“This is no longer a buy-the-dip market.”
That’s according to Goldman’s Scott Rubner, who’s enjoyed considerable press this year from at least one mainstream financial media outlet.
In a new note, Rubner said the S&P breached a short-term CTA sell trigger threshold for the first time in nearly three months. That’s consistent with color from Nomura, whose Charlie McElligott suggested trend-following strats likely sold more than $40 billion+ across global equity futures over the past week.
Rubner, who described “a clear shift in sentiment” among clients this month, said equities are trading in a vacuum where technical flows predominate.
In language reminiscent of McElligott’s parlance, Rubner said the proliferation of 0DTE options has made “each day its own ecosystem.” You’re reminded that August has seen four of the top 10 0DTE volume days on record, and four of the top 10 days as a share of overall volume too.
“Think this doesn’t matter?” Rubner asked, rhetorically, on the way to delivering a play-by-play recap of how 0DTE dynamics influenced the market earlier this week. To wit:
The most traded option line in the US market [on Tuesday] was the SPXW 8/15/23 4440 puts traded 99,000 contracts or $45B billion notional. At 3:18pm the delta on this option was ~10% (cost $.70 cents), by 3:40pm the delta on this option increased to ~80% (cost $9.00), resulting in substantial delta from market makers! There is not enough liquidity on the screens to handle market maker delta hedging such a dramatic move over a short 20 minute period.
And there it is, spelled out in granular detail, and in no uncertain terms.
As Rubner alluded to in that passage, thin August markets are a contributing factor. Top-of-book depth has deteriorated by more than half over just the past two weeks alone, he noted. That’s illustrated in the figure on the right, above. On-screen liquidity has diminished commensurately.
He also flagged “a short-term supply and demand mismatch” between the VWAP corporate bid (which he likened to Rocky) and systematic strat selling at market (which he likened to Ivan Drago), before reiterating that there’s an “asymmetric flow-of-funds skew to the downside as we test key technical levels.” That’s a point that’ll sound very familiar to regular readers. How many times this month have I alluded to a downside flows asymmetry?
Finally, Rubner noted that Wall Street’s “two-weeker” starts this Friday. Everybody (not literally, but you get the idea) will be gone until Labor Day.
It’s possible, he suggested, that the poor seasonal will be brought forward into August.
“September back-to-school seasonals are the worst of the year,” Rubner remarked. “My view is that weakness gets pulled forward — ‘you will be here.'”
Making money on Calls into making money on PUTs. The trend is your friend.