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JPM Head Quant Warns Second Market Crash May Be Imminent: Violent Selling Could Return On Thursday
Last Friday, when the market was down only 2%, we presented readers with a note which promptly became the most read piece across Wall Street trading desks, which was written by JPM's head quant Marko Kolanovic, who correctly calculated the option gamma hedging imbalance into the close, and just as correctly predicted the closing dump on Friday which according to many catalyzed Monday's "limit down" open.
Given that the market is already down ~2%, we expect the market selloff to accelerate after 3:30PM into the close with peak hedging pressure ~3:45PM. The magnitude of the negative price impact could be ~30-60bps in the absence of any other fundamental buying or selling pressure into the close.
We bring it up because Kolanovic is out with another note, one which may be even more unpleasant for bulls who, looking at nothing but price action, were convinced that after the biggest two day market jump in history, the worst is behind us.
In the just released note, the head JPM quant warns that a large pool of assets controlled by price-insensitive managers including derivatives hedgers, Trend Following strategies (CTAs), Risk Parity portfolios and Volatility Managed strategies, which is programmatically trading equities regardless of underlying fundamentals, is about to start selling equities, "and will negatively affect market in coming days and weeks." For good measure, he casually tosses the word "crash" in the note as well.
By way of reference, JPM notes that a good example of how price-insensitive sellers can cause market a disruption/crash is the price action on the US Monday open. It says that technical selling related to various hedging programs, in an environment of low (pre-market) liquidity indeed caused a ‘flash crash’ on Monday’s open. S&P 500 futures hit a 5% limit down preopen, and then a 7% limit low at 9:31 and 9:33. The inability of hedgers to short futures spilled over into large cap stocks that were still trading and could be used as a proxy hedge. Had it not been for the futures limit down event, the selloff would likely have been worse as indicated by the price of the index implied by individual stocks. The figure below shows the S&P 500 futures, SPY ETF and S&P 500 replicated from
the largest stocks that were trading near the market open.
Kolanovic correctly takes credit for his prediction and notes that "in our Friday note we forecasted end-of-the-day selling pressure due to option gamma hedging. We saw similar price impacts on Thursday, Friday, and Monday (pushing the market lower into the close) and an upside squeeze on Wednesday. Our estimate is that up to 20% of market volume was driven by hedging of various derivative exposures such as options, dynamic delta hedging programs, levered ETF stop loss orders, and other related products and strategies (note that levered ETFs have gamma exposure of only ~$1bn per 1%, i.e., much smaller than that of S&P 500 options). We estimate the cumulative selling pressure from options hedging during the market selloff to be ~$100bn. Options gamma is expected to remain substantially (in excess of $20bn) tilted towards puts while the S&P 500 is between 1850 and 2000.
The figure below shows Put-Call Gamma assuming current open interest and different spot prices. JPM expects high volatility to persist (should we stay in this price range) and cause quick intraday moves up or down, particularly towards the end of the trading day.
According to the quant, it is not only derivative hedgers who are pushing the market around like a toy with barely any resistance: :in fact, there is a much larger pool of assets that is programmatically trading equities regardless of underlying fundamentals."
It is these investors who, "in the current environment" are selling equities and "will negatively impact the market over the coming days and weeks."
Trend Following strategies (CTAs), Risk Parity portfolios, and Volatility Managed strategies all invest in equities based on past price performance and volatility. For instance, in our June market commentary we showed that if the equity indices fall 10%, these trend followers may need to subsequently sell ~$100bn of equity exposure. These types of ‘price insensitive’ flows are starting to materialize, and our goal is to estimate their likely size and timing. These technical flows are determined by algorithms and risk limits, and can hence push the market away from fundamentals.
This is where it gets scary for the bulls who thought we may be out of the woods, and that the crash was behind us. If Marko is right, as of this moment we are merely in the eye of the hurricane:
The obvious risk is if these technical flows outsize fundamental buyers. In the current environment of low liquidity, they may cause a market crash such as the one we saw at the US market open on Monday. We attempt to estimate the amount of these flows from three groups of investors: Trend Following strategies (CTA), Risk Parity portfolios, and Volatility Managed strategies. These investors follow different signals and have different rebalancing time frames. The time frame is important as it may give us an estimate of how much longer we may see selling pressure.
