Last week, when previewing the next big slide in stocks, we warned that according to Nomura calculations, CTAs, or trend-following models had just turned bearish, going net short the S&P for the first time in three years. As we further explained, once CTAs turn from even modestly bullish to net short, "it will no longer be about covering long exposure but rather adding to the short side, and by implication, the more the market falls, the more shorts will be laywered on and the greater the downside momentum and acceleration."
And as Nomura warned, "now is the time when CTAs are likely to chase further downside of SPX futures by starting to add fresh shorts, and thus we will have to keep a close eye on trend-following investor reactions."
That's precisely what we observed on both Friday and especially Monday, when we saw a massive layering of shorts which in turn slammed the market to its worst Christmas Eve drop on record.
Unfortunately, today we have even more bad news for those tracking technicals and positional indicators.
First, as Nomura quant Masanari Takada writes overnight, in addition to the increasingly bearish algos "overall hedge fund investors also seem to have greatly reduced their risk appetite, with only limited purchases of US equities on dips."
Meanwhile, confirming the observations from last week, Nomura now estimates that systematic trend followers such as CTAs added fresh short positions on US equity futures to chase the downward momentum at fast pace.
Only it's not just the US anymore: according to the Japanese bank, it has widely observed such “bearish trades” by algo investors, not only in the US stock market but also in other advanced economy stock markets; in other words, CTAs are now net short the entire developed world.
In his ominous assessment of the latest technical moves, Takada writes that "it would be highly possible that the trend followers like CTAs go for broke and have been expanding speculative short positions on global equity markets."
And as Nomura concludes, ahead of the year-end holiday season where market liquidity tends to lower, "we have to keep in mind the risk that selling pressures on equity futures from systematic trend chasers will, on a relative basis, be significant during this period."
One look at today's abysmal market action, which saw the Dow spike at the start following Trump's beckoning to BTFD, only to fade all gains, and then fade Hassett's vow that Powell's job is "100 percent safe", confirms that the selling may well continue until we finally get the last, capitulatory flush (if not beyond).