JPMorgan's "Gandalf" Quant Nailed It Again

Tyler Durden's picture

Over the past 3 months, the name Marko Kolanovic, head of JPM's Quant Team, has become one of the most loved, or feared (depending on which way he is leaning) and respected on all of Wall Street for one simple reason: think Dennis Gartman, only correct every time. Well, the man Bloomberg calls "Gandalf" just did it again - "nailing" the top in stocks last week.


There are three possible explanations for Kolanovic’s mojo:

1. He’s Gandalf. This guy is truly a wizard who deciphers the quant tea leaves like few others out there.


2. Self-Fulfilling Prophecy. There are enough traders and investors out there who are so completely flummoxed by this market that they’re inclined to believe Marko’s take and trade accordingly.


3. Random Luck. If you flip a quarter four times and it lands on heads four times, it doesn’t mean you’ve found a magic quarter.

The reason, however, as we have profiled before, is simple: he has somehow succeeded in calling every single market inflection point since the August 24 flash crash, and we have documented them all:

But his most prodigious call came on September 24 when we wrote "Bears Beware, JPM's Head Quant Just Flipped To Bullish: "The Technical Buying Begins." So it did, leading to the biggest market ramp in history, and biggest monthly point gain ever.

But then, on November 5th, he said "The Rally Drivers Are Gone" and 'mysteriously' this happened...


A reminder of his reasoning....


In our reports in August, we forecasted the selling pressure from option hedging and pointed to the role various systematic strategies had in the selloff. In our note from September 24th, we predicted a reversion of these technical flows and their potential to lift the market. We believe that most of these equity inflows played out over the past month and were a significant driver of the October market rally.

Just add a historic short squeeze and buybacks greater than even during last year's record, and you get the three catalyst that led to the massive rally since September. More importantly, according to Kolanovic the "technical inflows" that led to the rally are now over.


After the September option expiry, investors rolled protection lower, and as the market moved higher, convexity in index option products declined. We estimate that hedging of index options during the week of September 28th contributed to ~$20bn of equity inflows. During the month of October, the gamma exposure of put options declined significantly (and gamma of call options increased), such that the net effect of option hedging has been muted since (and likely contributed to lower realized volatility given the imbalance of option gamma towards calls).

Where did the inflows come from? Why the momos of course, as the best performing stocks were once again those which were going up because they were going up:


Perhaps the most significant inflows came from trend following strategies, i.e. CTAs. As discussed in our previous reports, all of the equity momentum signals (short, medium and long term momentum) turned negative in late August. As a result, CTA Equity exposure (as measured by its equity beta) reached record short levels in mid-September. On October 2nd, short term momentum turned positive (e.g. 1M momentum) and shortly afterwards long term momentum turned positive as well (e.g. 12M momentum). This implied a significant re-levering of CTAs during the week of October 5th (which we observe from the sharp increase in CTA beta – as shown in Figure 1).



At the end of October/early November intermediate equity momentum (e.g. 3M-6M) also turned positive, and this resulted in another large equity inflow from CTA strategies. Currently, all of the equity momentum terms are positive, which suggests that CTA equity exposure should be at the high levels observed in early summer (also confirmed with the short term beta of a CTA index to the S&P 500 in Figure 1). In short, trend followers made a full circle of equity investing from record long, to record short and  then long again over the past quarter. Our estimate of equity inflows from trend following strategies over the past month is ~$70-90bn.

Then it was the constant vol traders, who too were caught in a feedback loop of buying stocks as vol dropped:


Given the sharp decline in realized volatility, strategies that target constant volatility also had to re-lever. Figure 2 shows estimated equity exposure of Volatility Targeting strategies (our asset/signal assumptions about Volatility Targeting (VT) strategies are unchanged: ~$300bn in assets, with an average 8-9% target volatility).



VT strategies likely started buying equities in late September and through October, at a pace of ~$5-8bn per week (or a total of ~$30-50bn). Given that levels of volatility are still below those observed in early summer, in theory, VT strategies could continue buying equities if volatility were to decline further. However, our view is that realized volatility is unlikely to drift much lower (e.g. to the summer lows), so any residual buying from VT strategies may not be sufficient to push the market much higher.

And then, the infamous risk parity funds:


Finally, we want to address Risk Parity strategies. Our estimate of assets following various versions of Risk Parity is ~$500bn. However, Risk Parity strategies employed by Hedge Funds may be substantially different from those employed by e.g. Pension funds (using risk parity in house as a longer term asset allocation method). For this reason, we use different models for ~$150bn in ‘HF-like’ risk parity assets (leverage >1, higher rebalance frequencies, and typically using volatility target overlays) and ~$350 in Risk Parity pension asset allocations (leverage < 1, slower rebalance frequencies and signals, and typically not using volatility targeting overlays). Figure 3 shows the equity exposure of a prototype ‘HF-like’ Risk Parity allocation, which indicates that these funds de-levered in August and September, but re-levered in October to finish at their pre-crash equity allocations.