So, how much longer may we see the selling pressure?
1. Volatility Target (or Volatility Control) strategies provide the most immediate selling as a reaction to the increase in volatility. These strategies adjust equity leverage based on short-term realized volatility. Typical signals are 1-, 2-, or 3-month realized volatility. Volatility target products are provided by many dealers, index providers and asset managers. Volatility targeting strategies also became very popular with the insurance industry. After the 2008 financial crisis, many Variable Annuity (VA) providers moved from hedging their equity exposure with options to investing directly in volatility target indices (e.g., 10% volatility target S&P 500). It is estimated that VA issuers have ~$360bn in strategies that are managing volatility; some of these use options to manage tail risk, some buy low volatility stocks, and some invest in volatility target strategies. We estimate that strategies that are targeting a particular level of volatility or managing to an equity floor could have $100-$200bn of assets.
Assuming that, on average, these strategies follow a 2-month realized volatility signal, we can estimate their selling pressure. 2M realized volatility increased over the past week from ~10% to ~20% (i.e., doubled), so these strategies need to reduce equity exposure by up to ~50% to keep volatility constant. This could lead to $50-$100bn of selling, and it likely started already this week. There is often a delay of 1-3 days between when a signal is triggered and trade implementation, and positions are often reduced over several days. We think this could have contributed to the ‘unexpected’ selloff that happened in the last hour of Tuesday’s trading session. While these flows may continue to have a negative impact over the next few days, they would be the first to reverse (start buying the market) when volatility declines.
2. Trend Following strategies/CTA funds have an estimated ~$350bn in AUM. We modelled CTA exposures in our May and June commentaries, and estimated flows under different scenarios for asset prices. In particular, under a 10% down scenario in equites we estimated CTAs need to sell ~$100bn of equities. In our model, the bulk of selling was in US markets, some in Japan and relatively little in Europe. S&P 500 futures did underperform Europe (by ~3%) and Japan (by ~2%) over the last two trading sessions (European hours), which may indicate that CTA flows have started to impact equity markets. The rebalance time frame for CTA strategies is typically longer than for volatility control strategies. CTA funds may act on their signal in a period that ranges from several days to a month. We believe that selling from CTAs may have just started and will continue over the next several days/weeks.
3. Risk Parity is one of the most popular and (historically) successful portfolio construction methodologies. Risk Parity allocates portfolio weights in proportion to assets’ total contribution to risk (a simplified version, called Equal Marginal Volatility allocates inversely proportional to the asset’s realized volatility). In a survey of quantitative investment managers (~800 clients in US and Europe), we found that ~50% prefer a Risk Parity approach (vs. 15% for traditional fixed weights (e.g., 60/40), 20% Markowitz MVO, and ~20% active asset timing). Estimated assets in Risk Parity strategies are ~$500bn and ~40% of these assets may be allocated to equities. Risk Parity portfolios may also incorporate leverage, often 1-2x. Risk parity funds often rebalance at a lower frequency (e.g., monthly, vs. daily for volatility target) and use slower moving signals (e.g. 6M or 1Y realized volatility). The increase in equity volatility and correlation would cause Risk Parity portfolios to reduce equity exposure. For instance, 6M realized volatility increased from 11% to 15% and a modest increase in correlations would result in approximately a ~20% reduction of equity exposure. Based on our estimate of Risk Parity equity exposure, this could translate into $50bn-$100bn of selling over the coming weeks.
In summary, JPM estimates that "the combined selling of Volatility Target strategies, CTAs and Risk Parity portfolios could be $150-$300bn over the next several weeks. Rebalancing of these funds may appear as a persistent and fundamentally unjustified selling pressure as these funds execute their programs. In addition, there may be a positive feedback loop between all of these sellers – Gamma hedging of derivatives causes higher market volatility, which in turn leads to selling in Risk Parity portfolios, and the resulting downward price action invites further CTA shorting. All of these flows pose risk for fundamental investors eager to buy the market dip. Fundamental investors may wish to time their market entry to coincide with the abatement of these technical selling pressures."
