The Blow-Off Top: "More S&P Delta Was Bought In Last 2 Weeks Than At Any Point Since 2007"

Last week, BofA chief investment strategist Michael Hartnett summarized the current market as follows: the "best reason to be bearish in Q4 is there is no reason to be bearish." He also observed that tha market's "blow off top" phase, which he dubbed the Icarus Rally previously, had been activated and was approaching its final thrust, with BofA's Q4 targets for this final push in risk assets as follows: S&P 2630, Nasdaq 6666, 10-year Treasury 2.85%, EUR 1.15.

And yet, some have argued that Hartnett's designation is not accurate, as there simply is not enough exuberance and euphoria to defined this phase of the market as a blow off top. Which, of course, is also debatable: for one, CNN's frequently noted Fear and Greed index closed last week at a level of 95, indicating of near widespread euphoria.

Then, over the weekend, Morgan Stanley's Chris Metli, executive director of the bank's Quantitative and Derivative Strategies (QDS), showed another indicator of just how deep in the blow off top phase the market was.

Metli notes that in the aftermath of last week's NFP report, which was hopeless distorted by hurricanes, yet in which investors focused on the one-time spike in hourly earnings (largely a function of overtime pay in the utilities sector, at least according to the BLS), the more bullish sentiment and positioning, particularly at the index level in the options and futures markets, makes the outright buying of equities riskier now, and as a result "QDS suggests investors sell equities and rotate into long call options – in other words, stay long to participate in a blow off top, but don’t leave your left tail exposed."

Metli lists the following three reasons why traders should be concerned, of which the first one was most notable, namely that "Investors in the SPX options market have bought more delta in the last two weeks than at any point since at least 2007."  In other words, investors are now finally buying into the rally, but not via stocks, but via levered, upside calls, a stampede which typically takes place when investors are confident there is virtually no downside risk left. It usually precedes periods of sharp risk corrections.

Metli then notes that as a result of these flows, "in an up 5% move end users of SPX options (i.e. non-market makers) would be the longest equities since at least 2008… while they would be the least well protected in a down 5% move since at least 2008."  Andd while all would not be lost - since there has been deeper OTM tail protection bought – "there could be an air pocket in the 2400 to 2500 range before that protection kicks in."

Finally, the MS Futures team has noted that the net long builds have started to reach notable levels in several global markets. And, yet again confirming the scramble to buy equities no matter the cost, S&P futures have reportedly seen over $27bn traded on the offer versus the bid over the past two weeks – on par with the record amount bought in late July, notably before some hiccups that occurred the following month.

What should traders make of the above data, and is it time to sell everything and quietly exit stage left? Here is Merli's conclusion:

Within equities the biggest pain trades remain a) higher vol and b) a pro-cyclical and pro-value rotation (away from Growth, Tech, and Defensives).  There are signs that a rotation towards Value has started, and in contrast to the hiccups in Growth/Tech seen over the summer, this rotation could have legs as it appears to be driven by an actual shift in the macro environment.  This could support value, cyclicals, and equities broadly over the next month.  But the closer the end of the year gets, the more worrisome those rotations will be – instead of a year-end chase, investors who have had good performance could start to protect their gains if investments go against them.

Finally, for those who are hoping to top tick the market and short it at the "Icarus Rally" peak, Morgan Stanley warns that "picking the top in a blow off rally is difficult", and adds that "the best strategy to participate in the upside while limiting exposure to the downside tail is simply to replace stocks with call options." In other words, the best way to hedge against a blow off top is to... participate in it.


HulkHogan wisehiney Mon, 10/09/2017 - 14:24 Permalink

I sold everything in my personal account today that I bought this January. Started with selling BEAT this morning and just sold everything else. Not even really sure why other than I give up on this Trump rally and can't sit here holding stocks with high Pe.  of course this means even higher highs to end the year.

In reply to by wisehiney

zorba THE GREEK wisehiney Mon, 10/09/2017 - 14:29 Permalink

I have been around for a while, survived the recession of the early 1970s, which was much worse than the last one because the markets were allowed to correct and businesses were allowed to go under. Buying highly levered into an overpriced market is one of the final signs of a major correction, if not an all out crash. There is going to be a lot of pain. The only question is; will the Fed go balls out and buy stocks to keep the market from crashing? If they do, it will only make things worse because when average Joe sees that the Fed will go to any extreme to save the markets, you will have people getting second mortgages on their houses and investing in a can't lose market. Eventually the Fed will own the stock market along will the bond market and just about every other asset and will lead to the end of free markets and capitalism and the nationalization of everything.

