Having correctly called the market meltup for the past two months, things went haywire for Goldman trader Scott Rubner, whose strategy pulled a fast and furious reversal ever since
Black Red Friday when stocks tumbled, volatility explode, yields collapsed and cryptos crashed.
So naturally, Rubner's clients want to know if the mauling is finally over (or were they just the sacrificial lambs into the correction that Goldman was aggressively selling into as it urged clients to buy)?
As the Goldman trader writes in his first Tactical Flow-of-Funds note for the month of December, "the #1 incoming question from investors this week: Does the selloff change the supply and demand picture for the rest of the year? Is this December 2018? What inning is it? Do you have hands made from diamonds or paper?"
And linked to that, will it be a December to Remember? Rubner's response: "no, not really: The investor tone of the week has been defense, not offence."
Putting it all together, despite the Omicron-linked turmoil in the past week, Rubner remains as bullish as ever, and when looking at the tactical flow-of-funds sell-off Check List, writes that the “Red Light, Green Light”... Turning Green."
He expands on his views in the thread below:
- Non-fundamental CTA supply – Red Light.
- Non-fundamental Vol-Control and Risk Parity Supply – Red Light.
- Low Liquidity and Massive MOC imbalances – Red Light.
- Flat dealer gamma – Yellow Light.
- Institutional Demand for index puts and ETF shares hedges – Yellow Light.
- December Option Expiry - Yellow Light.
- Fundamental HF De-risking – Yellow Light.
- Credit Outflows – Yellow Light.
- Retail BTD’rs– Yellow Light.
- Buybacks – Green Light.
- December passive Equity Inflows – Green Light.
- Cash on the sidelines and GS Wedge– Green Light.
- GS Bearish Sentiment and Technical analysis – Green Light.
Bottom Line: Do I think we have seen the lows for the year? Yes. Am I confident in this call? No. Its time, not price. We need 1-2 more weeks to clear this supply and turn red light to green light. I expect a large covering day today into the weekend. I expect short covering to continue next week to give us the all clear signal.
#WJH (What just happened?) – here is an update on the week and set up.
CTA non-fundamental supply has driven price action since the Friday after Thanksgiving. This is a new and important market dynamic. This is typically the fastest execution style (ie shorting the break down).
1. GS Systematic Strats Division estimates -$60B worth of CTA selling of global equity futures assuming a flat tape over the next 1-week.
2. GS Systematic Strats Division estimates -$42B worth of CTA selling of global equity futures in an UP tape over the next 1-week. (this usually means that it will be difficult to break higher to the upside as rallies get sold).
3. GS Systematic Strats Division estimates -$76B worth of CTA selling of global equity futures assuming a flat tape over the next 1-month.
4. GS Systematic Strats Division estimates that CTA’s gave already sold $44B over the last 1-week.
The modeled total systematic numbers are larger including CTA, Risk Parity, and Vol Control
5. GS Systematic Strats Division estimates -$18B worth of selling of global equity futures already executed yesterday from all-strategies. We model another $14B worth of selling today.
6. GS Systematic Strats Division estimates -$65B worth of selling of global equity futures from all-strategies over the next week assuming a flat tape nearly the same number in an up modest tape).
7. GS Systematic Strats Division estimates -$84B worth of selling of global equity futures from all-strategies over the next month assuming a flat tape. Up big is small. Down big is large.
Liquidity remains challenged and MOC imbalances have been massive w/ 10 minutes to trade.
8. Top book liquidity in the deepest equity future in the world has declined to $5M on the screens. This futures depth has not improved and ticked lower on the week. This works both to the upside and downside.
9. Supply has been heavy and fast while liquidity has been challenged exacerbating a potential move.
10. MOC Imbalances have been massive and get posted @ 3:50pm NY EST: Friday = $-3.7B for sale, Monday = $-3.5B for sale, Tuesday = $-8B for sale (this is the largest that I have seen), Wednesday =$-4B for sale, Thursday = $-3.9B for sale. Watching the MOC imbalances have been of critical importance given lower top book liquidity.
Dealer Gamma is significantly less long and at the verge of flipping negative
11. The long dealer gamma position has been significantly reduced. This would exacerbate a move in either direction as dealers remove this buffer, something that has helped market microstructure since March 2020.
