The last three days in stock-market-land have been somewhat farcical as stocks have exploded higher (dominated by action at the cash market open) while bonds have refused to follow suit…
What drove this crazy? Simple – as Nomura’s Charlie McElligott notes – A good ol’ fashion short-squeeze:
The cross-asset-class strategist noted that yesterday our futures imbalance monitor showed the largest 1d “buy pressure” in S&P futures that we’ve seen over the past month across all lot sizes and the 2nd largest “buy pressure” in NQ futures over the past 1m
And the squeeze has sent Delta and Gamma imbalances soaring back to extremes in S&P and Nasdaq…
What is most interesting is that – as predicted in the post-opex window – Nomura’s Vol Control model did de-allocate yesterday to the tune of -$2.9B…but against that much $ squeeze, it was like “Pissin’ In the Wind” as the late, great Jerry Jeff Walker would say; today an “unch” day would be a “no change” from VC; a + or -1.0% 1d change would be another -$4.4B for sale; a + or – 1.5% move would be -$11.2B; and a + or – 2.0% move would see a -$32.5B to go (liquidity constrained, of course).
What does that mean? Simple again – more pressure building as Minsky glimpses over the market’s shoulder.
McElligott concludes ominously:
…even moreso because of the violence of the two day rally, the “delta-one” second order “accelerant flow” catalysts for a risk-off move remain tied to:
1) the potential for this “overpositioning” (especially as it relates to still-low realized vol from systematic funds) and how tightly wound it would be into a selloff over the next few weeks (massive VC $ to dump with each passing day)…
as well as 2) now “extreme” long $Delta as a de-risking flow overhang IF some sort of hypothetical pullback were to “stick”…
However with this latest iteration of “buy dip via sell rich vols” trade, it feels like we are going to need a macro “vol catalyst” tiebreaker (pray for a Jackson Hole surprise, despite nobody seeing that as an option here in Eq or in Rate Vol space)
In other words – brace!