Trader Who Correctly Called Tuesday's Crash Lays Out What Happens Next

Having correctly predicted the "breaking point" trigger for the S&P's Tuesday plunge - which incidentally coincided with the 200DMA - at which CTAs would collectively puke, Nomura's head cross-asset quant Charlie McEllgiott, is back with a note slamming his critics (apparently those who failed to be right decided to deflect their lack of added value by criticizing the Nomura strategist), while also mapping out what's next for the market should the current risk waterfall continue.

First, we go right to McElligott's well-deserved victory lap, in which he steamrolls his "quant" critics, and writes that he received a number of pass-along notes yesterday from around the Street "which questioned the validity accuracy of our CTA model ‘deleveraging’ call from Tuesday, which again “nailed” the S&P futures level where the market would come under significant notional selling pressure (as well as Russell and Nasdaq “trigger” levels as well)."

What he is saying is simple: Wall Street is perplexed by how he could get it so right, and all the other "experts" did not, and is accusing the Nomura quant of a lucky one-time fluke. Needess to say, McElligott will have none of it, and highlights that as part of the sellside criticism of his take, there were "mis-categorizations/inaccuracies" on a number of fronts which need to be highlighted:

  • Misinformation as to the notional size of the selling which we estimated vs what was reported
  • Inaccuracies of the AUM scale of the CTA universe and position sizing / leverage allocation therein
  • Whether this “trigger” was a “deleveraging” of a long (size reduction of the long which it was) vs outright “shorting”(which was misreported / misinterpreted by some)
  • Omissions / lack-of-context surrounding macro- and positioning- / performance- catalysts which I’ve been documenting in recent notes that actually “kicked off” the move to said trigger levels
  • A general lack-of-awareness as to the make-up of the model--i.e. that we incorporate 2w, 1m, 3m, 6m and 12m windows to capture the broad-spectrum of CTA lookback periods across the trend universe
  • No context as to the incredible accuracy of the model—not just via the success that the tool has had in identifying “market inflections,” but with regards to our CTA replication model’s incredible track-record vs benchmark

Not satisfied with the evisceration of his most vocal critics, the man who is rapidly emerging as the true quant "Gandalf" writes that in light of "the incredible task of prognosticating 58 unique cross-asset futures contracts as our QIS team’s model does—and inherent requirements of trade direction / sizing / leverage of course—the index replication model is brilliantly accurate on performance-matching vs the index", to wit:

  • Since 2016, the model has exhibited an average deviation from benchmark of just 54bps, with a median deviation from benchmark of 48bps
  • Over the incredibly volatile last 6m both from a cross-asset realized volatility- and CTA performance- perspective, the average deviation of the replication model from benchmark is just 56bps, with the median deviation from benchmark being 58bps

And his crushing parting words at his desperate-for-publicity-and-page-views critics:

In the absence of viable alternative theories being presented from elsewhere with regards to the extreme and ‘price-insensitive’ -action and explosive futures volume on the sell-down—as well as an awareness that many competing CTA models on the Street grossly oversimplify to just a few of the larger asset futures and apparently do nothing more than incorporate a “VWAP breakeven” and / or simple “moving-average” logic—I feel more confident than ever in our TRANSPARENT model—especially as we alone have our performance historically tracked versus benchmark.


Having dispatched with a cohort of jealous wannabe quants, McElligott then focuses on the reason behind last night's flash crash "gap down" in equities, and - as he did earlier this week - notes that upcoming deleveraging levels in the S&P are now at risk of becoming outright shorts from systematic funds. He explains why:

  • Once those few brave macro funds who were fortunate enough to have performance in order to play for ‘Equities Upside’ around Powell / G20 event risk then began to monetize their trades immediately out of the gates Monday, in-turn created an avalanche of both large notional delta for sale as well as outright futures selling which clearly outsized buy demand flows
  • This “real” flow from fundamental / discretionary universe into very poor year-end liquidity then conspired with the latest cross-asset confirmation of the “end-of-cycle” growth-scare which picked-up Monday and Tuesday—this time from US front-end inversions across a number of curves and “corroborated” the slowdown / recession-type pricing which has already been made evident in US Equities “cyclical” sectors over the past few months
  • As monetization then triggered simple ‘stop-losses’ in light of the rapidly deteriorating risk-sentiment, we then hit the selling levels for the recently re-accumulated “Max Long” in SPX from CTA trend universe (who added $22B last week and another $16B+ on Monday this week to start Tuesday “Max Long”)
  • In light of the well-flagged “tight ranges” for systematic CTA buy- and sell- trigger levels from this year’s “chop trade” across the spectrum of horizon windows we track, this meant that despite again turning “Max Long” that we remained dangerously proximate to “deleveraging” levels which would in-turn “flip” both 3m- and 1m- horizons back from “long” to “short” around 2764 (cutting from +100% Long” to 82.5 to 65 to 47 to 30 to ultimately just 22% long as of the Tuesday close after clubbing through 2711)

So with the danger of an even more aggressive flush looming as systematic funds unwind what little remains of their long exposure and turn short, and in light of these newest "gap moves", the Nomura strategist notes that we are again near significant levels within reach across our asset spectrum. Of biggest note: it appears that when the S&P opens there may be another violent flush of selling, as CTAs turn from fractionally long to "max short" below 2,664. Incidentally, we are currently trading below this key level.

Here are all the other key market levels of note:

  • SPX +22% long, would be selling and getting max short under 2664.10 (-21.2bil), buying over 2769.54 to get 68.8% long (+8.2bil), and max long over 2809.59 (+5.4bil)
  • Russell -100% short,  buying over 1577.23 to get +53.2% long and max long over 1660.75
  • NDX +22% long, selling under 6424.00 (-14.2bil), buying over 7170.08 +68.8% long, and max over 7184.96
  • Eurostoxx -100% short, buying over 3231.73 -68.8%(+21.8bil), and flip to long over 3407.34 +53.2%and max long 3425.53
  • Nikkei -100% short, buying over 22,069 to flip and get long 22% (+54.6bil) and more buying over 22,094.5 to get +53.2% long (+14bil) and max long over 22,556.05 (+21bil)
  • HSCEI -68.8% short, should have sold last night to get max short under 10,663.82 (-2.2bil), buying over 11,034.22 (+8.8bil) and max long over 11,719.37 (+3.4bil)
  • US 10yr bonds -29.1% short, selling under 119.0369 (-17.2bil) and max short under 117.9431 (-23.4bil) buying over 122.6506 to get max long
  • EURUSD -100% short, buying / covering over 1.1401 to get to -89.9% short (+5.2bil), more buying over 1.1667 to get to -32.2% short, and flip to long and max long over 1.1895
  • USDJPY +100% long, should be selling today under 112.8644 to get to +89.9% long (-5bil), more selling under 110.4334 (-28bil) and flip to short and max short under 109.1255
  • GBPUSD -100%, buying / covering over 1.2784 to get to -89.9% (+4bil) and more buying over 1.3054 (+23.2bil) and flip to long 1.3428 to max long
  • USDCNH, +32.2% long, buying over 6.9081 (+4.2bil) and max long over 6.9427 (+800mil) selling under and max short under 6.4302 (-10.2bil)
  • WTI -16.2% short, should be max short under 51.4357 (-1.2bil) and holds -16.2% over 51.4462, smaller buying over 59.8621 to go -3.1% short (+200mil) and max long over 62.9969 (+1.4bil)
  • Gold +3.1% long, buying over 1284.19 +89.9% (+1.2bil) and max long over 1305.58 (+200mil), selling and max short under 1195.17 (-1.6bil)