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If we weren't so bearish we would say it should bounce now
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NASDAQ - king of mean reversion
Mean reversion is often a painful strategy. You short when everything feels great, and cover/buy when everything feels awful. On Aug 16 (here) we outlined how one should short the market even though everything felt great. Today it "feels" like everything is a mess and we are about to break down - which is usually the feeling at the lows of a range. We think it is time for the inverse of August 16 and time to start trading buy.
Source: Refinitiv
Mid June déjà vu?
The reversal in the US 10 year is significant today. This could be the short term shooting star that has rates reverse lower, at least in the short term. The set up brings memories to mid June, when rates did a similar type of reversal...and equities decided bouncing hard.
Source: Refinitiv
SPX - max agony
SPX is moving further into short gamma territory. Volatility itself isn't huge, but dealers need to sell more and more deltas the lower we move. Note this "eases" around the 3600 level. From a gamma "agony" point of view, a sharp move higher would cause the biggest problem for the short gamma dealer community as they would need to chase deltas furiously, magnifying moves in an iliquid market.
Source: Spotgamma
Say hello to extreme fear
In June we reached 17 before the market reversed...
Source: CNN
Say hello to put love
The crowd continues hating puts at local market highs, and loving puts at local market lows. They haven't loved puts this much in a long time...
Source: Tradingview
A quarter of SPX has RSI under 30
The bull in bearish breadth is getting extreme again. On the other hand, oversold can stay oversold for longer than most can stay long...
Source: Tier1Alpha
Households have puked bro
Hard to believe, but JPM's Nikos writes:
1. The US household sector appears to have returned to 2018 levels in terms of equity allocations or leverage, more than reversing the previous post pandemic increases.
2. This is another indication of how much equity investor positioning has downshifted this year, thus limiting any equity market downside from here.
Second chart shows the "shorter term" view.
Source: JPM
Source: GS
The CTA shorty
They were very short in time for the June reversal, then had to chase the bounce, and flipped into net long in time for the August reversal lower. Since then CTAs have sold aggressively and are now running net shorts. Do we see another frustrating CTA bounce? Chart shows US CTA exposure.
Source: GS
Some VIX panic is here
VIX term structure shifting sharply higher on a Friday is a sign of panic, especially as the shorter term maturities are trading in backwardation. The crowd chases short term protection when the panic kicks in, and this is exactly what we are seeing today. Nobody wanted "cheap" VIX, but they love relatively more expensive VIX. Do you go against the crowd?
Source: vixcentral
VIX caught up (partly)
More and more equity sales people have started showing us the longer term MOVE vs VIX gap. This is usually a late sign. We outlined the lagging VIX in mid August in our post, "Beyond boring equities - BIG stuff is moving". The VIX has moved sharply higher since mid August, while MOVE has done very little. People pointing out the gap here are very late to understanding cross asset volatility...
Source: Refinitiv
Under the hood "fear/panic" is here
The VIX 2/8 months futures spread has moved sharply higher over past sessions and is now at the highest levels since mid June. The spread is in "fear/panic" territory as the short end of the curve is relatively more well bid. We are far from "pure panic" though...
Source: Refinitiv
"Un-muting" the VIX
Muted VIX is gone. Back is the nervous VIX. Note that the short term gap between VIX (inverted) and SPX is now closed. Fear is here...
Source: Refinitiv
Two more things that are synonymous with a short term bottom
1. "Sell 'em all" style action this week as all major asset classes reported outflows, while inflows to money market funds jumped to the highest level since May.
2. High profile downgrade in the shape of Goldman's reduced price target for SPX.
