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JPM Head Quant Is Back With New Warning: "Only Half The Selling Is Done; Expect More Downside"
The first two appearances by JPM's head quant, Marko Kolanovic, caused a near-panic in the market.
The first time was the Friday before the August 24th flash crash, when as we first reported, he accurately predicted the gamma (un)hedging unwind into the Friday close which sent the market plunging and subsequently morphed into the limit down open on Monday.
The second time was exactly one week ago, when with the market up 450 points, Kolanovic again predicted imminent violent selling, which did indeed materialize not only earlier this week, but within minutes after we posted his note, sending the market tumbling to almost unchanged, before another violent bout of buying pushed it back to the highs in just 30 minutes.
Moments ago Marko came back back with a new note, and unfortunately, once again it isn't pretty.
As a reminder, Kolanovic was the first to explain just how the various "technical" price-insensitive trading strats, which include derivatives hedgers, Trend Following strategies (CTAs), Risk Parity portfolios and Volatility Managed strategies, were incorrectly positioned, and how the residual volatility resulting from either option gamma-hedging or due to any other reason, had become a self-fulfilling prophecy as one after another technical seller emerged and flooded any fundamental buying.
For those confused by all the jargon, we had a brief primer looking at the blow up in "risk parity" funds earlier today: it is a required read for anyone who wants to get to the bottom of the marginal market moving forces at play today.
So what is Kolanovic' update today, and is volatility finally coming down? Not at all.
In a note released moments ago, the head JPM quant says "we have been asked to assess the remaining amount and timeline of these flows and their impact on market price and volatility. In our report, we outlined four groups of strategies: Volatility Target Strategies, CTAs, Risk Parity strategies, and Derivative Hedgers.
Here is his assessment:
- Volatility Targeting (VT) Strategies follow fast signals (such as short term realized volatility) and rebalance quickly (e.g. 1-5 days). Selling pressure from these strategies (estimated to be $50-75Bn) peaked last week and is largely out of the way now. Short-term realized volatility increased from ~10% to ~30%, indicating these funds already reduced their exposure by ~70%. If volatility were to increase further (e.g. in-line with the peak realized volatility in 2011 of ~50%), these funds would have to sell progressively smaller amounts (e.g. an additional ~10-15%). The question is when these funds will start buying. Our view is that the re-levering of these funds is not imminent (e.g. not in the next few days). Leverage in these strategies is a function of trailing volatility (e.g. moving average of the VIX or 1M realized volatility), and even if the VIX were to start declining now, trailing realized volatility would stay elevated for the next ~3 weeks.
- CTAs – Following our report last week, we have been getting questions about CTA equity exposure and the timeline of CTA flows. Our CTA replication models suggested that CTA equity exposure at the end of July was very high, at approximately 30% (or $80-$100Bn notional). This allocation to equities is also consistent with the performance of CTA indices in August (Bonds and Commodities were roughly flat, while Equities were down 8% - thus, a 30% equity allocation would match the -2.5% CTA observed performance). As the trend following signals (e.g. 1M, 3M, 6M, 12M price returns) started turning negative in August, CTAs started de-levering equities (in early August). As of September 1st, our CTA replicator indicates that the strategies should be ~25% short equities (short ~$70bn). This would indicate a ~$150bn swing (selling) of CTAs’ equity allocation.
However, CTA strategies don’t rebalance as quickly as VT strategies, and it often takes 1-4 weeks to achieve their target exposure. To assess where we are in the process of CTA de-leveraging, we have calculated the daily beta of a broad CTA index (HFRXSDV) to the S&P 500 shown in the figure below. Note that the CTA S&P 500 beta dropped from record levels at the beginning of August to zero currently, indicating that CTAs may have completed more than 50% of the expected equity selling (as noted above, target equity exposure is negative ~25%). We estimate that CTAs may continue selling equities for another ~2 weeks, and that the flows may total ~$40-$60bn. Once CTAs establish their September 1st target positions (short equities), they will no longer be selling, and risk becomes skewed towards CTAs buying equities. We estimate CTA flows in other asset classes include a reduction of USD exposure (from $40bn to zero), no change in bond positions, and some short covering of Oil and Gold (from short 40bn to short 30bn).
