"It Could Get Weird": Stocks Puke As "Extreme" Negative Gamma Strikes

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by Tyler Durden
Tuesday, May 04, 2021 - 10:10 AM

Just like late February, when we had 2021's first inflation scare-cum-Treasury tantrum, Tech is breaking down and look no further than Amazon for the evidence. In just the three days since reporting blowout Q1 earnings which sent its stock to a new all time high, AMZN stock is down over 9% and is on the verge of a correction. Other FAAMGs, most notably Apple which had a just as impressive quarter, are not faring any better.

However, unlike late February when tech was monkeyhammered largely due to sharply higher yields, this time there is the double whammy of dealers caught in a self-reinforcing negative gamma trap. As SpotGamma wrote overnight, "both SPY & QQQ remain in negative gamma territory which implies higher relative volatility."

Nomura's resident x-asset expert, Chalie McElligott, picks on this and in a note this morning writes that while "there is nothing exceedingly bulky or “whale-like” by itself", there has "been a pick-up with broad Vol / Gamma selling from clients in recent weeks." The details:

  • This has show via standard overwriter flows in singles and index, but also to the systematic strangle-selling mentioned in the press last week (which looks like the odd-lottish flows in ratios that trade ~3-4x’s a week, while there too is a separate daily overwriter program in one month straddles for example)…all of which has contributed to what has been a very “long gamma” dynamic for Dealers—and thus the “stuck” S&P for about three weeks, pinging around the gravity of the big strikes at 4150-4200
  • The %ile rank of the overall $Gamma magnitude across US Equities index has come-off after recent expirations (SPX / SPY consolidated now a middling 56.6%ile $Gamma / IWM 35.9%ile; EEM 37.4%ile); however, Nasdaq / QQQ’s continue to be the epicenter for how broad index movement could get weird, with -$435.8mm $Gamma which is extremely negative at just 3.8%ile

Needless to say, negative QQQ gamma + tech selloff = explosive combination, and as McElligott summarizes, "with this “extreme” negative $Gamma in QQQ, we see Dealers increasingly moving into “short Gamma vs spot” territory as well (Gamma “neutral line” at 339.36 vs spot 333.55); similarly, we currently see Dealers “short Gamma vs spot” too in both IWM (226.19 “neutral line” vs 224.79 spot) and EEM (54.29 “neutral line” vs spot 53.59)"

Tech's inability to breakout higher has crippled sentiment, and as the Nomura quant concludes, following what had been a strong recovery in April for the Tech sector and “Secular Growth” (aided by the stabilization in USTs and relative “bull-flattening” off the extremes of the March Rates selloff / “bear-steepening”) "our Nomura Sector Sentiment analysis shows that WoW, we have seen Tech sector sentiment collapse (again)--with an 85.1%ile score a week ago, but today printing down at 53.9%"

With reflation scares dragging tech lower, it's likely to get worse not better due to the connection between legacy “duration proxy” Tech sector / “Secular Growth” as we enter the next two months of “peak” US economic data base-effect, with this week’s heavy US data slate culminating in the critical Friday NFP, which is expected to be a monster print (see "Early Indications Point To 1.5 Million Jobs Number") and is set to spark more reflation selling and dictate the timing of Fed “tapering” socialization.

The only silver lining - for now - is that the broader SPX/SPY remains “long Gamma" ... as long as  we stay above the 4074.19 neutral line.

Yet even with this favorable gamma profile, as the tech revulsion spreads, dragging Nasdaq lower...

... it is starting to hit broader indexes, such as the S&P and Russell...

... which just dipped below its 50dma.

What happens next?

According to McElligott, the key “macro catalyst” will the maintenance of “loose” US financial conditions into market sensitivities around the eventual “taper,” with GS Financial Conditions notably printing all-time”easy” levels as stocks printed all-time highs

Finally, with TSY yields unlikely to make any major moves (especially with “real yields” remaining so deeply negative), McElligott expects that focus will pivot to the US Dollar as a potential “fly in the ointment,” where “higher Dollar” could act to be a financial conditions negative, and sure enough, today see the DXY squeezing meaningfully higher...