* * *
In other words, if JPM is right, yesterday and today are merely the eye of the hurricane - enjoy them; tomorrow is when the winds return full force.
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QE4 JPM LONG PAPER AND PROMISES (from known liars/ worthless)
FUCK YOU JAMIE DIMON!
Helicopter money on the way....
RIPS
HFT funds made an absolute killing off the market crashes. This is the best environment for taking advantage of panicked investors. This JPM criminial is just talking his book, althrough I believe we are headed into a worse crash than this past Monday.
The lions divide the herd in order to eat dinner. Same here.
They know the people are panicked and are fixing the market to eat dinner.
GOTS
RIPS
Will be nice to watch the Hedge Funds and HFTs self-immolate.
Dow Jones is down almost 200 points the last 20 minutes...
Let's see how this day ends.
The return of violent selling will be followed by the return of violent Fed buying.
"Violent Selling Could Return On Thursday"
Is he referring to any Thursday? One particualr Thursday? Thursday, June 01, 2017? We're pretty far into this Thursday. Does he mean today?
Funny ... as soon as this is posted the "Happy Times Are Here Again" "recovery" begins to roll over...
Liquidity crisis my ass:
"The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
- Ben Bernanke, 2002
Isn't their a military parade planned somewhere in the US in the next week?
Get to work, Mr. Yellen or don't you support the troops?
STARTING TO SELL OFF NOW
Big ol' solid "meh" here.
The sheeple will get fleeced. Idiots looking at their portfolio thinking they are a genius -- never thinking to book profits, and when it comes crashing down will be beside themselves.
The Dow's high today was... 16,666.42
Nothing to see here. Move along. These are not the digits you are looking for.
Well, looks like JPM did well fleecing some muppets today. Looks like the market are doing the exact opposite of what they said would happen.
It appears the "markets" are in fact a required retirement subscription that pays poorly but will be the only investment which will be allowed even a chance of returns.
Thanks, Fed.
How do they do that?
Bullshit. As always just BTFD.
Dont be so negative.
Get on the ZH Doom Train.
"Get on the ZH Doom Train."
We'd say that ZH is more into defeatism than doom. "Oh woe am I, the bankers always win! There's nothing we can do! Bend over and take it like a good boy!"
Bandini Fairy, you should read more posts.
I've maintained for years here that there's nothing the bankers can do to you which you haven't asked them to do (much like other vampires).
But, by all means, continue running around the room in a crack-addled frenzy screaming about how you're "one hunnit, bitchez!"; it's a salve for us to know what's ahead of you.
We are still in the Information War stage. The NWO boys have got a big play coming up, but IMO it will have mixed effects, much like 9/11, which served as a catalyst for MILLIONS to come to their senses. Well, temporarily come to their senses, any way.
Yes, that's what I meant. Doom and fear are a good thing at times.
Zero Hedge is to be cross-referenced with mainstream financial media. It shouldn't be one's sole source of information.
The hedge is pretty much my only source of news and I've done quite well out of it. Without it, I never would have had the drive to get out of debt, for example.
ZH tells the truth 75% of the time. The lame stream media tells lies 75% of the time.
Obi Wan sez - The Force is Strong with this one
I see a barfing clown in my near future.
Roller coaster clicking to the top
...the seatbelts are fraying...
PPT wont let her go
That'll be why silver "surged".
I agree with "HFT funds made an absolute killing off the market crashes". However I also believe that we have seen the lows in S&P500 for this year. Now the JPM's of the world are just keeping us scared...
Thanks for all the downvotes.
Please click away at those red arrows. I'm looking for near 2100 S&P but the strategy only works if not too many voters go along at this stage.
I guess everyone is supposed to agree with you that the volatility is over and it's smooth sailing the rest of the year?
BLACK MONDAY, meet BLACK FRIDAY....................
We are so screwed.
Yep. and my problem with pronouncements from JPM is they are pronouncements from JPM.....
