With traders puzzled by the sharp rebound in stocks from last week’s modest selloff, earlier today we reported that Nomura’s Charlie McElligott had a theory that explained said market move higher, one which revolved around three catalysts:
Buybacks (Healthcare, Tech, Industrials and Fins are the top 4 S&P sectors today and are 4 of the top 5 Buyback desk ‘executed’ sectors, with Mutual Fund Overweights / Megacaps +1.4% vs S&P +1.0% and RTY +0.8%, respectively)
Overwriters continue to systematically roll-out into Friday’s Quad Witch OpEx, driving a dealer “delta-grab” and further spurring mkt gains
Finally, VIX term-structure continues to compress and steepen further into contango, with systematic roll-down strats in “high cotton” again shorting volatility (VIX back to Oct 3rd / pre-Powell “a long way” from neutral on interest rates comment the following day)
Of these three, the key driver was simple – the notorious March Quad Witch, i.e. “Freaky Friday” (as a reminder the last two quads took place at key inflection points: the 21st Sep print of 2940 preceded a three month equity selloff of almost 20%, followed by a 21st Dec print of 2458, or 16% below current spot).
The “March Surprise” window-for-stock-pullback scenario has anticipated this type of “melt-up” into Friday’s options expiration, as that’s the seasonality of “up into OpEx, down out of OpEx” shown on the chart below.
And speaking of the “extreme” gamma and delta positioning, McElligott noted that the sum of Nasdaq Gamma within 1% of spot is currently in the 98th %ile, while the sum of QQQ Delta across strikes is 96th %ile, which explains the forced dealer delta grab via overwriter roll-outs CEASE and aligns with the buyback blackout commencement.
The electronic ink was barely dry on McElligott’s note when Goldman’s vol trader, Moran Forman, magically came out with “his own” take on the upcoming market reversal, which surprisingly also revolved around two things: an anticipated slide in dealer long gamma positions (just as Charlie noted above), and the drop in buyback activity (an idea which again was “inspired” by, well, see above).
Whatever the source of Mr. Forman’s analysis, the Goldman trader is correct that after Friday, 2 major “vol-dampening” forces will be gone, meanwhile with Trump also kicking the China Trade can down the road into April (at the earliest), Goldman writes that “it feels like VIX creeps higher again.”
To summarize Goldman’s three catalysts for market turbulence:
BUYBACK BLACKOUT WINDOW: 3/25/19 …read more