Equity inflows from these funds may have amounted to ~$20bn in October. Risk parity strategies that use slower signals (e.g. 12M covariances) did not materially change their equity exposures.

His conclusion: the catalysts behind the furious, technically-driven October rally are now gone, but unlike mid-August, at least the likelihood of another flash crash is lower...


Summarizing technical flows from option hedges, volatility targeting, CTA and Risk Parity funds, we believe that these strategies largely re-levered to pre August crash levels. This was a significant driver of the S&P 500 performance in October and hence poses some downside risk. Additionally, given the tight trading range over the past year, CTA signals have risk of changing on relatively small market moves (i.e. there is elevated ‘CTA gamma’). On the other hand, given the lack of a large put option gamma imbalance, and perhaps some residual buying from VT funds, near term the market is likely more resilient to the risk of another technically driven flash crash.

... unless the Fed surprises: according to Kolanovic one person can overturn the cart, and that person is Janet Yellen if she once again confuses the market:


Over the past year, macro momentum trades increased exposure to various liquid assets in anticipation of a rise in US rates. Example trades include going long USD and Developed Markets, and short Commodities and Emerging Markets. These macro trends have also percolated into equity long-short momentum trades which are currently short Energy, Materials and Industrials, and Long Health Care and Consumer Discretionary sectors. Several of these macro and stock trends are relying on an anticipated Fed tightening that would boost the USD and further weaken commodities and EM assets. The risk of this increasingly one dimensional positioning across CTAs, Macro and some of Equity Long-Short managers is that these trends don’t materialize and trades become too crowded. The result could be a sharp reversion as positions are exited.

The only question then is: does the Fed want to risk such a "sharp reversion as positions are exited." The answer is revealed on December 16

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HedgeAccordingly's picture

Delta hedging in a thin market HFT filled shadow liquidy market = large violent moves in short periods of time and institutions go to market to hedge. 

Hedging Or Cross Hedging? It Makes A Difference
junction's picture

Head quant Marko Kolanovic will be right until he is wrong.  The French Friday 13th attacks should create a pall on the markets that will extend into next week.  Then Obama will ramp up his attacks on Russia for claiming ISIS is an enemy of Western civilization and Christian culture and the Democratic Party will have its Hitlery coronation debate.  And things will continue going downhill for the USA, more DHS trained cops gunning down civilians, more Bush narcotics getting distribured in the USA and more crappy school lunches courtesy of trannie Michelle.  And, of course,  more layoffs courtesy of thieving American corporate CEOs out to boost their year-end bonus. 

neilhorn's picture

That reminds me: I haven't had my narcotic fix today. I'll have my school lunch first, so my vomitus will have substance.

BorisTheBlade's picture

Well, perhaps the reputation is built up for the exact moment it needs to be shredded, like signal the market moving way and capitalize on the exact oppossite. Just a guess.

Carpenter1's picture

LOL! Anyone with access to JPM's intel and resources could nail every call. THEY OWN THE FED FOR FUCK"S SAKE!! How many times do we have to be bashed over the head before we understand where the lines are drawn??

johnconnor's picture

I'd also be a genius predicting the markets if I were engaged in rigging them...

NoDebt's picture

"If you flip a quarter four times and it lands on heads four times, it doesn’t mean you’ve found a magic quarter"

Well, fuck, there goes my last good idea.

knukles's picture

You still owe me a buck for that quarter, bub.

LetThemEatRand's picture

Prediction -- the Fed raises interest rates in December.  Why?  Because they know that even MSM is starting to question why they can't if everything is awesome.  When they do raise rates a tiny amount (which is a joke, but that's neither here nor there), they use the PPT at full throttle to keep stock prices stable.  They also get a drop in PMs which they want anyway, and they get to say they did it.   

Oldwood's picture

One bump up, just to prove they can, and then while the SHTF they will go sub zero in their critical life saving role. Every action, every policy is to create another opportunity to react in a direction aligned to their agenda.

BullyBearish's picture

Part of the plan is to LOAD UP THE SHORTS for a very helpful SQUEEZE at just the right time...but will it work this time?  The last SHORTS LOAD UP lasted for 30 trading days...they don't have 30 trading days before Christmas.

YesWeKahn's picture

There is no magic, JPM makes the market.

LetThemEatRand's picture

Gandalf is smart enough to get his Fed inside information via briefcase at the stripclub instead of by email like that idiot who was busted recently.

