Here Is The "Catalyst" For The Market's Inexplicable Surge: A $17 Billion Trade Gone Wrong

Tyler Durden's picture

We have noted in the last few days the divergences between US equity and volatility markets and chatter of a major fund needing to liquidate positions. After today's price action (and more color from trading desks) we are starting to see the 'fingerprints' of what appears to be a multi-billion dollar forced short cover, reportedly by Catalyst Funds' Hedged Futures Strategy Fund (HFXAX), that has almost perfectly correlated with the linear surge in US stocks.

As RBC's Charlie McElligott, who dug deeper into the details behind this move, notes the melt-up in the S&P is the result of "a purported / murky melt-down over the past week in a large trade by a multi-billion Dollar (open-ended) futures fund which sells vol on S&P.  Without going into specifics, there is market speculation that the entity is effectively short upwards of ~$17B of SPX (deltas to buy) through selling February expiry upside 1x5 (or 1x4) call spreads."

The trade was going well, until the S&P rose above 2,300. At that point the "convexity seemingly ‘kicked-in’ as witnessed by market participants, the short-gamma ‘take’ since has been nothing short of astonishing."

He notes that "the ‘fingerprints’ in trading SPX 3rd weeks was notable yesterday, where big 2280 calls traded (amongst others) which created $5.5B of deltas to buy in-and-of itself. "

As visualized in the chart of e-minis below, the ‘short gamma’ grab is evident since we took-out the 2300 level.

Tying the synthetic move to fundamentals, the RBC head of cross-asset strategy then notes that "US nominal yields still can’t meaningfully “punch through” 2.50 / 2.52 level, while real rates and USD actually trade LOWER despite an outstanding run of data (especially inflation) and hawkish Janet Yellen" and adds:

I think there is a two-fold rationale here:

  1. As highlighted earlier in the week by Mark Orsley and me, the turn in Chinese data and concurrent squeeze in short Yuan trades actually has alleviated some of the PBoC’s UST-selling pressure.  That and 
  2. the market is still ridiculously short duration, with some leveraged funds likely covering out of frustration.  Either way, it seems reasonable that a sharp-reversal in broad risk-asset sentiment could REALLY squeeze this short-base, and with no China-supply this time around.  A FTQ-bid would drive rates lower and could see recently-accelerated “value” and “cyclical” equities-plays get wacked, while duration-sensitives (defensive yield-plays) would be sent scrambling-higher

What, according to RBC, is the catalyst that could make things "get weird"?

The potential for President Trump’s speech to a joint-session of Congress on February 28th to disappoint very-high market expectations with regard to tax-policy clarity.   We’ve spoken for months now on how the ‘corporate tax cut input’ is the largest anecdotal driver of the S&P / single-stock estimate upgrades since the election, with the generic assumption being applied of a 20% corp tax rate.  The issue is this: it is abundantly-clear at this point that in order to fund a cut to a 20% rate, you HAVE TO incorporate a B.A.T. as the funding mechanism…otherwise the best-case cut is significantly weaker.  But as this Senate / CEO “anti-B.A.T. food-fight” drags on, it’s incredibly doubtful that Trump will be capable of making any specific claims to the larger policy construct in just such a short period of time, as it would require TREMENDOUS progress from the current bickering.  And if today’s public-portion of Trump’s meeting with retailer CEOs counts as anything, there was no mention on camera between parties of the B.A.T. whatsoever.  Again, this reiterates to me the high-potential for disappointment.

However, more ominously, McElligott concludes with his biggest concerns:

This equities upside short-gamma grab has taken out a ton of ‘bid on the downside’ in equities index, in the case that we were to see any sell-off post a Trump speech disappointment.  This lack of cover-demand on a vacuum-move could see sloppiness develop, as it seems that the data and Fed itself are no longer dictating the market story at this stage - whether stocks, fixed-income or vol.  “Policy” is now firmly “in the driver’s seat,” and that is where I see the least degree of confidence in the market.

 

I’m worried that this stock ‘melt-up’ move is extraordinarily mechanical right now - almost entirely the aforementioned forced-covering, not high conviction induced-buying - and may be sending a “false signal” which is potentially dragging-in new buying on the breakout to new highs.

