Systematic flows may have weighed on equities early this week, as acute Fed fears pushed up bond yields and undermined risk sentiment.
Subdued markets, low realized vol and a generally placid environment are necessary conditions for various iterations of virtuous, mechanical feedback loops to take hold. Persistent policy angst isn’t exactly conducive to calm waters.
Although dispersion and churn beneath the surface can have a dampening effect to the extent winners (e.g., energy) offset losers (e.g., tech), days like Tuesday are challenging. One-month realized is moving higher again (figure below).
As the subheading suggests, vol control de-leveraging may have contributed to selling pressure during Tuesday’s rout.
“I mentioned yesterday the imminent pivot from Vol Control turning from recent exposure ‘add’ to an exposure ‘reducer,’ and with [Tuesday’s] -1.8% SPX 1d change and 1m rVol back to 16, this created a -$10.5 billion de-allocation flow from US Equities,” Nomura’s Charlie McElligott wrote Wednesday.
The figure on the left (below) gives you some context. It would’ve ranked as the biggest one-day vol control notional rebalance since the emergence of Omicron.
At the same time, the swoon in tech may have triggered CTA selling. “We did indeed ‘flip’ from the legacy ‘+100% Long’ to the current ‘-37% Short’ signal, implying an estimated aggregate sale of ~-$17.6 billion of NQ across the universe,” McElligott went on to say.
The figure on the right (above) shows how rare it is that the CTA signal flips “short.” Typically, such episodes prove fleeting.
Meanwhile, leveraged ETF rebalancing contributed more than $8 billion in selling Tuesday, on Charlie’s estimates. As far as options positioning, he called QQQ “just a hot mess.” Net $Delta is the shortest ever (back to 2014) and we’re sitting near “max short Gamma,” he remarked, calling the setup “a doozy” into OpEx.
