"Staggering 1-Day Moves": Nomura Warns The Market "Remains Shockingly Dysfunctional"

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by Tyler Durden
Thursday, Dec 02, 2021 - 08:29 PM

Earlier today we observed that amid the market turmoil of the past month, hedge funds have been unwinding net exposure at a furious pace and selling (or shorting) to retail investors, who paradoxically have been buying at the fastest pace on record.

We got some incremental data this morning from Goldman, which noted that the bank's prime book (hedge fund-facing) 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). The frenzied shorting, which occurred in the context of sharp net deleveraging...

... probably explains why stocks are surging today as the crowd is now scrambling to cover.

What about recent developments in the arcane world of Greeks? Well, despite the furious melt-up short squeeze, Nomura's Charlie McElligott warns that there remains risk of further systematic de-leveraging as previously dormant realized vol finally “crashed-up” to stress already well-flagged by previously discussed spikes in Skew, Put Skew, rVol : iVol, Term Structure, etc.

Meanwhile, according to McElligott's calculations, one potential driver for lower prices, Vol Control funds, have reduced US equity exposure by -$46.5B over the past 1w, and will be selling -$2.1B on another 1% daily change, or -$8.9B on another 1.5% daily change

Just as notable, Nomura's CTA Trend model is nearing a “flip” trigger level in the legacy “+100% Long” signal in S&P futures to “Short” - although for that to happen, the S&P would need to close below today’s trigger of 4496, something which won't happen thanks to today's furious squeeze. That said, selling under 4496 would see the “long” sold and flip “-42% Short” across the aggregate signal.

So today's oversold bounce notwithstanding - and with the VIX at 28 it is likely the market will reverse downward again tomorrow - McElligott warns that the environment remains shockingly dysfunctional, with Nomura's John Pierce noting that with VVIX (‘vol of vol’) closing at 155 yday, the second-highest closing level YTD - which notably was only previously exceeded in 2021 by the massive pain felt during the Meme stock / HF Short Book blow-up in January - and speaking of….

  • The Equities gross-down culminated into the cash close yesterday, although surprising to some, it was already well under-way even when the broad index was on early highs, with “HF Crowding Factor” down all session and finishing on the lows by the close
  • The US Equities 1d Factor moves were staggering, with 36 of our 39 Factor pairs and legs in the Nomura + Wolfe universe experience greater than 1 z-score moves, while of the 26 individual Factor legs, the median move was -1.9 z-score (lower) on impulse de-risking into year-end illiquidity

As McElligott further notes, the dynamic repricing lower of “(expensive) Growth”/“High Vol”/“High Leverage (balance sheet)” has continued to be the thematic story - as these make up much of the “short legs” which have fueled the stellar quarter-to-date performance behind “Quality” (+14.5% QTD), “Defensive Value” (+8.6%) and “Low Risk” (+8.2%)

Why?  The same reason we discussed on Monday in "The Most Crowded Hedge Fund Stocks Just Had Their Worst Month In History" - here Nomura adds that “crowding” has yet-again been an issue, which is simply another form of “shadow leverage” (on top of what had been mid / upper 90%ile Nets and Grosses up into last month).

Shockingly Nomura calculates that crowded Hedge Fund Longs are -11.5% over the past 16 sessions (a -2.1 sigma move since 2006), and YTD, “HF Crowded Longs” are underperforming Nasdaq 100 by -12.1% and S&P 500 by -9.5%, but stunningly, with all of that underperformance coming since early- / mid- November, after what had been outperformance for the majority of the year!

For the best example of how most crowded trades have imploded, look no further than the components of the infamous ARKK ETF, 42 of 43 names are in the red over the past month, 36 of those 42 “red” names are down > -10% over the past 1m, 26 are > -20% and 9 are > -30%

And as many of the above (formerly) “high flyers” were a “retail” story (“Wolfe Retail Red Alert” -9.3% in past 5d), this dynamic was most clearly on “shock” display by the 1d return yesterday in the Bloomberg “US Pure Trading Activity” Factor, registering a -5.5 z-score move (10Y lookback), the 2nd worst 1d return for the Factor over the past decade.

Indeed, the collapse of many of the high flyers, most of which are also among the retail "favorite" stocks, is why the dramatic outperformance of the "retail favorite basket" saw striking losses in the past few days...

... even if we have yet to see retail traders putting their insatiable buying of everything sold by hedge funds even on "transitory" hold.