- Risk Parity (RP) –We studied this allocation method in our Primer on Systematic Strategies, and argued that it is one of the soundest approaches to managing portfolio risk.
Risk Parity strategies de-lever when asset volatility and correlation increase. In our report last week, we estimated that risk parity outflows from equities may total $50-100bn on account of the increase in market volatility and risky asset correlations. These rebalances have started, but, given their typically slower rebalance frequency (e.g. monthly), are largely incomplete. We believe the bulk of the risk parity flows are yet to come, and this may add selling pressure to equities over the next 1-3 weeks. To illustrate this point, one can look at a sample multi-asset Risk Parity strategy such as the Salient Risk Parity index. The beta of this index to the S&P 500 (shown in the figure above) reached highs of 60% in early August, and has dropped to about 45% currently (compared to a beta of 0% during some of the previous episodes of market volatility).
Please note that in our estimate of Risk Parity assets we have included funds that use Risk Parity as a risk management overlay and tactical allocation, and not just the dedicated Risk Parity (Quant) hedge funds. One could perhaps even broaden the definition of Risk Parity funds to include investors that change their strategic allocation based on expected volatility (e.g. such as CalSTRS announcement of plans to reduce equity exposure in the near future, recently reported in the media).
His take home assessment: only half the selling is done, and another $100 billion remains over the next 1-3 weeks:
In summary, we estimate that only about half (or slightly more than half) of total technical selling was completed to-date (mostly completed by VT funds, half by CTAs, and a smaller fraction by RPs). We estimate that a further ~$100bn of selling remains to be completed over the next 1-3 weeks. As a result, we expect elevated volatility and downside price risk to persist. In our view, the risk/reward for equity investors remains in favor of waiting, rather than being fully invested until there is more clarity from macro data and central banks.
The problem is that since this is a self-reinforcing loops, the more selling there is, the more selling there will be unless some central bank forcefully intervenes. Draghi tried earlier today, but it was not enough.
* * *
Finally, anyone still confused about the infamous 3:30pm ramp (or recently tumble) phenomenon, the answer is simple: all gamma hedging:
Gamma hedging of options, levered ETFs, variance swaps and other convex products continues to be a significant driver of price action near the market close. As we predicted in our note on Friday, the typical impact is during market down days (and is causing an acceleration of market moves from ~3:30PM to the close). Note that the impact of gamma hedging may also push the market higher (if the market is up from the previous close). For instance, on September 2nd gamma hedging likely helped squeeze the market higher into the close (figure left). We have also noticed that gamma hedgers are moving their hedging activity earlier in the day in an attempt to avoid losses. There is also a strong possibility that option hedging flows are being anticipated by speculators. This can lead to price patterns in which intraday momentum happens earlier in the day, briefly reverses as speculators exit their positions, and finally reappears at the market close as hedgers with no flexibility execute at the close (e.g. levered ETFs or var swap/put basis that often has to be done MOC). Gamma positioning of S&P 500 options remains tilted towards puts, and we expect upward pressure on realized volatility from gamma hedgers to continue over the coming weeks.
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"We will do this, and we will do that, as we rape you on the downside and profit on the upswing."
Without churn and volatility, the banking conglomerate is nothing. A level market is useless to them.
In the new normal that advice is nothing more than a wink and a nod to buy for the "smart" ie. criminal money
I never listen to anything Dimon says. He is just talking his book.
JPM already duped me once a few days ago with a similar post....and now they want to dupe me again??? Holy Fuck.
Fool me once, shame on you, fool me twice, shame on me.
And yeah, fuck Jamie Dimon.
