If you were wondering whether familiar accelerant flows played a role in Thursday’s wild ride on Wall Street, the answer is: Of course they did.
Plainly, the bond rout (made worse by a concerning read on unit labor costs), was a major catalyst, but as is so often the case, once things started moving in the wrong direction, the equity selloff took on a life of its own.
To the extent they remained in play, hedges accumulated into this week’s Fed event risk may have been problematic. “With spot melting lower… those remaining downside-strike puts began to pick up again, and fast,” Nomura’s Charlie McElligott wrote Friday. That, in turn, meant dealers selling futures into the selloff, exacerbating the move.
Of course, when spot careens sharply lower accompanied by higher vol, it can trigger “the machines,” as it were. Although vol actually underperformed the scope of the selloff, both one-month and three-month realized are (obviously) 100%ile on a short lookback (figure below).
That suggests vol control selling, even as exposure was already bombed-out. Thursday saw more than $7 billion in US equities futures selling from the vol control universe on Nomura’s models, taking exposure down to just the 7th%ile.
CTAs, meanwhile, piled on with more than $12 billion in selling across global equities, and the bludgeoning in long-duration shares triggered by a worst-case-scenario, reals-led bear steepener meant that out of some $13 billion in EOD rebalancing pressure from leveraged ETFs, more than $9 billion came courtesy of Nasdaq/tech products, again according to Nomura.
Insult to injury was a veritable disaster in E-Commerce names. They collapsed in sympathy with Etsy, which came under siege after delivering disappointing guidance (figure below).
Ebay was along for the (nauseating) ride, as was Wayfair.
McElligott didn’t mince words. “I’m talking full-blown, Game of Thrones ‘Red Wedding’-style liquidation in Growth / High-Multiple / MegaCap Tech / High Spec equities Thursday, on massive netting down of exposure,” he wrote, in a violent retelling.
“[The] bloodshed in that stuff,” Charlie marveled, pointing to downside moves as large as 3.5 standard deviations.
I see pitches about it being time to buy the bombed-out e-com, Web 2.0, etc names because valuation is “reasonable” and fundamentals are “good”.
The lesson from deep cyclicals investing is that buyers need valuations to be “low” or “unreasonably low”, valuations need to embed normalized growth, and fundamentals to be “bad” or “outright bad”.
Some of the pummeled names are, in my opinion, starting to meet two of these three requirements. It would be helpful to see some outright bad reports. Big misses, big guidedowns, layoffs, etc.
Of course, the company’s business model needs to be able to survive a period of outright bad results. Some of these guys are in fact wearing no clothes.
H-Man, a forest fire can be a welcomed event since it promotes new growth from the ashes of what was. We definitely have the forest fire, the issue is what the new growth will resemble?