Nomura: If S&P Hits 2535, CTAs Go "Max Short", Sell $100 Billion

By Charlie McElligott, Nomura head of Equity Derivative Sales

Loud Noises

  • Asian equities and price action reversals in Gold / CDX / VIX further evidences that this is another “US equities-centric” de-risking
  • $100B for sale from systematic CTA’s in SPX IF we were to breach the 2535 level,as they would pivot from current “43% long” all the way through “Neutral” and immediately “MAX SHORT” across 1m, 3m and 6m models
  • This 2535 level ‘clusters’ along with the 1Y ES1 VWAP (2539) and the YTD lows (2532.5) in the same range, effectively creating a “stop loss” for many where ‘longs’ turn into losses
  • Volumes are in the index futures / VIX futures / ETF space are screaming higher, as ‘dynamic hedging’ adds incremental “short gamma” effect to market on top of dealer gamma hedging
  • As thematic trades and “momentum” / sectors reverse recent performance, “Growth over Value” is the largest area of ”factor” pain as it has been the de-facto trade since the GFC
  • US equities outlook remains medium-term constructive however (before late-year / early ’19 “financial tightening” convo), as after the next two weeks of chop around the seasonal “momentum unwind” phenomenon, you have “earning macro blinders” kick-in which synchronizes with Banks resuming buy-backs (mid-April) and Tech EPS growth leaders doing the same shortly thereafter (last week April)
  • Additional, both “200dma breach after sustained period above-“ and “TRIN index / exposure purge-” analogs show excellent forward returns for SPX
  • Broad CTA “macro positioning” however is reflecting loss of “global growth” momentum, as SPX nears “max short,” Crude nears “sell” level, Industrial Metals pivot from “long” to “neutral” and broad Fixed-Income “longs” are established over the past month


Asian equities open on lows but close on highs, as the US “growth-down” catches its breath after a rollicking first day of the quarter for equitiesHang Seng actually bounced, closing higher by the end of the session, while Nikkei / SHCOMP / Kospi were all effectively ‘flat’.  And despite BoJ Gov Kuroda’s overnight comments stating that there are internal discussions over an eventual exit from stimulus / easing policy, Yen actually weakened.  Net / net, Asia ‘risk’ performed very well last night.

And not for nuthin’, but is anybody else getting that “Plaza Accord” vibe from the Chinese Yuan and Korean Won price-action of late?  Since the Korean “trade deal” was announced 3/26, Won has strengthened 2.5% vs USD.  Similarly, we see Yuan +3.5% versus USD since the start of the year, while 12m USDCNY NDF’s are -4.3%--indicating further expectations of Yuan strengthening.  Just ‘feels’ like there might be something to the idea of a larger ‘deal’ already in the works with US and Asian counterparts regarding this long-time US complaint of artificially-suppressed currencies.  QUID-PRO-QUO.

Europe however continues to trade poorly, with today’s Euro Zone Markit PMI showing another meaningful MoM decline (to 56.6 from 58.6 in Feb), while German and Italian PMIs missed as well, with factories noting delayed production due to increasing capacity constraints.  And while we’re speaking about ‘mehhh’ EU data, we should throw in the fact that German Retail Sales printed an absolute clunker, -0.7% MoM vs ests. +0.7%. 

Spooz are catching a modest respite from the incessant ‘dynamic hedging’ being seen over the past week and a half as funds (asset managers and HF’s) puke hedge with futures and ETFs.  This is evidenced by flattish cash volumes yday, but ETFs at 24% of the total cash volume (near ‘extreme’ stress levels), and with SPY volume +70% vs 30adv by mid-afternoon; SPX futs running +40%; NDX futs +39%; QQQ +77%; VIX futs +34%; VXX +28%; HYG +58% and IWM +34%.  For all of those crowing about “where’s the volume on the selloff?”, THAT’S where the volume is…the ‘tail’ is once again “wagging the dog.”


US equities are holding the attention of global cross-asset markets, where similar to February, a mix of negative idiosyncratic equities events (Tech ‘data’ space this time around, vs VIX ETN market structure collapse in Feb) alongside a legacy “growth” trade narrative has, in turn,  caused “crowded” positioning in a number of overlapping themes / sectors / factors / risk premia to “tip over” via the process of broad exposure-reduction due to high realized volatility dictating ongoing de-risking.

With Monday’s trade, there were certainly some indications of a broader de-risking in popular macro and CTA positions--namely Crude -3.0% and EEM -2.7% at their lows--along with general de-risking as the VIX curve went even further inverted, along with Gold higher and Credit widening…but all improved by the close, and relatively speaking, certainly saw nothing near the extent of the damage experienced in US equities.  Again, this is an equities-centric “positioning cleanse.”

The first-movers as always are the systematic CTA “trend” community, whose rule-based risk-management framework “cuts and moves-on” without emotion.  In the case of SPX positioning, work from my colleagues Anders Christensen and Anthony Morris shows that January ’18 marked all-time highs with regards to CTA implied SPX positions as part of the overall total notional exposures, peaking near 60% of the entire $ allocation across all models.  Now, as per the Nomura Quant Strategies model, we show the SPX position to be estimated at just  9% of the total notional now, lowest since late ’16 and speaking to a violent and ongoing de-risking in SPX over the past two months.

Source: Nomura Quant Strategies

On the ‘go-forward,’ we show the next critical level for CTA exposure reduction to be at the 2535 level, where for the first time since late ’16, we will see position pivot simultaneously from “long” (recently “max long”) all the way through “neutral” to outright “max short.”

Per our calculations, the “notional for sale” on a move to “neutral” would look like ~ $31B of SPX selling.  The issue, however, is the alignment of various time-horizon models ‘grouping’ near this 2535 level (10d, 1m and 3m models are already ‘short’—but 6m model will join at 2535), meaning that the current “43% long” gaps through “neutral” and all the way to outright “MAX SHORT”—which then would require a notional deleveraging of SPX closer to ~ $100B.

This THEN is further complicated by the fact that the YTD low in S&P minis is 2532.5; that the 38.2% Fibo Retracement of the past 1Y move in SPX is at 2535; and that the VWAP in ES1 over the past 1Y sitting at 2539.  The risk is that this “clustering” at / near 2535 is likely to act as a “stop loss” for many, as ‘longs’ established over the recent 1Y + time horizon turn into losses.
Regarding the sloppiness of the price-action of the past week: the recent preference from discretionary funds to “dynamically hedge” in liquid index futures / VIX futures / ETFs (vs index option downside), is, in turn, creating an additional “short gamma” affect in the market (1987, anyone?).  This comes on top  of the already “~$19B per 1% move” estimate we ran yesterday being hedged by dealers, as puts have been violently “grabbed” over the course of the year.

The pain within equities is not just index-level, as my talking-point over the past month on the seasonality for “momentum reversal” continues to realize in size, with “laggards outperforming leaders” as has been the historical trend over the last 20 years.  Thematically, longs in both “cyclical growth” AND “secular growth” are again massively underperforming consensual underweights / shorts in “defensives,” which of course rally alongside bonds and are thus viewed as “low vol / low risk.”
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Finally, back to systematic CTA fund positioning, where we are increasingly ‘AT’ OR ‘NEAR’ PRICE-INFLECTIONS across equities, fixed-income and commodities…which just-happens to coincide with the slowing in global data.