Fool you three times, join Dubya in the corner
Selling is 5% done - not 50% done.
http://www.indexindicators.com/charts/nyse-vs-nyse-stocks-above-200d-sma-params-3y-x-x-x/
.
Nice period...don't be a douche.
PULL THE FUCKING TRIGGER!
As if there should never be downside pricing risk?!
Screw the selling, when do the detonations begin?
Uhh, Tianjin? or did you mean TBTF bankruptcies?
"Push the button Max!"
bring it on, i've been waiting patiently for years now.
The Titanic is leaning heavily right now, she's taking on water and fast. Slam that 200 ema baby, slam those DJI 5-day & 5-year 200 ema butt-cheeks
Will we see some real fear & capitulation in the market yet this week?
More like, only 1/5th the selling is completed.
Just wait until the margins calls start rolling in and accelerate the selling even further.
Ludicrous speed is the goal.
I long for the old days. You research a stock, look at the overall market, and then buy the stock thinking it will play out over a couple of years.
Now you look at a chart (or have a PC program) buy a stock or sector using leverage of some type, go for a piss and if its up when you get back in 3 minutes you sell, and if its down you sell.either the trade works or not.
Ah yes, I remember it well.
When we get back there, the newbies will piss and moan, and never believe it, when and if....
It's easy, you go buy an actual operating business with a good practical management and making quality things people will always want.
Never touch the market again - and don't list on it either.
If I read this right, some things are moar high frequencier than others?
He was too cute with the 25% and the 33% routine.
I don't know......., what does gartman have to say about all of this?
Say, where is Beeks? BEEKS???
Sen. Franken should have access to the shipping records.
(Just watched it again last night. Funny stuff.)
This ain't your daddy's trading.
Now I know why quant is paid big bucks
Conservative estimate...
In other words; QuantFrankly, we're Fucked...
esoteric humor...hah
Gamma? Like Gamma rays radiation from a nuclear bomb?? Man, now it all makes sense. Theres a nuclear bomb coming to market. S&p to the 1000's, or wait, what if I put a buy order. Seriously, it's a nice theory the gamma hedging. Lets wait for the momentum within the range
All of the above is magician's distraction. The real truth is that they're looking at clients' accounts and margin balances and just know that they have to sell soon. heh.
According to MarketWatch.com:
http://www.marketwatch.com/story/panel-of-ex-fed-officials-say-no-rate-h...
Panel of ex-Fed officials say no rate hike will come at September meeting
Published: Sept 3, 2015 1:46 p.m. ET
By Greg Robb
Senior economics reporter
The global economic outlook has worsened since the Federal Reserve’s last meeting in July, which will lead the U.S. central bank to hold off on lifting interest rates in September, a panel of former Fed officials agreed Thursday.
The global economic situation has deteriorated and “not by a trivial amount,” said Joseph Gagnon, a former Fed staffer and now senior fellow at the Peterson Institute for International Economics.
Global stock markets are down 5% to 10% since the Fed last met, and the dollar is up 2% on a broad trade-weighted basis, he noted.
“The Fed has cultivated this recovery so carefully, with such enormous effort, for over the last seven years — are you really going to take the risk in this environment with unstable global financial markets and real macroeconomic questions about the global outlook that are not just about volatility?” asked Julia Coronado, chief economist at Graham Capital Management .
The former Fed officials spoke at a panel discussion sponsored by the Brookings Institution.
Jon Faust, a professor of economist at Johns Hopkins University and a former adviser to Chairwoman Janet Yellen, said Fed officials will delay, awaiting the “macrosignal” behind the recent market turmoil.
Donald Kohn, who served at the Fed for 40 years and ended up as its vice chairman, said two things would make him hesitate to hike rates if he were voting at the September meeting: very low inflation and low market expectations of a September move due to recent market volatility.
Kohn said he would want the Fed statement after its September meeting to stress that rates will rise before the end of the year. “That will help build in the expectation of higher rates later this year and put that in the markets, so when I finally did move it wouldn’t be such a surprise,” he said.
