s mini-drawdown (“drawdown” is just another term that’s now so relative as to be almost meaningless) downside was bid further, which probably meant “just a ton of futures delta being dynamically shorted in order to hedge those short puts into an accelerated selloff,” Charlie went on to say.
Between that and clients slashing nets (shorting on the assumption that things were about to get worse), the stage was set for what McElligott today described as “a good ol’ fashion short-squeeze,” precipitated by the return of the vol sellers, who “wagged the dog” (if you will), catalyzing a reversal in spot, which in turn eased vol further, and here we are.
Where? Where are we? Well, on Monday we were watching what McElligott said was “the largest one-day ‘buy pressure’ in S&P futures that we’ve seen over the past month across all lot sizes and the second largest ‘buy pressure’ in NQ futures over the past month.” That was according to the bank’s futures imbalance monitor.
Now that we’ve squeezed to new highs, Charlie noted that “SPX / SPY options consolidated $Delta is back to [an] ‘extreme’ rank at 93.6%ile, while the $Gamma rebuilds up to 89.4%ile [and] QQQ options are back ‘wildin’ out’ again too, with $Gamma at 99.9%ile and $Delta at 98.4%ile.”
So, the “stability breeds instability” catalysts are now reloaded (having never really de-cocked in the first place), but an avalanche needs a skier’s scream, as I’m fond of putting it. And coming full circle, traders seem confident that Powell won’t risk shouting too loudly (on YouTube, where his Jackson Hole speech will be livestreamed).
For the second consecutive day, McElligott closed on a somewhat fatalistic note. “Pray for a Jackson Hole surprise, despite nobody seeing that as an option here in the equities or in the rates vol space,” he said.