In reply to by wisehiney

DC Beastie Boy Mon, 10/09/2017 - 14:11 Permalink

Sell into strength, buy into weakness.Althought, QE and the $24T to the Fed owners buy up the market.It's waaaaay eaiser to go long than short.Because to go short, you have to buy the security to short it, which is bullish. 

silverer Mon, 10/09/2017 - 14:15 Permalink

Anybody notice how Tesla was down today? I don't why the stock went down. Probably nothing to do with them not building the cars they projected to make, because everyone knows that in the US now, you don't sell cars to earn money, you just print your profits after selling a good story around the campfire.

In.Sip.ient Mon, 10/09/2017 - 15:53 Permalink

Maybe THERE IS NO DOWNSIDE! Maybe that is just the point?  If you can counton the FEDs to bail 'em out with a lot of CTRL-Paction, it is technically impossible to have a downside? Face it, the only downside in this market is holding FRNs... 

Maestro Maestro Mon, 10/09/2017 - 18:00 Permalink

OK, morons,

I'm going to say what you all know but are afraid to put into words.

A real stock market reflects what is going on with revenues and profits. With revenues and profits down or flat, the stock market must go down. This one doesn't, so the Dow Jones, the S&P 500 and NASDAQ are NOT stock markets.

These financial markets reflect one thing and one thing only: the domination of the world by the United States of America. As long as American supremacy reigns, the so-called stock markets (in reality, barometers of American primacy in world affairs as instantiated by the Americans' ability to print dollars out of thin air and buy your ever willing collective asses lock, stock and barrel with it, you despicable vermin) will NEVER go down, irregardless of economic, political and military turmoil or travails no matter how disastrous they are.

In short,

If you're buying stocks (or bonds) today, you're buying the myth that America will last forever and Americans can do whatever they want.

The moment the world acquiesces that the emperor isn't wearing any clothes at all, the dollar and ALL fiat currencies which are only different names for the dollar, will crash. NOT the stock market, which will probably go much higher in nominal terms but lose 99% of its value in real purchasing power.

In short, the stock market today only signifies HUBRIS.

You will NOT win by shorting it because the currency in which you hope to get reimbursed will crash as the indices charge higher.

You will NOT win by going long the stock market because the currencies will be obliterated if America is repudiated as the going paradigm.

Cryptos = CIA

Tell me, do you know why sugar is sweet and blue is blue? Did the human race got together 10,000 years ago and decided that it is so?

Just like practically all of you believe that gold and silver derive their value from consensus?


squid gm_general Mon, 10/09/2017 - 20:35 Permalink

General, everything you say is perfectly true so long as the FED allows it.They didn't allow it in 2008 because banks going bust and wiping out deposits, especially payroll floats of medium and small businesses, would have caused MASSIVE upheaval. Now, did the FED give a flying fuck about massive bankrupcies due to failing member banks? No. What they feared is Americans all over the country showing up to their congressional representative's offices with pitch forks and guns. That scenario would have brought back Glass-Steagal and prosecutions. Timmy Getner, Ben Bernake, Jamie Diamon and a whole load of others would now be Baba's bitch in prison. That is what the FED did not want in 2008. So this next crash which you and I both know will be larger, they will do the same thing only BIGGER!!! The moment the FED detects the required deflation that MUST happen during a bust, they will print like you've never seen. And we don't need 100% of the population to lose confidence, you need only 5-10% to lose confidence and the herd will follow. The USD will go up right before its end, just like the NASDAQ did in 2000. It will rise and rise and then die over 18 months. I'm preparing but not looking forward to it. It will not be a nice time for 99.9% of the people. Squid

In reply to by gm_general

Maestro Maestro gm_general Tue, 10/10/2017 - 04:02 Permalink

Why aren't they allowing even a 5% correction this time? Because they know that the result will be different this time. Any sign of financial weakness now will result in what is (only nominally) called hyperinflation, as in, abandonment of the sinking ship aka the dollar.


That's a lot of nonsense really. In order to have either deflation or inflation, first there has to be MONEY!

Whereas today, there is no money around. Dollars, euros, shekels, and roubles are NOT money.

So, forget it. There will never be any deflation or inflation as long as the dollar system is in place. The only possible outcome is "hyperinflation" aka the death of money, or, more accurately, the long overdue funeral of money.

Retain this. That the ruling classes who own and control both the Fed and the ECB, are afraid to let the markets go down even 2 percent, proves that they are afraid to show any weakness, thus not confident at all that they can control it all much longer.

The markets are not resilient at all. They are on life support provided by China's and Russia's blatantly treasonous support of the petrodollar. Now it's true that both Putin and his Chinese equivalent are bitches of the Anglo-zionist bankers. But were they obliged to pull the plug on the dollar, it will be all over instantly.

It's funny and out in the open for all to see, isn't it?

Without Chinese and Russian support of the petrodollar, the dollar (and the yen and the euro) will be disappeared instantly.

In reply to by gm_general