If a tree falls in the forest and nobody’s around to hear it, does it make a sound?
The market version, as spelled out by Nomura’s Charlie McElligott, says if there’s no follow-through, there’s no risk-event.
In a Monday note, he juxtaposed this week’s earliest price action with the 2024 early-August growth scare. Lest we should forget, the session after last year’s July NFP disappointment (which, just like this year’s jobs panic, was preceded by an on-hold FOMC and accompanied by a poor read on ISM’s factory employment gauge) saw the Nikkei suffer an honest-to-God crash and the VIX surge the most on record.
There was no evidence of any such chaos on Monday, when the only fireworks were on the upside. “For now, this may be nothing more than profit-taking ‘randomness’ on what had been a low-participation, slow summer Friday,” Charlie wrote, adding that it’d take a “sustained, multi-day [move] lower in spot equities” and a similarly sticky move higher in vol to “generate destabilizing systematic de-risking.”
Recall that equity positioning among systematics — vol control and CTA trend — was dialed up off the April lows nearly as fast as it was purged into the “Liberation Day” drawdown. Some worry that exposure’s ripe for another purge. And it is. But to McElligott’s point, you have to get a sustained move lower that pushes spot through CTA trigger levels and/or a durable vol expansion to force vol control de-risking.
The figures below give you a sense of how close (or, more to the point, how not close) we are to getting a blast of systematic de-leveraging.
Even if the S&P averaged a +/- 1% daily directional move for the next two weeks, you’d still only get $15 billion or so of equity-selling from the target vol universe (second row, third column in the upper right-hand table).
As for CTAs, sell triggers “remain by and large equivalent to deep out-of-the-money,” Charlie wrote, noting that positions in the S&P and Nasdaq 100 are “both comfortably ~10% or more away from sell levels” (the red-shaded cells in the CTA tables).
Of course, this is all subject to change. Indeed, these numbers (the estimates shown and discussed briefly above) will be different by the time you read this.
The point, though, is simply that “we need more than a one-day drawdown to see further spot unwind and punishment of short vol-supply,” as McElligott put it.
To quote Johnny Depp’s Jimmy Bulger, “If nobody sees it, it didn’t happen.”
Or, as I noted in a comment on Revisionist History:
“Meanwhile I notice that volatility is creeping back up today, though when it comes to our friends the robo-traders, one flower does not make spring.”
SPX up just slightly from last Thursday’s close before NFP. Friday didn’t happen, or that dip below the 20DMA buying opportunity
My take is that Friday’s route was due to the activation of the worldwide ban on trade (the implementation of the long-threatened and often delayed tariffs that Trump has been trying to push forward since Liberation Day). Lost among the headlines was the fact that the tariff implementation date was moved from the 1st to the 7th, with the reasoning that it gives time for Customs to figure out how they are actually going to implement the complex web of tariffs. I think the trading machines went into the TACO trade subroutine, but I don’t see Trump reversing this one, since he has spent so much time talking about how great it (he) is. Thursday could be a bad day for Mr. Market, especially if any of the Penguins mention the possibility of reciprocal tariffs. I am disappointed that Congress doesn’t put up any fight against Trump’s Really Bad Ideas, but I find it hard to believe that every world leader is going to smooch the Big Beautiful Orange End.