Fed officials have argued that the timing of the first rate hike doesn’t matter as much of the path of interest rates. They have stressed that the rate path is likely to be a gradual one.
Coronado took issue with this, saying it was “not entirely true for the markets that translate Fed policy.” A September move would be a “big surprise” and viewed as a “policy mistake,” she said.
Coronado said there were less than 20% chance of a rate hike in September. Gangnon, Kohn and Faust said the odds were higher but still less than 50%.
Which was ... 4.5 weeks ago.
Time to go long?
Relax guys, it's September by Zork's sake... Time to clean up portfolio's from losers and sit tight - which means more selling. NASDAQ is supposed to go down a hill, S&P to tread water and the DJI to go nowhere at best.
Today the ECB announced their intention to do more of the same, pumping money in the ECOnomy, which as we know aint working. More of the same shit, just as ususal
In a couple of weeks I expect YELLen to do more or less the same, unless she has decided she wants to get fired on the spot and crucified before that.
Its allright. All fine, really. My puts are pulling me up on a daily basis...
Breath, be happy, and buy puts...
Zennnnnnn.....
I contend that every unit of currency being printed is actually shrinking the pool of investment capital. They are buying bonds allowing investors to unwind leverage. Lower leverage equals less money available in the capital pool.
Helicopter drop is only thing that will work at this point.
Relax guys, it's September by Zork's sake... Time to clean up portfolio's from losers and sit tight - which means more selling. NASDAQ is supposed to go down a hill, S&P to tread water and the DJI to go nowhere at best.
Today the ECB announced their intention to do more of the same, pumping money in the ECOnomy, which as we know aint working. More of the same shit, just as ususal
In a couple of weeks I expect YELLen to do more or less the same, unless she has decided she wants to get fired on the spot and crucified before that.
Its allright. All fine, really. My puts are pulling me up on a daily basis...
Breath, be happy, and buy puts...
Zennnnnnn.....
Oooops, sorry for the double post...
Dow up 70 since that comment
How the hell does this banker know only half the selling is done, like he's some kinda fortune teller? Only one things for certain, nobody knows the future. We can only speculate and place our bets where it makes most sense.
Yellen does...she can print trillions forever...she just needs permission from Goldman and JP Morgan
Yellen can only print as long as she can tax to remove the surplus currency from the market. When the little people have nothing left to steal, the cycle of wealth transfer will end with hyperinflation to the moon. Then there will be technology enhanced industrial scale carnage.
Smoke 'em while you can.
Attention, major move on the way. Regionals very active, the rise of darkpools
Translation: BTFDYFI
It's all been hollowed out now. It's just of matter of timing when Mr. Yellen says Pull It.
Gotta make sure the 1% buddies are safely out of the way first.
When JPM says sell ... it might be a time to buy.
there was a time when information like this would have been valuable. alas, these days the only possibly useful information is which central banker will do what on any given day.
It would be most useful if we knew which window in the high-rise he will pass by at a given time.
The DOW trades like a fucking penny stock. Algo's fist fucking each other with free levered up 1's and 0's. these aren't markets - hell this isn't even trading. This is a video game. The banks know that if their prop desks blow this this up that their buddies in DC will cover their losses and assign blame to anyone but those responsible. The schmucks who think their money is safe in a bank will be termed 'investors' when the market implodes and they'll lose everything and guys like Corzine will wink and nod and walk away free and rich.
i've almost had enough of this shit - anyone else?
not quite like picking stocks anymore, is it. your fighting computer systems that the deep pockets have spent billions on.
probably just best to wait until some kind of trend reasserts itself. problem with that is, it happens to fast.
Sounds good..... now when will they announce QE4 and start the melt-up?
Not sure what to make of this guy's call - he was wrong last week and he will be wrong again.
Debt is not the cause of slavery. The desire to live beyond one's means is the cause of slavery.
What the fuck does this article mean? Every seller has a buyer. I could just as easily say only half of the buying has been done.
he mean crash, Spungo.