Stocks May Be ‘Impossible To Trade’ For Months

We’re going to need a de-escalation.

That’s a kind of general statement regarding the now wildly perilous situation in eastern Europe, but (far) more narrowly, it also applies to equities at a time when bear markets are proliferating.

Chaos in commodities is precipitating an acute inflation scare, conjuring the specter of societal upheaval in food-insecure locales and dramatic state intervention in Europe, where dependence on Russian energy is now an existential liability. And that’s to say nothing of the now non-zero chance of a nuclear confrontation between the US and an increasingly paranoid Vladimir Putin. The “button” is, unfortunately, on his end of the Kremlin’s very long meeting tables.

In addition to the sentiment overhang from the macro tumult, the combination of Fed dynamics and the technical backdrop is likely to make equities “impossible to trade,” Nomura’s Charlie McElligott said Monday.

“[The] magnitude of ‘Short Gamma, Short Delta’ across the US Index / ETF Options space is creating this gappy range-trade, frankly across multiple asset majors, boosted by the macro equivalent ‘short Strangles’ from the Fed,” he said, reiterating the notion that the Fed put is struck much lower than spot, while major central banks are effectively selling calls simultaneously, “as any substantial rally is stocks will perversely ease financial conditions, which is counterproductive to their inflation-fighting goals.”

SPX, QQQ, IWM, HYG and EEM gamma are 15th%ile, 3rd%ile, 21st%ile and 1.7%ile, respectively, with deltas seeing even more extreme readings. That means the door is (still) open to accelerant flows into an illiquid market. Large directional moves mean more scope for CTA Trend flows to exacerbate “chop.”

“Several fast money investors had already significantly reduced their equity exposure before the Russian invasion of Ukraine and they have continued to do so,” Goldman said Monday, noting that “higher realized equity vol and the negative trend YTD have likely forced risk parity and CTAs to sell equities.”

Nomura warned on the backdrop vis-à-vis CTA triggers in rates, where “Bond / MM ‘Short signals’ are now in a brutal chop zone, remaining at risk against the growing risk-off ‘stagflation’ potentials in Europe,” as Charlie put it.

The March Fed meeting could provide some respite in “cleared event risk” fashion, especially given the overlap with OpEx, but any rebound may prove fleeting if there’s no resolution to the war. The overlap between the conflict, inflation and thereby monetary policy is extraordinarily vexing. It’s a moving Venn diagram of sorts.

“The added complexity of a geopolitics-driven ‘inflation overshoot’ catalyst [in an] already very challenging ‘stagflation + tightening cycle'” environment is a concern and “will make sustained bounces challenging beyond that of tactical short-covering / hedging adjustments in the absence of Ukraine de-escalation,” McElligott went on to say.

Writing in his own daily missive, Rabobank’s Michael Every noted that “Wars can escalate fast.”

“Look where we are today and were we were 14 days ago,” Every said. “Where will we be 14 days from now?”