Winston Churchill's picture

Call me nostalgic, but I prefereed the days when those briefcases were just fikked with cash.

Same as it ever was.

GooseShtepping Moron's picture

It's not really a complicated matter to become a Gandalf market timer. You just have to develop the mental discipline to look only at the facts and ignore the hype. The difficulty is in the execution. That, and having access to enough quality data to stay informed. Most people are lacking in one or both respects. Ordinary human beings are almost by definition frozen out of the second category. We can do something to enhance our prowess in the first category, but I fully acknowledge how difficult it can be when you have a thousand other pressures in life to deal with.

buzzsaw99's picture

the answer is obvious. he can see certain entities trades and knows which ones have been moving "markets".

AGuy's picture

"the answer is obvious. he can see certain entities trades and knows which ones have been moving "markets"."

Do you mean, when a large Hedge fund like Bridgewater liquidates a third of its stock holdings?


inosent's picture

Not that it matters:

Basically, I expected Nov to take the edge off. And don't expect a fill 'close' to support (which is Oct low basically).

It is an evil world. No other way to see it. The France thing showing up after hours (market on close) is conspicuous. Same thing happened 9/11 - well, that was just before the market opened. I send out my sincerest condolance to the victims families. The profiessional military nature of the operation might have a connection to the markets. Either way, like i said, the world is evil. There are ppl out there who'll pretty much do anything to drive prices down  - but I am telling you there are big hands underneath, and I would not be looking for a crash. More like an upcrash, but the break of new all time highs wont happen until mid late Dec or Jan. Something like that.



venturen's picture

who even cares what the market is a fixed casino.

Whatta's picture

HellzBellz boys and girls, I called the top too. It was simple. The FANG top. The market topped last summer after FANG earnings, and it did this Q too after FB. Take away the 2 sigma moves after those earnings announcements and you have nowhere else to go but down.

Check my stream on StockTwits (@rahagar), The Fang Top was shown there a couple of weeks ago. And I don't make a billion a year skimming other peoples money like the JPMorgue folks! #PayMe

GotGalt's picture

Fuck twitter and the asshats that reside there.  #youareatool

armageddon addahere's picture

4. Hot dice. The streak peters out soon

5. He really knows. Will hit them every time until conditions change and the market no longer conforms to his theories. Give him 2 years.

5. He really REALLY knows. Racks up an impressive record over 20 years. The number of people who have done this is vanishingly small.

armageddon addahere's picture

My guess is, inside information. It is possible to forecast likely events but not get the timing so exact unless the game is rigged (and we know it is).

hedgiex's picture

Go easy on this new flash. There is a momentum to his dances until the music change. Dancing in deformed markets is a skill. His explanation much better than the billions of noises from the defunct crowd of fundamental analysts and economists as well as the technical analysts fixated on models from a different Age. 

Gatos Locos's picture
Gatos Locos (not verified) Nov 13, 2015 10:16 PM

Get 240 people  to flip a coin.  If you get  heads you continue flipping  120 get heads.  Flip a coin again.  60  get heads.  Again and 30 get more flip....and you have the 15 geniuses.   

GRDguy's picture

Give me a break; it is damn easy to predict the top when you're the one who starts the avalanche. 

Rhino69's picture

JPM is a big one in the finance industry. Any chance they might just have a hand in all this? Every dummy knows, you push any index far enough, the stop loss orders kick in.

neilhorn's picture

' the stop loss orders kick in."

Stop loss used to be a way to prevent loss for an individual investor. Now they are targets for financial engineers who are aiming projectiles at the heart of the naive.

Johnny Horscaulk's picture
Johnny Horscaulk (not verified) Nov 14, 2015 4:25 AM

If i were lead detective say - lets begin assuming 2. But lets examine our premises too: Do we know for sure, I mean really know, that he isnt a fucking wizard?

Or that others are coordinating with him, and he in turn is being fed by say a goldman or boa?

On the cogbeh side > you have to know at least this stuff as a start, yeah?:

Or just what gatos said.

Looking at what goldman and boa did wouldnt hurt though.

Raoul_Luke's picture

Let me get this straight. The Fed has maneuvered itself into a situation where if they don't raise rates the market crashes on an exodus from macro momentum positions and if they do raise rates the market crashes on the strengthening dollar's effect on corporate profits, the economy and deflation?  Oh this should be fun...

Danno Anderson's picture

Better take another look at the charts as the S&P500 is now higher than it was Aug 21 thru Sept3 when all the great bearish calls were made.

This is just another Wall Street puff job.  Wonder how much was paid to the author ?


Neochrome's picture

Because, real science...

He graduated from New York University with a PhD in theoretical high-energy physics.