They're "Foaming At The Mouth" - Nomura Raises Red-Flag At "Clown-Car" That Is Equities

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by Tyler Durden
Tuesday, Nov 02, 2021 - 12:47 PM

"Retail bravado is again spreading, as $$$ is being made and is emboldening further risk-taking," warns Nomura's Charlie McElligott in his latest note, adding that TSLA's "weaponized Gamma" impact on markets seems to have reinvigorated the Reddit army.

Retail Call Buying: We saw outsized call volumes in a few familiar names on Monday including TSLA (1.54M calls), AMC (400k calls), SOFI (384k calls), BKKT (372k calls), PLTR (306k calls), FCEL (280k calls), LCD (385k calls), FUBO (167k calls), GME (154k calls), QS (127k calls), WISH (156k calls), XPEV (117k calls), CHPT (116k calls), KMIA (79k calls), RKT (79k calls), RKY (79k calls), FSR (78k calls), MVIS (72k calls), BLNK (61k calls), VUZI (58k calls), RIG (55k calls)

But the "clown car" that is equities shows no signs of stopping yet as it continues to be fully-immersed back in a “(Max) Long Gamma, Long Delta” US Index options regime that will make it almost impossible for us to pull-back on the powerfully resumption of large options selling / overwriting, likely until monthly Op-Ex cycle’s “Gamma unclench à Delta de-risk” set-up

That said, the Nomura strategist warns traders not to just assume IWM is the pure play on 'cyclical value' stuff: a client points out to me this morning, this “cheap IWM vols / upside grab” just so happens to also be yet-another expression of “foaming at the mouth” Reddit WSB Robinhood YOLOers too, as HILARIOUSLY, the largest holding nowadays in Russell 2000 / IWM just happens to be meme stock legend AMC


Switching to bond-land, McElligott notes that it sure has looked like those who were “trapped” in short-Vega positions have been out grabbing VERY large downside (puts and put spreads) in 0EF, 0EH, 2EZ and 3EZ in recent days, as they desperately tried to get some Gamma back...

However, McElligott suggest that we are finally seeing the upper left side softening both in USD- and especially come in hard in EUR- vols, so it seems the worst of the stop-outs are cleared, which is somewhat confirmed by the relative 'normalization of bond vol relative to equity vol...

So what could reverse these trends?

1) CB’s this week could push-back on mkt implied hikes (exacerbated by stop-outs last week, btw) with more “dovish-y / less hawkish” commentary this week (a la RBA overnight) which stops the beatdown in front-end...

while 2) inflation stays sticky and even accelerates into Nov and Dec prints (for example, US OER still not backing-down, Used Autos reaccelerating + Supply-Chain bottlenecks persisting through Holiday season),

while also too 3) seeing markets add-back long-end risk prem as Taper is potentially accelerated and QE wraps-up.

And as far as the equity melt-up goes, McElligott warns that:

we are now in an area where as that said “target volatility” strat Equities exposures has been rebuilt, we are now LOSING that systematic “buying” tailwind again in coming weeks, meaning that for CTAs, signals are already “+100% Long,” while for Vol Contol, there is a negligible potential amount to buy from here without further precipitous drops in rVol.

His parting thought is simple - caveat emptor.