‘Anecdotally,’ Everyone Wants To Buy The Dip

“Anecdotally, clients want to buy a pullback or deploy bullish expressions,” Nomura’s Charlie McElligott said Wednesday.

That’s the sophisticated version of retail investors buying the dip. When you have money, you’re buying “pullbacks” and “deploying” capital via various upside “expressions.” When you’re typing “1” into the “shares” box to increase your SPY holdings from 10 to 11 (“Well, it’s one louder, isn’t it?”) you’re “buying the dip.”

This is the beauty of the post-financial crisis monetary policy regime. Every market participant, from whales to minnows, is a BTD meme. Classical conditioning is classical conditioning. You might be “deploying” a few million or you might be spending your final $300 federal unemployment supplement. Either way, it’s Pavlov. It’s muscle memory. You buy dips and you sell rich vol. Because every, single time the bell rings, the food’s coming.

Why should this time be any different? Well, the short answer is that the September FOMC looms on the horizon, and although there’s virtually no chance of a taper unveil, the dots could shift.

Uncertainty around the new SEP and dot plot could mean “the normally reflexive vol-selling into Op-Ex ‘gamma unclench / vol expansion’ windows experienced YTD could be” postponed, McElligott reiterated. Recall that it was reflexive vol-selling which saved equities last month just when it looked like a selloff was imminent.

For now, the “story in equities continues to be about taking down exposure” ahead of that assumed vol expansion and in front of buyback blackouts and the Fed, Charlie went on to say, noting that “32% of SPX / SPY Gamma and over 50% of QQQ / IWM Gamma [is] coming off,” opening the door to a wider distribution of outcomes — “free like a bird,” as he put it.

Meanwhile, we’ve flipped into negative gamma territory (figures below, from McElligott).

Vol control is still something of a wild card, with exposure adds likely for the next couple of sessions (assuming no large swings), and the possibility of de-leveraging thereafter on a hypothetical big down day which, again, becomes more plausible as equities lose their “pin.”

Thankfully, CTAs are still a relatively safe distance from triggers, or at least on US benchmarks. Global equities are a bit of a different story, apparently.

All of this is, of course, set against a backdrop of what McElligott aptly described as “persistent demand for financial assets.”

There is, he wrote, “just an insatiable vacuum on any cheapening.”