Kolanovic Admits He Was Wrong, Says Central Banks May Step In To Halt The Crash

How the market's mighty wizards have fallen.

Just last Thursday, JPM's head quant Marko Kolanovic, the man who once moved markets with one word, predicted that the recent crash  in stocks was nothing to be worried about, and that quants wouldn't liquidate into it, to wit:

Equity price momentum is positive and trend followers are not likely to reduce equity exposure. While the recent move was concerning for its correlation properties (bonds, equities and commodities all going lower), overall the volatility of multi-asset portfolio is still very low, and the increase was relatively small (e.g., increased from ~4% to ~5%). Also, there are other circumstances that are not in favor of a continued sell-off – we are in the midst of one of the strongest earnings seasons in the US, and global growth continues to be strong.

Two trading days later, and nearly 2000 Dow points lower, that assessment could not be more wrong.

So, now that systematic funds got clearly blown up, and for countless retail investors using XIV to short volatility this may well be the end following termination events at short-vol ETFs such as XIV,  Kolanovic is out with a note in which he expresses renewed hope that the cataclysmic move of the past few days - driven entirely by either CTAs, risk parity, vol-targeting funds or all of the above - is nothing but a scratch.

Here is his note:

In last week’s note, we noted that volatility, at the time, was not sufficient to trigger systematic strategy de-risking. On Friday, the market dropped ~2% on a day when bonds were down ~40bps. The move on Friday was helped by market makers’ hedging of option positions (as gamma positions turned from long to short midday). Friday’s move, on its own, was significant as it pushed realized volatility higher, which is a signal for many volatility targeting strategies to de-risk. Anecdotally, broad knowledge about the risk of systematic selling kept many investors fearful and waiting on the sidelines (both in equity and volatility markets). Midday today, short-term momentum turned negative (1M S&P 500 price return), resulting in selling from trend-following strategies.

... which, of course, is something Marko said would not happen. Anyway, back to the note:

Further outflows resulted from index option gamma hedging, covering of short volatility trades, and volatility targeting strategies. These technical flows, in the absence of fundamental buyers, resulted in a flash crash at ~3:10pm
today. At one point, the Dow was down more than 6%, and later partially recovered. After-hours, the VIX reached 38 and futures more than doubled—it is not clear at this point how this will reflect on various short volatility products (e.g., some volatility ETPs traded down over 50% after hours).

Actually, with the XIV down 80% on the day, tracking the VIX, it most likely means a termination event is imminent.

So what happens next according to the JPM head quant? In short: don't worry, all shall be well.

Today’s large increase of market volatility will clearly contribute to further outflows from systematic strategies in the days ahead (volatility targeting, risk parity, CTAs, short volatility). The total amount of these outflows may add to ~$100bn, as things stand.

As a reminder, this is roughly half the $190 billion number cited by Goldman as the total amount in global equity selling over the next few weeks. Both numbers would be large enough to lead to further dramatic downside in the stock market.

And here comes the damage control:

However, we want to point out the massive divergence between strong market fundamentals and equity price action over the past few days. The large market decline over the past few days will likely draw fundamental investors and even trigger pension fund rebalances (those that rebalance on weight thresholds).

And if that's not enough to wake the BTFDers out of their shocked daze, here come the big guns:

We also want to highlight a strong probability of policy makers stepping in to calm the market.

Right, because when you get a call so incredibly wrong, there is nothing quite like central banks bailling you out.

Finally, here is Kolanovic's advice after the biggest point drop in Dow Jones history: just BTFD:

Rapid sell-offs, such as the one today, can also be followed by market bounce backs as liquidity gets exhausted by programmatic selling. With next year P/E on the S&P 500 now below 16, further positive impacts of tax reform and stabilization of bond yields (e.g., note the current record level of CFTC bond short positions), we think that the ongoing market selloff ultimately presents a buying opportunity.

On Thursday, when commenting on Kolanovic's painfully sanguine assessment, we said that it was "Almost as if Gandalf was given the tap on the shoulder..."

Now, we sadly know for sure.


francis scott … zorba THE GREEK Mon, 02/05/2018 - 19:07 Permalink

There is no doubt that the Fed has controlled the rise in

the Dow from 6500 in March 2009 to its all time high of

26,616.71 set on January 26, 2018.

So why would there be any doubt the Fed will determine

the controlled sell-off profit/taking for its criminal

co-conspirators: the brokerages, institutions, and funds 

from Wall Street.  