I suppose he will be the one doing the selling! LOL That's how he knows!
Head fake to squeeze more muppets....Rinse and repeat until Sesame Street goes out of business.
101 recipes for fresh muppet......
As the World Churns.
"it's a cookbook!"
there is more than one way
to skin a muppet...
Depends whether or not you want a muppet skin coat....
Hey knuckledragger, can you provide a link. I've got muppets running out of my ears...
;-D
https://www.youtube.com/watch?v=0dtbY1KB64c
Dead muppets everywhere...
bullish! right? just shut up and BTFD
green
red
Mass order for popcorn anyone?
well, jpm ain't goldman but if they're publically calling a crash I may have to put back in some of the $ I took out last wed (wish I could say I'm that good, knew it was a "when" ? but didn't expect to cut it so close...)
The only people GS fears is JPM, and with good reason.....
One of the reasons you vacuum up client capital is to be able to spoof client origination when you are actually trading your customer deposits. JPM figured this out early.
Ebs and flows. We all knew people would grab on there normalcy bias and see this major down swing as "a buying opportunity" and thing there is real value behind all this smoke and mirrors. When these winds do finally catch up, its going to be real carnage QE4 won't be able to resolve. The world will thing they have to all print at the same time to prop this up and by then the people will have caught on and sell it all.
The beginning to the end of this ponzi seems here...the actual end, I hope is sooner than further away to be honest.
JPM is an international bank.
They'd kill your grandmother for 1% more of anything.
JPM can kiss 1% of my ass. (Another Seinfeld reference, yes.)
I never knew the equity market did back-to-school sales, too.
I challenge anyone to find one single word in the above text "dump" that contributes one iota to productive and constructive activity in society and the real economy.
The guy is evidently as clever as shit, but in a despicable fashion that benefits no-one except himself and his exclusive insider "club".
You have never baited deer, or in this case sheep......
Amen. I hope they hang the bastards. The ""new world order"" better be without mega banks who push paper around, one can hope DC/Wall Street become footnotes in some book about how civilzations and/or societies committ suicide. In the new new order hope those raising chickens and making machine tools are considered of more value than a Dimon or Blankfein. I jope some old lady making a quilt has more real value thannsomeone inventing next economic weapon of mass destruction..I can hope but not holding my breath.
well the quants/algos should love that headline
might as well read "skynet, we're coming for YOU!!!"
Stawks are awesome! The Fed orders them to levitate and they obey.
Push on that string and pop that rubber band bitches.
Hot time is 1433....Their RUNNING AT ROCINGHAM....57 minutes to unload at the highs and run for the hills
Hot time is 1433....Their RUNNING AT ROCINGHAM....57 minutes to unload at the highs and run for the hills
Just in Time for WAVE 5 DOWN to complete the cycle.
I for one trust our benevolent Zionist jew overlords to do what is best for mainstreet America.
Looks like selling will take off through 1930
"...who correctly calculated the option gamma hedging imbalance into the close"
Nothing like good 'ole-fashioned price discovery doing its work, eh...?
Who cares. Don't fight the FEDs software. A half trillion is no match for the FEDs hundreds of quadrillions.
PRINT.
Well, guess what? "Violent selling" did NOT return on Thursday.
Selling pressure? - What selling pressure? - The market bounced off from a mini-drop today and is up - SP500 at 1987 !!!
Its a free market.....
......unless institutions start to lose money at a seconds' pace. Then FULL (CORPORATE) COMMUNISM
RAMP IT UP AND RAMP IT OUT! Greed and power know no bounds.
Quant? Robet Shaw in Jaws?
The NYSE tvs are out...they do not know what the bids or offers are now......those crazy guys behind the curtain have taken over again....us retail investors..dont worry..nothing to see here
Why don't people let the machines handle it. Go home, fire up your Ashley Madison account, take a vacation.
if the Fed can create digital deposits at will, and not even the U.S. govt. can audit them, why don't they just send a trillion dollars to each of their personal accounts? Maybe they do... but the answer is: the market isn't about money, it is about social engineering... a.k.a., New World Order. That will be acheived by a crash of the general population's finances, not a bull run. It's coming.
