As Stocks Slump, Nomura Exposes What Levels Will 'Trigger' CTAs

With Quad Witch behind us and China's Golden Week upon us, the regularly-scheduled "global growth scare" has taken front-page headlines (for now) and is sparking equity derisking as safe-haven flows have sent gold and bond (prices) higher.

And, as Nomura's Charlie McElligott notes, while the ugly ISM miss was the short-term macro-catalyst, US equity markets are now testing levels where more technical forced selling will exaggerate the markets' volatility.

1) A now much deeper and more sizeable “Short $Gamma” position for Dealers in both SPX (flipped “short” under 2978, with combined $Gamma of SPX / SPY at -$7.1B, just 11.7th %ile back to 2013) and Nasdaq (“flipped” short under 190.63, with $Gamma in QQQ of -$317.3mm, just 7.8th %ile since 2013)

 

2) We now see net “Negative $Delta” in index / ETF options now significant as well, with SPX / SPY at -$103.9B (15.6th %ile, flipped “negative” below 2962) and QQQ at -$7.4B (8.0th %ile, flipped “negative” below 191.45)

3) The final “escalation flow” comes from CTA Trend “triggers” being hit, as the Nomura CTA model estimates that both the S&P- and Nasdaq- futures positions would be DELEVERAGING / REDUCING from the prior “+100% Long” to now a “+54%” signal (the 3m window “flipped” short for both), with S&P selling on the closes below 2960 and Nasdaq selling below 7778 yesterday, which is likely some of the flow we seen going through the market now during the overnight / early hours session

Fleshing out CTA positioning in Global Equities futures and further triggers from here:

  • SPX position would turn outright SHORT on a break lower and close below 2903 - yet would re-leverage back to “+100% Long” on a close above 2972

  • For Nasdaq, the position would turn outright SHORT on a break lower and close below 7569 - yet would re-leverage back to “+100% Long” on a close above 7825

And across other asset classes...

Trade accordingly.