Here’s ‘Who’ Sold During 2022’s Worst Stock Plunge

If you’re looking to assign blame for US stocks’ worst day of 2022, you can obviously point to inflation.

And if you’re looking to assign blame for inflation, you can draw names out of a hat. Pick a scapegoat, any scapegoat. Everyone else is.

On a more granular level, though, note that the CPI-driven plunge in equities triggered mechanical de-leveraging, which served to push shares lower still.

I suppose this was already “old news” by Wednesday, but everyone loves a postmortem — as long as it’s not being conducted on them. Dark humor aside, it’s always worth taking inventory of systematic, unemotional flows.

According to one bank’s estimates, the gap higher in realized vol (shown above) triggered an anomalous exposure reduction from the vol control universe.

“The -4.3% move implied a breathtaking de-allocation of -$17.9 billion [in] forced mechanical exposure reduction,” Nomura’s Charlie McElligott wrote Wednesday.

As the figure (above) suggests, that’s a very large impulse. In fact, it was a 2.7%ile one-day change on a 10-year lookback.

Meanwhile, leveraged retail products demonstrated why, in my opinion, leveraged retail products aren’t a good idea. Their end-of-day hedging needs on Tuesday came to almost $16 billion across index ETFs and sector products (figure below).

McElligott called that “spectacular.” The EOD rebalancing “was not a drill,” he said.

At the same time, anybody who piled into short-dated upside on the assumption that August’s CPI report was likely to come in soft, thereby adding fuel to what was a burgeoning rally, was “handed brutal comeuppance,” as Bloomberg put it.

“With the vomitous decline in equities, short-dated upside calls (all the rage of late) got REKT and saw their delta collapse,” McElligott went on to say.

At the same time, that pile of legacy downside (the puts) suddenly looked viable again. “Their delta exploded higher,” Charlie wrote, before quantifying the impact, which, on Nomura’s estimates, was “a jaw-dropping -$368.2 billion” day-over-day impulse (figure above).

CTAs, which so often get the blame for large downside moves, played a relatively limited role, McElligott said. They sold “just” $4.6 billion across US equities futures.