I'm waiting for Gartman to get long before I go short.
Well, looky there. Selling has commenced.
Down 250 in twenty minutes
Some folks missed another opportunity to sell, yesterday and earlier today. ouch.
Been on here too long. I think I understood most of that. ETF's need to rebalance their portifolios by selling; Increased default risk is causing derivative holders (CDS) to up their cash by selling equities, & Momo funds need to rebalance by selling due to the drop. This is all gonna start a feedback loop which began at 2pm.
These physics Ph.d's use to design NASA space ships and invent smart phones. Now they engineer weapons of financial destruction. Nice.
I would expect a second spasm on Friday afternoon once the Treasuries' damage has been fully suppressed, leaked and then set into panic fervor.
Middle Class, we hardly knew ye
Thursday, is it? Are you sure.
so in other words, the entire house of cards is just pure momentum chasing of large order flow...IM headed to jfk to bet on arrivals and departures....
Can you say...PREDICTIVE PROGRAMMING !
LOL thought those puts i bought were going to be worthless i learned from 2007and 2009 , pump fake rallies too to volatile to go long
She dropping....down 20 points on the S&P since 1433...If he is right I will hang up my anger, rage and resentment for the rest of the afternoon
I am getting that played for a fool bile in my throat again...and that is after 3 pepcid's.....has ZH's cadre been played again by the shit on our shoes?
Je Suis Ray Finkel
I went looking for this Marko Kolanovic guy, and just pulled this up from Barron's:
Copied and pasted for your edification.
Barron’s “Stocks to Watch”
News and commentary about the stocks you need to know about today
Aug 27, 2015
1:55 PM ET
Risk Parity, CTA Flows ‘Pose Risk for Fundamental Investors,’ JPMorgan Says
By Ben Levisohn
As my colleague Steve Sears noted in a post, the rapid rebalancing of so-called risk-control funds has been put forward as a possible reason for the extreme market volatility of late.
JPMorgan’s Marko Kolanovic (JPM's head quant) weighs in:
Associated Press
Trend following strategies (CTAs),Risk Parity portfolios, and Volatility Managed strategies all invest in equities based on past price performance and volatility. For instance, in our June market commentary we showed that if the equity indices fall 10% (and don’t recover immediately), these trend followers may need to subsequently sell ~$100bn of equity exposure. These types of ‘price insensitive’ flows are starting to materialize, and our goal is to estimate their size and timing. These technical flows are determined by algorithms and risk limits, and can hence push the market away from fundamentals.
The obvious risk is if these technical flows outsize fundamental buyers. In the current environment of low liquidity, they may cause a market crash such as the one we saw at the US market open on Monday. We attempt to estimate the amount of these flows from 3 groups of investors: Trend following strategies (CTA), Risk Parity portfolios, and Volatility managed strategies. These investors follow different signals and have different rebalancing time frames. The timeframe is important as it may give us an estimate of how much longer we may see selling pressure, and when can we expect reversal….
[We] estimate that the combined selling of Volatility Target strategies, CTAs and Risk Parity portfolios could be $150-$300bn over the next several weeks (provided the market doesn’t recover very quickly). Rebalancing of these funds may appear as a persistent and fundamentally unjustified selling pressure as these funds execute their programs. In addition, there may be a positive feedback loop between all of these sellers – Gamma hedging of derivatives causes higher market volatility, which in turn leads to selling in Risk Parity portfolios, and the resulting downward price action invites further CTA shorting. All of these flows pose risk for fundamental investors eager to buy the market dip.
A good example of how price insensitive sellers can cause market a disruption/crash is the price action on the US Monday open. We believe that technical selling related to various hedging programs, in an environment of low (pre-market) liquidity indeed caused a ‘flash crash’ on Monday’s open. S&P 500 futures hit a 5% limit down pre-open, and then a 7% limit low at 9:31 and 9:33. The inability of hedgers to short futures spilled over into large cap stocks that were still trading and could be used as a proxy hedge. Had it not been for the futures limit down event, the selloff would likely have been worse as indicated by the price of the index implied by individual stocks.