As he concludes: "This could lead to a scenario where a market can “collapse under their own weight." Indeed, because if one removes the forced buying from the "blowing up fund" (which as noted above is allegedly the Catalyst Funds' Hedged Futures Strategy Fund), there is certainly a long way down.

This should surprise no one of course - anyone who has experienced the moves of the last week or so is exasperated, as our trading desk contact noted earlier - "something snapped" - and the ammo for this mechanical move is out on Friday when the options expiration.

Finally, for those wondering, here is the relationship between aforementioned culprit for the market meltup, the HFXAX and the S&P. One can see where things started to get weird.

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Bam_Man's picture

Welcome to February, 2000 version 2.0

Only difference is that this time, there is no "new economy".

There is hardly any "economy" at all, except for $Trillion+ deficits and endless CB printing.

Paper Boy's picture

Fiat will take teh path of least resistance... up and out through the smokestack.

walküre's picture

Soros behind it?

Soros wettet ein Vermögen gegen Trump

https://www.welt.de/finanzen/article162090133/Soros-wettet-ein-Vermoegen...

Soros betting the farm against Trump....

NotApplicable's picture

Question is, does Janet have his back? Or is he swimming naked?

YouJustMadeTheList's picture

Don't go swimming naked with Janet

 

Pro tip

ChanceIs's picture

Nor with Angela.  Especially not Angela.  Or Madeline Albright for that matter.

The central planners's picture

What about Maxine waters or donna brazile?

Conax's picture

People that might relish the job and do great can't buy in. People that can buy in get there and hate it as they are watched and followed everywhere, spied upon.. Only the powermad even go for it anymore.

This is why we can't have nice things.

justinius1969's picture

Bit more wiggle room me thinks no?

weburke's picture

the case can be made that the run up to the year  2000 was short sqeezes.

GUS100CORRINA's picture

When I read these charts, I thought of one acronym.

LTCM ... Remember these guys ... KINGS OF THE "SHORT" TRADE IN VOLATILITY

This market is a powder keg waiting to blow.

All that is needed is a lit match and BOOM!!!!!!!!!!!!!!!!!!!!

Fundies's picture

So how low does it go ? Cant be much more than a few thousand at the most.

SoDamnMad's picture

You would be miserable too if every asshole (and there sure are a lot of them) was taking a cheap shot at you. She could fall on a handgrenade to save 50 BLM/ Muslimchildren and the MSM would rip her apart.  Gotta stop and go reload some more. Season for assholes opens in a few weeks and I want to be ready.

Sick Underbelly's picture

What the hell could possibly go wrong?  :-)

Zero_Ledge's picture

I have a similar trade on.  Long 2375 Calls and short 5X 2400 Calls.  So I wouldn't mind a little more squeeze before Friday morning. Just need Janet to keep it below 2400 before Friday. (Tyler = Janet. Shhhh. Don't tell anyone.)

 

Fake Trump's picture

I won't mind going to bed naked with her. I like BIG girls.

gatorengineer's picture

You can't as far as I know naked short volatility so there is a counterparts that is long with a very short time to Opex.  In short,pun intended, story doesn't explain the whole thing.  I think strong dollar move shows the carry trade is moving from bonds to blue chips.  No other explanation for ath on appl.

Mr. Pain's picture

I was thinking about old George when I was reading this article.I hope he loses it all!

NaiLib's picture

:) To be finished off the same way....by a rate rise in March.....and the 3 years melt down in equities , right?

 

 

Bam_Man's picture

History doesn't necessarily repeat, but it often rhymes.

stocker84's picture

You're right.. It does rhyme, Mark Twain.

If you fight the algos and the Fed,
You're portfolio will end up dead.

If you bet against the bank,
Your trading balance will surely tank.

Chart'em and Trade'm if you got'em,
But if you fight the Fed, they'll get your bottom.

This advice, i give real quick,
If you don't like it, suck my d....

JRobby's picture

Wise policy if one does not want the word "annihilated" on one's death certificate. 

gatorengineer's picture

I dunno i kinda like blaze of glory...

pipes's picture

So what rhymes with 9-11 I wonder?

stocker84's picture

That's a toughy...