The Fed will, in its good time, secretly publish a number

for the Dow, at which point the markets will be a buy.

The Global Financial Felons, who have been

accumulating shares since 2009 and were

the major sellers last month, will use their

original funds plus the profits they just booked,

to buy back the stocks they just sold, when the

Fed declares the bottom of this sell-off, with

heavy buying and some nice fake good news.


It's hard to believe anyone at ZH doesn't wake

up to this truth every morning, like a glass of

orange juice, a bowl of Cherrios and a cup of coffee.  

In reply to by zorba THE GREEK

zorba THE GREEK Beam Me Up Scotty Mon, 02/05/2018 - 19:50 Permalink

Watching the trading this afternoon, it became obvious that the Fed was indeed buying with both hands. The algo driven sell orders caused 1% drops in the S&P in a matter of seconds. We were just minutes away from a market halt when a deep pocket stepped in and was buying in 10s of billions at a shot. It had to take several 100 billions to stop and reverse that kind of selling. That is more cash than all the funds together had on the sidelines. Only one entity has that kind of buying power. guess who.  The futures are now down more than today's losses. The question is, will the Fed come in tomorrow and do the same thing? At this rate, the Fed will own 10-20% of the market by the end of the week.

In reply to by Beam Me Up Scotty

zorba THE GREEK zorba THE GREEK Mon, 02/05/2018 - 19:58 Permalink

In   prospective, that is no big deal for the Fed dollar-wise. They own a greater % of the bond market, and that is 10 time larger than the stock market. Don't let the Fed balance sheet mislead you. They may have a 4 Trillion balance sheet, but they most likely hold more than that in bonds alone. Their U.S. treasury holdings don't affect their balance sheet. Tomorrow will be interesting.

In reply to by zorba THE GREEK

Harry Lightning Bud Dry Mon, 02/05/2018 - 19:35 Permalink

13 before 30. This is Japan, January 1990. If the Fed tries to bailk out the stock market now, they will make the resultant fall even worse. Because remember, there are two bubbles, the one in stocks and the one in bonds. And its the bond bubble that is calling the shots now. Anything the Fed does that is perceived as inflationary will spike bond yields, leading to further stock selling.

A fundamental paradigm shift is occurring in financial markets that will end the status quo way investors have been earning money in financial markets for the last eight years. The inevitable inflationary pressures finally have arrived, and the Fed is no where close to having a handle on them. Until that happens the bond market will not stabilize. And to stabilize the bond market by controlling inflationary pressures, the Fed will have to increase short term rates by a substantive amount in excess of the trailing twelve month inflation rate. That means stock price multiples will have to adjust to a world where margin interest rates are equal or greater than dividend rates, which will restrict speculative buying and return stock price multiples back to 15 instead of 25. To do that, stocks will need to shed 40% of their over-inflated values, meaning Dow 15,000 instead of Dow 25,000. As markets always overshoot, Dow 13,000+ becomes likely.

In reply to by Bud Dry

Dilluminati Mon, 02/05/2018 - 18:38 Permalink

If you were in anything non-liquid there can be all the promises that a central bank may want to make, but at the end of the day it is debt-deflation so lets look at the real math..

When to many debts chase too few dollars circulating in an economy you create debt deflation.

Anyone really wondering how the fuck this ends?

On a bright note the ultra-wealthy like Soros lost much more than you...

wonderful time to sell to pay your taxes..

DavidFL JustPrintMoreDuh Mon, 02/05/2018 - 19:02 Permalink

Dont believe QE will fix this one; too many forces from different angles are stacking up. The Fed does not have the tools to arrest this one - money alone wont stabilize or strangle the robots this time. If this was just your typical ETF or equity sell off, the Fed could handle it; but alas it is not!

In reply to by JustPrintMoreDuh

Racer Mon, 02/05/2018 - 18:49 Permalink

So they can 'allow' a ridiculous euphoric melt up but not allow a correction?

They tried to do that in the past before and failed.

They kept blowing the bubbles and now I hope it truly blows them up into tiny pieces

DavidFL Mon, 02/05/2018 - 18:58 Permalink

This guy is your typical sell side idiot. He says the Fed will step in - WTF does he think caused this mess!! The robots will overwhelm the system. If you are in anything semi or non-liquid; god help you!

asteroids Mon, 02/05/2018 - 19:11 Permalink

There is a whole generation of trader that has never known "fear" and "terror" in having his wealth destroyed. Well, that changes tonight. This whole "market" is an accident waiting to happen.