If Kolanovic is correct, the volatility has only just begun.
Stunning timing on this article. Would be nice to see the dow collapse to push my eu up a bit higher !!
And let the Wolves run riot FRIDAY ! :)
HOLD TIGHT ..... lets see how it pans out.....
So....a vicious selloff commences (the CBs and machines decide to stand back and let that happen). The Fed heroically jumps in and catches all the falling knives, printing like crazy, buying everything that is sold. That's on top of all the toxic mortgages they heroically bought.
When the smoke clears, the Fed is the owner or majority shareholder in every publically traded company in America and the largest landowner and landlord in America.
Are we still gonna be here, talking shit on ZeroHedge after that? What'll be the point? There will be nothing to complain about, the republic will be gone, America will be no more. This scenario is taking shape right now. The Fed is going to end up owning America. Even if the usd is destroyed in the process, they'll be able to just "take their country and go home." I have to believe there are people in the Fed that are secretly hoping Americans will wake up and stop this inertia, because they fear for their lives and their families' lives in the aftermath of the Fed buying America with money printed from thin air. As I think about it, maybe this is why they have to let it crash.
looks like a ramp to me?
Shanghai ramps no more obviously.
TZA on sale now!
The important thing to remember is, that Main Street ( Born and bred dopes ) think this is all real and that is all that matters to these nut jobs.
Perception...
I take it JPM is short as a motherfucker right now?
Looks like they want 1970 for the close. Let's see if they get it. (They usually get what they want.)
good call
Well, kinda.
That sure was a healthy, normal functioning market today.
Gamma Hedging works both ways...short gamma hedgers could quite easily push the market up. Depending on which way it is trending, they have to be on the same trend, up or down.
Shouldn't the Fed own the entire "market" by now?
It's like the Fed stages reenactments of old market dramas to maintain a facade of a market.
Fooled ya again...
What does the JPM Head Cunt have to say about all this?
" and can hence push the market away from fundamentals.."
Thanks for the great laugh!
Theory still stands. The markets goal is to piss off ZH as much as possible.
UP 369
Look for 17,000 + tomorrow and 20,000 by the end of next week. QE4 on the way.
Down 300 in an hour. Up 300 the next hour. Perfectly normal.
The HFT playground is too rough for most kids to play in. Go ahead and play if you dare.
The market did the opposite of what this guy predicted. So much for his ability to see the future.
In other news today. Usain Bolt wins 200 m Final
https://www.youtube.com/watch?v=DQV9ebH_o0Q
Even the slowest money should be in physical by now....there has been enough warning
www.teamramgold.com/about-us
Just ordered 20 ton. going to cut it up to pocket size pieces so can use to buy groceries when fiat crashes.
What, me worry?
Exactly
Exactly
Dutchboy was retired too. He was a card. Did you buy that Bentley?
Yup, bought a Bentley, and also a Veyron (low mileage used)
Lucky you shorted!
short gamma impacts in both directions
This isn't your father's stock market anymore. Wow.
JPM meant next week Thursday?
Doesn't that violate some SEC rule when the market makers deek the sheeple?
THEY ARE BETTER THAN GARTMAN !!!
Oil up 10.75% ! On what, may I ask? I suppose the fundamentals all changed in the last 2 days.
NOPE. This is pure speculation, pure and simple. MOMO trading at its best. Notice the Dow was up only about 1/2 of what it was yesterday.
This Bear Trap is already losing steam. I'll step out on a limb here and say up 150 points Friday, Monday 750 point Crash, followed by more losses on Tuesday and Wed.
This can only mean war.
Thursday, Thursday, Thursday . . .
I thought it was Never on Sunday . . .
Black Friday . . .
Thursday?
Which Thursday did Marko have in mind, exactly?
Apparently, the rest of the market didn't read Marko's note or maybe they are all planning on something for next Thursday. Yeah, that's what it must be . . .
By the way, do you evern wonder how guys like Marko get and keep their 7 figure jobs? Did he catch Dimon with his pants around his ankles giving Yellin his gamma hedge imbalancer?