"That Was One Of The Most Manic 36 Hours Of Trading In My 18 Year Career"

To commemorate the most ferocious reversal in the market observed in years, we shared a laconic comment yesterday via twitter on what happened in the stock market in the milliseconds (and minutes) following Trump's Thursday afternoon tweet:

Of course, the trader "surprise", and what happened yesterday has to be taken in context - a move that first saw stocks plunge, then recoup all losses, then replunge... and continue to plunge today, in the process wiping out both shorts and longs.

That said, we were not the only ones to feel dazed and confused by the market action of the past 3 days: Nomura's Charlie McElligott was just as frazzled, if not more, noting in his latest letter to clients that "that was one of the most manic 36 hours of trading I have ever witnessed in my 18 year career."

Why? Read on the following selected excerpts from his Friday note for the various reasons why few will forget what happened over the past several days.


Well that was one of the most manic 36 hours of trading I have ever witnessed in my 18 year career

President Trump has again changed the market calculus—and thus investors (myself clearly included) are now forced to adjust their views on the monetary policy path from here, as this re-escalation of the China trade war likely forces the Fed (and “competing” Central Banks in beggar-thy-neighbor currency devaluation fashion) to once-again ‘bend the knee’ in preemptive strike against the negative forward growth implications

Thus, we now see FOMC OIS implying another 25bps now being fully priced-in for the Sept meeting (assuming 2.15 Fed Funds Effective), whereas after the Fed those odds were trending down through ‘just’ 60% likelihood.

As per my initial note yesterday, I was ready to enter a (now laughable) tactical “long USD” + “short duration” position (as well as a broad reversal of “momentum” themes within Equities—i.e. “long IWM / short Tech” with both a +USD and positioning pain “kicker”) into August’s seasonal volatility and high likelihood of Fed disappointment in September as per the Powell commentary.

What I was thematically anticipating was a broad “grossing-down” of popular cross-asset macro positioning on account of what I perceived as low prospects for any September easing from the Fed (due to stable US data and the Fed’s prior day messaging on their collective mindset, preferring “insurance” as opposed to “easing cycle”) and into PM mentality shift to monetization ahead of August vol / illiquidity

That said, following 1) the ugly ISM print details and most importantly 2) the fresh tariff round escalation from POTUS, that mindset has been conceptually “stopped-out” dead in its tracks, with a fresh wave of “stop-ins” to all-things Duration- / Rates- linked (i.e. +4SD move in Red ED$ yday)

This “Duration-Grab” has taken many forms:

  • Real Money—both foreign and domestic—have been driving the demand seen on our desk for weeks, and that continued yday
  • Overnight there was talk of Asian Real $ flatteners going-through, as well as outright long-end buying
  • Suffice to say that on any breakout to new levels (in this case, fresh multi-year levels), you are likely going to see (negative) convexity hedgers active—which from the looks of the trade in swaps yday, we got that in the form of new Receiving flows
  • Also too then it’s likely that there are fresh duration buys in the long-end originated from Vol Dealer desks, who too are being forced-in as per Gamma hedging requirements from the incessant Receiver demand

Yesterday the market “voted with its feet” in regard to “Fed Policy Error” via their perceived miserly 25bps cut and QT-cessation, destroying WTI Crude (-7.9% yday, bouncing today +2.3%), Breakevens (5Y -7bps yday, flat today) and 5y5y inflation (-8bps yday, flat today)—as such, Cyclical Equities were destroyed with Industrials -2.0%, Energy -2.3% and Fins -2.3% as the S&P’s three worst performing sectors—thus US Value factors were hard-hit as well;

Because of this explosion higher in “all things duration,” the big winner of the day within US Equities was thus “1Y Price Momentum” factor, which as I have explained for months is a pure expression of “Long Duration, Short Cyclicals”—thus posting a spectacular +3.6% return on the day, which was the largest positive daily return for the factor in over 3 years

As an indication of the “foaming at the mouth” nature of the current “Duration Grab” into today’s NFP—which up until yesterday had major potential to rock the boat of the Rates trade—a competitor’s survey of Rates Clients showed the highest proclivity of respondents to “buy the dip” in USTs on any upside surprise in today’s Non-Farm print since November of 2010

Please see my “Sequencing Adjustments” notes below for August “Equities Pullback” catalysts (Dealer Short Gamma, Dealer Short Vol, Systematic VIX Roll-down Unwind, > 95th %ile HF Gross Exposure, VIX + Seasonality / August Illiquidity which incentivizes “book down” behavior), perversely then into the clear risk thereafter of a powerful “short squeeze” thereafter on all of the new Fodder as single-name / ETF / index futs shorts which were pressed in size yday and into the inevitable September dovish Central Bank policy response.


We certainly got our anticipated August “Vol Spike” call correct, with US Equities ‘vol of vol’ (VVIX) seeing a 9.2 vols move yday alone and indicating a massive grab for tails, as the whole curve was lifted. In line with this view, Equities are clearly now “open for the pullback” in the following weeks on mix of the following catalyst--

  • Dealers now clearly “Short Gamma” in Index / ETF (flipped below ~2980, as I highlighted in the past few notes ahead of the move)
  • Dealers now too are clearly “Short Vol” in-bulk, thanks to the “50 Cent” VIX upside flows which have been trading in SIZE over the past few weeks
  • Similarly, Systematic VIX Roll-down players in recent weeks had definitely reapplied significant size to the “Short Vol” trade, as per VIX futures positioning—thus, with the curve again “inverted,” they will be forced / unemotional hedging of these front-end shorts in UX1 and UX2
  • Per competitor PB data, HF Gross-Exposure sits at > 95th %ile on a 10Y historical--yeouch
  • VIX seasonality shows that the average VIX return in the month of August is +9.2% over the 29 year history of the index, the best avg return of any month and nearly +50% over the 2nd best month for VIX (which mind you happens to be September at +6.9% on avg)
  • The currently higher level of realized vol will begin to “drag up” trailing realized vol inputs for the “Target Volatility” systematic fund universe, which are significantly positioned and thus open to mechanical deleveraging—i.e. our CTA model’s current ~ 10m high $ allocation to both SPX and NDX futures positions
    • As per my below tables, we would expect to see CTA deleveraging in the current +100% Long positions in SPX futures under 2916 (get to +56%), while Nasdaq futs would deleverage below 7731 (same 56%)
  • Finally and anecdotally, we are now into the standard PM pre-holiday “gross-down” season, especially with YTD gains incentivizing profit-taking and after the “scar-tissue” of 4Q18 has conditioned folks to “take chips off when you CAN, not when you’re FORCED to”

HOWEVER, this “August Pullback” risk has to be watched with extreme precision, as the follow-up from there is the “perversion” I noted yesterday—which is that these market-shock events only FIRM the case for more investor conditioned “buy the escalated Fed easing case,” as external risks to growth further percolate—likely then forcing September to see a wave of fresh Central Bank “capitulatory easing.”

This danger of a ripping-rally thereafter is even more clear if you think about the amount of dynamic hedging Futures Shorts laid-out yesterday—as well as the fact that Equities funds were VIOLENTLY pressing their Shorts (i.e. 1Y Price Momentum Shorts closed -3.2%, a 1.2%ile outcome since 1984).

Punchline: this means there is massive “fodder” again building for another “Global Central Bank Policy Response” short-squeeze in the making ahead of the big September meetings.