While we previously discussed the "why" behind today's selloff, which as noted earlier was a story in the Indian press suggesting US-China trade talks have hit an impasse, the next question is "who"? This is a relevant question because if one looks at oil, for example, instead of stocks, one will find a series of violent daily reversals, which have seen CTAs turn from max short, to max long, and back to max short again.
As Nomura's Charlie McElligott writes in an ad hoc note this afternoon, the CTA model for WTI Crude flipped “-100% Short” earlier today (looks that way per the “TWAP selling in machine” look of the chart), reversing entirely from yesterday’s previously re-established +100% Long positioning, culminating an "enormously volatile past few sessions", which have seen CTAs turn +100% Long last Friday but deleveraging to just +35% Long Monday, before forced re-leveraging on the Monday/Tuesday rally to +100%)
CTA rollercoaster in oil aside, equities remain in "bizarro-world" according to the Nomura quant, off the back of just two miniscule down-trades: yesterday’s -75bps SPX move followed by today’s -30bps “selloff” have incredibly sent VVIX back near ~100 (as Tom Eason said in his best deadpan, “…market’s pretty tightly wound here” with regard to ‘tails’.)
And yet, despite the massive marginal moves in oil, McElligott writes that in keeping with his YTD observations on the “Max Longs” in Bonds / Rates / EQ within systematic trend, regarding the CTA model he actually sees "both the US Equities Futs and UST / Rate positions remaining ITM (Equities moreso, USTs / Rates closer to triggering however) and above current deleveraging levels (see below for levels coming to today)." Indeed, as the following observations on trigger points show, there is a ways to go for equities before CTAs "flip":
- S&P 500, currently 100.0% long, [2923.1], selling under 2865.74 (-1.96%) to get to 57% , more selling under 2600.55 (-11.03%) to get to -100% , flip to short under 2600.84 (-11.02%), max short under 2600.55 (-11.03%)
- Russell 2000, currently 100.0% long, [1577.6], selling under 1553.11 (-1.55%) to get to 57% , more selling under 1542.0 (-2.26%) to get to -100% , flip to short under 1542.15 (-2.25%), max short under 1542.0 (-2.26%)
- NASDAQ 100, currently 100.0% long, [7756.5], selling under 7512.71 (-3.14%) to get to 57% , more selling under 6526.51 (-15.86%) to get to -100% , flip to short under 6527.29 (-15.85%), max short under 6526.51 (-15.86%)
- ED4, currently 100.0% long, [97.625], selling under 97.44 (-0.19) to get to -100% , flip to short under 97.49 (-0.14), max short under 97.44 (-0.19)
- USD_10Y, currently 100.0% long, [123.578125], selling under 122.29 (-1.29) to get to 54% , more selling under 119.44 (-4.14) to get to -11% , flip to short under 119.44 (-4.14), max short under 118.76 (-4.82)
If not CTAs, could today's coordinated selloff in stocks and bonds be blamed on risk-parity funds? The answer, according to the Nomura strategist is that this "may be the case on the margin; but rarely is it that simple, especially as the bank's risk-par model would require FAR more significant moves in realized vol to drive a sharp de- or re-leveraging; instead, their flows tend to look rather “counter-cyclical.”
So if not a systematic - CTA, risk parity, variably annuity - deleveraging, what is behind today's sharp dump? The answer, to McElligott, is that we had "a lot of people on the same side of the same trades with the same view—and it was working fine; stability breeds instability however, and all it takes sometimes is a modest tweak to a narrative which then “tilts” excess positioning / leverage into a correction with occasional “cleanses.”
As for the selling catalyst, while the US-China trade story may have been the initial snowball to launch the avalanche, what accelerated the slide is simple: too many funds were on the same side of the trade. As a result, according to the Nomura derivatives expects that...
"much the same way that Jerome Powell nuked cross-asset vols in early January with his “pivot” (through squelching Rate Vol and backing down on tightening & the balance-sheet)….it’s totally rational that we could then see the opposite motion (GASP!), as Jerome’s very simple “transitory-” and “patience-” focused message yesterday (which as per my note this morning is heavily overrated) “suddenly” then sees markets lose what was perceived as “clear” forward-guidance on the path of interest rates (lower)—especially after the past month guidance from Fed speakers themselves on weakening inflation trend forcing a re-think of policy and / or potentially meriting “insurance cuts."
Or, as we said it yesterday morning before all the post-trade post-mortems hit the inboxes, "The Fed Could Set Off A Stock Meltdown Today." It's slowing getting there.