The month-long rally - which just happened to coincide with the period when the US government was shut down - died with a thud today, when first China reported another month of declining industrial profits, but the real hit came when economic "bellwether" CAT posted its biggest earnings miss in 10 years...
... and slashed guidance sending the stock tumbling pre-open, and once again crystalizing "peak earnings" and global growth concerns, while chip leader NVDA shockingly cut its revenue for the second time, this time placing the blame squarely on China, and sending its stock plunging by double digits.
Which brings us back to the warning from Nomura's Charlie McElligott, who last Thursday laid out various key reasons why he expects a spike in volatility and a sharp drop in equities over the week.
So a few days later, has Charlie changed his tune?
Well, as he admits, and as we reported over the weekend, a number of conversations the Nomura strategist held with clients last week "indicated a sentiment transition back into a “don't fight the central bank liquidity reversal” stance, with some real-money CIOs and PMs noting that they “have to” re-deploy cash into risk-assets on the medium-term, due to the change of footing from the Fed along with the PBoC escalation and despite the “end-of-cycle” signals being sent.
And yet, despite this FOMO approach to investing, McElligott repeats that near-term/tactical headwinds persist, among which:
- Large expected “Pension Rebalancing” estimates with significant notional selling OUT of Equities and INTO Fixed-Income on account of very extreme MTD performance, with flows likely to weigh on this week’s returns into month-end.
- Window for the “violent S&P selloff -17.5% in 6-7d or less” analog pullback remains in place for another week or so, still tracking the ’07-’08 and ’11-’12 analogs
On the technical front, following the recent greater than expected releveraging by CTAs to the long side, there is a lack of systematic trend “covering flows” at current levels, after having cut prior “Max Shorts” across Global Equities in-half over the past two weeks; this also means that the next wave of "buy triggers" is currently well above current spot market levels, so there is little risk for another forced short squeeze event.
Last, and perhaps most importantly, on Jan 30, there is a significant Fed quantitative tightening/balance sheet run-off event, which as per the "chart that every trader should have taped to their screens"...
... sees a major $7.5 billion MBS maturation from the SOMA/QT Calendar at -$7.5B of maturation — which as Nomura has documented since last July has corresponded with a major negative S&P, and positive VIX weekly change.
The good news is that even if he is correct, McElligott concedes that after the imminent “peak pullback risk” over the coming week, there are catalysts for another short-term rally immediately after due to the
- analog psychology tracking,
- the return of the corporate buyback demand-flow and
- potential for VERY volatile NEGATIVE model input dates of Feb 2018 to “drop off” the 1Y window (currently the largest single time-weighting) in our CTA Trend model, then MECHANICALLY LOWER the “buy trigger” levels