Earlier this week, Nomura's Charlie McElligott pointed out something ominous: whereas dealer option exposure to the S&P was well in the money, Nasdaq dealer gamma was turning increasingly negative.
Fast forward to today when after the close we have a historic barrage of earnings reports from the Top 4 tech names - Apple, Amazon, Google and Facebook - an event which could lead to turmoil for the Nasdaq, and when McElligott warns that the technicals are also turning increasingly unfavorable.
As the Nomura quant writes, for equities, "there a is critical test developing" within the multi-year regime leader "secular growth" Nasdaq, which for the better part of a decade has continued to benefit from its “duration-sensitivity” and bull-flattening in UST curves via a predominately “goldilocks” US economy over that time, but which Nomura warns over the past week and half since making new all-time highs "is now agitating under “crowding” risk and the weight of both its own “perpetual growth” expectations and valuations."
To McElligott, this "agitation" is evident in the extreme "Growth vs Value" nature inherent to US Equities “1Y Price Momentum” factor, where the factor’s 60d and 120d realized vols exploded to record highs in recent days.
But what about dealer positioning, and just ahead of today's critical megatech earnings dump at that?
Looking at this "critical" point on Nasdaq, Nomura looks at QQQ options and finds that Dealers are even more "short Gamma" than they were earlier this week, with Gamma vs spot "neutral" level up at $261.90, while QQQs are currently trading $258.50—which naturally indicates the potential for a self-reinforcing exacerbation on further move lower...
... as the Nasdaq tumbles into a "gamma vortex", one where long overdue selling in the Nasdaq triggers even more selling as dealer option positioning accelerates the downside move.
In short: if McElligott is right, if dealers are indeed bracing for a major drop the Qs, and if today's earnings reports are anything less than perfection, then watch out below.