Yesterday, in our private twitter account for subscribers, we said that "if we can avoid a Pelosi World War, the buying impulse from CTAs and buybacks will only intensify", a view which was echoed this morning by JPM which said that "If There Is No Immediate Chinese Reaction To Pelosi Landing, Markets Rip Higher."
Well, now that Pelosi has landed and there are no mushroom cloud-shaped explosions, the only explosion is in the market where spoos just hit 4,136 and about to take out the Monday highs of 4,147...
... as the "most hated rally" is not only back with a bang, but about to push sharply higher, for three main reasons:
First, as Thomas Hayes, chairman at Great Hill Capital, said yesterday, “no one is positioned for any good new" pointing to cash levels that are at the highest since 9/11, and recession fears at the most pronounced since April 2020 and March 2009. “Managers will have to chase up and panic buy any further unexpected strength.”
Second, the buyback blackout is a distant memory, and according to Goldman, as of today, ~60% of S&P 500 is estimated to be in their open window (est. to end Sept 12). By the end of the week 83% of companies will be be in open window. Largest repurchasers reporting this week: SPGI, MGN, MPC. 2022 authorizations +20% vs 2021 YTD.
Third, and perhaps most important, the systematic short covering and buying frenzy just went into peak overdrive when moments ago spoos rose above 4,133 (after tumbling to 4,080 earlier), which according to Goldman is the price trigger for the last group of CTAs (medium-term) to join their ST and LT peers, and bid stocks up.
Here are some more details on the final point from Goldman's John Flood:
- CTAs are currently short -$11b S&P (covered $5b last week and $8b last month). Short Term Momentum (3948) and LT Mo (4066) are both firmly in positive territory creating a tailwind in the US equity market. MT Mo flips positive north of 4133 (keep this level up on your screens).
In a flat tape CTA’s will cover an additional $9BN S&P this WEEK. In up big tape this number grow to $14BN and in down big tape this number shrinks to $4b (for the week).
Over the next MONTH CTA’s will flip long in flat tape buying $19BN S&P, and in up big tape (medium term momentum positive) this demand grows to $32b. In down big tape over next month -$7b for sale (only sell scenario).
And of course, the more CTAs buy, the lower the VIX drops, the stronger the CTA buying signals will be, as positioning takes over for fundamentals, the higher stocks rise, and so on in a feedback loop until something macro short-circuits the buying frenzy.
But wait, there's more: as we warned yesterday in "Record Shorting In Tech Ensures 'Most Hated Rally' Will Continue", Goldman today warns that squeeze / FOMO dynamics are "as real as it gets in tech right now post better than feared earnings last week": Info tech L/S ratio hit a one-year low last week and currently stands at 2.46 (0 percentile one-year, 28th percentile five-year). From a positioning perspective, US Info tech Short MV as a percentage of Gross MV has reached a one-year high (93rd percentile 3-year, 69th percentile 5-year).
Translation: while various Fed speakers may be bitching and moaning that the market refuses to crash and fundamentals are out to lunch, technicals have taken over and have unleashed a perfect storm of buying which may only end with an official warning by Powell that the higher stocks rise, the more he will be forced to hike in the coming months even if it means escalating the technical recession into a depression (at which point the same Powell will have no choice but to unleash the biggest liquidity tsunami in history).