Buying Index puts to hedge / protect / lock-in performance
12. There is a massive demand for institutions to buy downside hedges and “protect performance”. On Wednesday, $1.1 Trillion worth of index and ETF Puts and another $230B worth of Single name puts on Wednesday for $1.3 Trillion total notional. This is a massive number.
13. $2.2 Trillion worth of total options traded in the US on Wednesday. This 4th largest notional day ever. The market absorbed this demand. At some point – do hedges get unwound creating delta net to buy?
Option Expiry is the biggest event in the options market for the rest of the year.
14. You will start to see the “short into option expiry” emails hit the inbox next week. Reminder, a massive $3.9 Trillion worth of options roll off.
AM Settlement: $2.6tln
SPX AM: $2.2tln
- E-mini: $295bln
- Non-SPX Index: $136bln
- PM Settlement: $1.3tln
- Single Stock: $593bln
- Non-SPY ETF: $304bln
- SPY: $241bln
- SPX PM: $148bln
- TOTAL: $3.9tln
Sources: Goldman Sachs Global Investment Research, OptionMetrics, Bloomberg
Fundamental de-risking update from GS PB: These are the key highlights.
15. The GS Prime book was heavily net sold to start December (largest 1-day $ net selling since September, -2.5 SDs vs. the average daily net flow of the past year) , driven by continued short sales and to a much lesser extent long sales (9 to 1) .
16. Nearly all regions were net sold led by North America and EM Asia (driven by Chinese equities), while Europe was the only net bought region driven by long buys and short covers.
17. US equities on the GS Prime book made up more than 90% of the global $ net selling (-2.5 SDs) , driven by short sales and to a lesser extent long sales (9 to 1).
18. Both Macro Products (Index and ETF combined) and Single Names were net sold and made up 55% and 45% of the $ net selling, respectively .
19. Macro Products saw the largest $ net selling in four months (-1.7 SDs) driven mainly by short sales , suggesting increased hedging activity to start December.
All eyes on credit outflows
20. I started to get pinged my multiple credit funds this week, most of who are people that I have not spoken to before. They were asking for data on credit outflows. Sure enough, IG and HY saw substantial outflows this week.
21. Weekly bond outflows are unusual. I am tracking this dynamic closely.
Buybacks are a significant part of the demand story and close shop for the day at 3:50PM EST
22. GS Corporate Execution desk flow was up 2.7x from 2020 levels yesterday (~roughly 3x) - Wednesday
23. GS Corporate Execution desk flow was up 2.7x from 2020 levels yesterday (~roughly 3x) - Tuesday
24. GS Corporate Execution desk flow was up 2.2x from 2020 levels on Friday US half day.
25. GS Corporate Execution desk flow was up 1.9x from 2020 levels last week.
26. The buyback open window for 2021 ends on 12/10, 6 trading days.
27. The desk increased their FY repurchase estimates from $885 to $925 Billion (+$40 Billion) ie more demand than I expected. (h/t vani)
Cash on the sidelines remains at extreme levels: >$5.5 Trillion in AUM (increased again this week).
December Passive Equity Inflows did not flip to negative:
28. Global Equity inflows: USA Inflows = +$11 Billion. Everything else -$2 Billion. 100% USA. 100% large cap. Mostly tech.
29. Largest outflows from Europe in the past year, etc. etc.
Bearish Sentiment is at the highest point since Covid – see GS RULES and TOOLS.
30. Bull sentiment down. Bear sentiment up.
31. GS rules and tools is in the middle of our best hit rate over the next 1m, 3m, 6m, etc.
Technical update from MacNeil:
The S&P500 /ESZ1 is trying to base and resume its larger bull trend from pivotal, long term trendline support at 4491.75 (in brown). While sentiment, and increasingly momentum, says that this trendline should hold and the bull trend should resume:
- AAII % bears is >40
- VIX3m/VIX ratio <1
- VIX>20% above its 10d exp MA
- Daily RSI is fast approaching oversold
Price action needs to confirm.
A sustained push above 4577.25 is the 1st sign of stabilization (old range lows and top of daily pivot in royal blue), Bulls need a close above 4650.75 (Dec-01 high in green) to regain control and say that the bull trend is resuming. A closing break of the trendline support would confirm a top and turn in the near and medium term trends, exposing further weakness to the confluence of support between 4300/4238.25 (200d MA in pink, the October lows and old May highs).