Nine eleven... There won't be a den of vipers up in heaven?

Den of vipers.. new testament reference. Their father... The first murderer. Who that was? Cain.. Descendant of Satan... Notice... Eve had twins... Fraternal. She gave birth to Cain then "continued in labor" with able. Able died without any children because he wasn't mentioned in Adams genealogy? Family tree starts with Seth. Cain had children but for some reason that only those with eyes can see, he's not mentioned in Adams genealogy. You know how the Bible loves to do that... Go down the list. For a purpose... To eventually show the lineage to Mary and Jesus.

So, yes... It's the descendants of Cain that prosecuted Christ. Jesus tells them indirectly. "You are all like your father" who is that? "The first murderer" who that was? Cain. You missed that? You missed it????? Eyes yet you cannot see?

How did Satan get up on that? Original manuscripts say, Satan wholly seduced Eve. Then she gives a little something something to Adam. Then when the Lord came, they covered their privates. Why? Because they used them to have sex. No apple, folks. Fruit of their loins. What did they cover with? A fig leaf.
Lots of references to figs in NT
parable of fig tree
The fig tree that He curses.

Hmmmmm
OK... Since I'm on the topic of off topic...
To those who argue with pro choicers... Two good Bible references. One... Mary had just conceived and went to visit her cousin Elisabeth who was pregnant with John the Baptist.. Yes, Christ and John the Baptist were related... John sensed the presence of his Lord and lept in Elisabeth's womb. Eyes, yet cannot see?

God said to Jeremiah..."Before I formed you in the womb I knew you"

p.s. don't condemn the Jews. Christ was a Jew. Condemn the descendants of Cain. Different kinda Jew. The Pharisees, the scribes... Etc.

JRobby's picture

So is it ok to eat figs or not?

Pizza is right out!

Agstacker's picture

So how does that pair up with God's command to "be fruitful and multiply"?

 

 

Carpe Tutti Bastardi's picture

Could it be that Adam and Eve commited the act of Sodomy,

as it was "the forbidden fruit"?

and NOT 'something something'!

JRobby's picture

Fiction does not even approach the definition of this delusion. 

Da chief's picture

Nutty forex trader has this right......US Dollar gonna dump hard - like....tomorrow.

https://forexkong.com/2017/02/02/usd-update-failed-daily-cycle/

Squidbilly's picture

SHUT IT DOWN THE GOYIN KNOW!

booboo's picture

Like a forest fire creating it's own wind storm

Hohum's picture

The rise of the stock market is an economic system eating itself.  No confidence to actually "invest."

itstippy's picture

Brilliant.  And it even fits on a Tweet.

Bravo, Mr. Hohum.

Peak Finance's picture

LO fucking L

So the bulk of my shorts expire Friday

SO

Maybe as soon as Monday, nice market correction when short squeeze ends OF COURSE AFTER MY SHIT EXPIRES

I still have some shorts but have not entered too many new postions cause I havent a fucking clue whats going on anymore. 

knukles's picture

No.  The Madness is Not Going Away.
Think of it behaviorally.  What misery and pain that transpires as the norm today, that which is accepted, simply sets the standard or "normal" upon which to further deteriorate tomorrow.
Because This Madness has been Created and is Fueled by Evil Forces

Not a good prognosis.

Order from Chaos

jcaz's picture

I hear ya, Peak- I gave up two weeks ago and bot straddles, but I've never hated making money so much-

Come tomorrow, I just know when the futures close,  they'll hammer stocks on this story and I'll wind up flat for the month.

They always fuck you in the drive-thru-  they'll figure out a way to fuck both you and me tomorrow.

abyssinian's picture

so.... buy this pop?  buy the dips and buy all the pops at new highs right? cause nothing can get this market down... no one even own any stocks to sell down the market. 

gatorengineer's picture

It's worked for 9 years now.... things tend to go hyperbolic before the pop

jmack's picture

SELL MORTIMER!

yogibear's picture

At some point when selling does occur it will be nasty.

TeethVillage88s's picture

Absinthe on the Trading Floor!

- Don't own any Small Caps
- Probably limit to Dow Jones Industrials
- Yahoo is worth $4 Billion, TOP KEK