If you’re wondering “Wha’ happened?!” on Thursday afternoon, when the bottom fell out for US equities, once again dashing hopes for a turnaround, you might be inclined to point the finger at Peloton. But there was more to it than that.
No, it didn’t help that a CNBC report suggested a company whose business is manufacturing connected exercise equipment may have paused production of… well, of connected exercise equipment. However, that was merely a “tipped domino,” so to speak.
In a sweeping Friday note, Nomura’s Charlie McElligott detailed precisely why Peloton matters. The company was “once a private-side holding,” he wrote, noting that from a sentiment perspective, this is a bad time for unicorns to be stepping on banana peels. “[U]nicorn books are finally getting an MTM ‘come-to-Jesus’ which is crushing performance for many funds instead of previously carrying it,” he said. The Peloton news thus injected a new dose of unadulterated fear into richly-valued growth names.
From there, things snowballed. Around 20 minutes later, the 100-DMA fell for minis, which McElligott described as the “first ‘ruh roh.'” Until then, dealer hedging was supportive for equities.
At that point, Nomura’s “internal Equities Futures ‘pressure’ / imbalance monitors began showing [the] same heavy ongoing ‘VWAP-style’ de-risking seen in prior days, hitting bids, particularly in ‘large lots,’ meaning big institutional / asset manager-type size,” McElligott went on to say, noting large sell programs starting around 2:30 ET and escalating into the cash close.
The “kill shot,” he wrote, was the S&P’s approach to the CTA sell trigger level noted here on Thursday morning. McElligott flagged that level earlier in the day. Apparently, his BBG chats lit up on the approach. “Traders were clearly keying on it and front-running it,” he said Friday, adding that once 4,507 fell (possibly triggering some $25 billion in estimated CTA de-leveraging), 4,500 was a sitting duck. That was the largest gamma strike.
“[T]hat spot level also saw us near [Thursday’s] point of Dealer ‘max short Gamma,’ in the area of -$22B per 1%,” Charlie remarked, before calling the Netflix guidedown the “coup de grace.”
In my own (obligatory) assessment of the Netflix debacle, I wrote that,
Netflix is a “general.” It’s not a FAAMG member, but it’s an alternate, if you will. If FAAMG were a sports team, and one of the starters was injured, Netflix is the sixth man. Even if the mood were bright, the broader market wouldn’t digest a double-digit decline in the shares with alacrity. And the mood isn’t bright right now.
In his Friday postmortem, McElligott struck a similar chord. “This (former?) ‘general’ of the FANGMAN / mega-cap Growth-era was slaughtered like a Microcap lamb,” he wrote. That, in turn, prompted fears of a “liquidation cascade across the fund universe, where so many ‘thrivers’ / ‘survivors’ of the past decade simply overweighted 5-10 of these names and watched their ‘returns versus benchmark’ drive asset growth.”
As I often put it, either you pile into those names, with leverage, or you underperform. It’s nearly impossible to beat an index that consistently returns 20% (or more) annually.
So, there you have it. Another domino effect, brought to you in part by dynamics the vast majority of market participants don’t understand, despite the concepts (if not the embedded arcana) being conceptually easy to grasp.
Incidentally, the “Wha’ happened?!” quote (employed here at the outset) is a Fred Willard reference. Kudos to anyone who caught it.
