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--------------------------------------------------------------------------------

NASDAQ TANKS AS "GAMMA UNCLENCH" ARRIVES - HERE ARE THE LEVELS TO SELL (OR BUY)

by Tyler Durden
Monday, Aug 22, 2022 - 03:00 PM

US equity markets are under pressure this morning with Nasdaq leading the charge
lower (having been dumped at the Asia open, the European open, and the US
open)...

The Dow, S&P, and Russell 2000 all reversed at their 200DMAs and look set to
test the 100DMA (Nasdaq never made it back to its 200DMA)...

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Wall Street Bounces, After Selloff Fed Boosts Liquidity

As Nomura's Charlie McElligott notes, one major reason for this sudden
volatility is the anticipated post Op-Ex “Gamma Unchlench” arrives and is
allowing US Equities a larger trading distribution, with several key technical
levels in play(or broken):

* Most critically after Friday’s heavy expiration activity, we now see Dealers
in “Negative Gamma vs Spot” location below 4219 flip-line for SPX / SPY
consolidated options (Note: QQQ, IWM and HYG all now in “Negative Gamma vs
Spot” territory as well)

* ES1 through the 4215 “50% high / low” retrace

* Through 4202 sees a break below the bottom of the mid-July bull channel

Nasdaq stands out as the most obvious pivot back into "negative gamma"
territory, with the ensuing 'delta purge'...

So what happens next?

As McElligott notes, from a “flows” perspective on the now two month Equities
rally, we have focused on:

* 1) Systematic strategy buying-to-cover from CTA Trend (+$78.6B of Global
Equities buying off the June net exposure low / peak of aggregated “Short”
positioning);

* ...as well as 2) Vol Control re-allocation to add back exposure (+$35B off
the May exposure lows), which only then accelerated the destruction of
downside hedges AND forced grabbing into upside...

* ...hence 3) massive Mechanical “Positive $Delta” flows from the Options
space, which at one-point were > +$900B of implied $Delta off the June low

NOW, however, we see those Systematic and Mechanical “buy” flows either largely
spent, or at risk of actually becoming supply a few weeks out, IF Vol was to
reset higher here for a sustained period of time

> 1. CTA Trend now sits in “no man’s land."
>
> Well-below releveraging buy-triggers overhead in US Equities futures... but
>
> Above de-leveraging / flip back “Short” sell-triggers...
>
>
>
> For the S&P, 3989 is key for a big purge (with 4094 the next support to watch
> at 100DMA), but for the Nasdaq 100 the 'level to sell' is close at 12,587.
>
> 2. Vol Control is the local tie-breaker, and it’s nuanced as-ever
>
> Vol Control in the NEAR-TERM (next two weeks) would require sustained 2.0%
> daily chg type days in-order to see a pivot back towards de-allocation (2%
> daily chg = -$4.7B over the next two weeks)—or, as an alternative, larger 1d
> absolute Vol shocks (e.g. a 3.0% SPX change today would see -$2.3B of VC
> de-allocation selling)
>
> 3. From a Vol mkt perspective, Spot lower / Vol higher and resumption of
> downside hedging demand
>
> (Skew actually performed on Friday) will see NEGATIVE $Delta flows picking
> back-up.

For the Nomura strategist, the key for this nascent selloff to hold is going to
be the willingness then of ACTIVE / DISCRETIONARY traders to again “lean into”
the market and resume “Shorting” HERE AND NOW while the post Op-Ex “window for
Vol expansion” is open, and / or take down “Nets” again ahead of a rough
seasonal for Equities, coming after what’s been a vicious two month covering
explosion across previously “grossed-UP” Shorts in “worst of” themes...

...so there is some scar tissue to sort out.

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DID FRIDAY’S MOVE MEAN THE BEAR IS BACK?

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SPX - 200 day moving average perfection

This could actually become the textbook reversal. You don't buy into longer term
trend lines and the 200 day moving average. Supports that matter are: 4200 and
the 4100 area.

SOURCE: REFINITIV

SPX - the short term view

SPX fell below the short term trend channel that had been in place since mid
July. Resistance levels are 4260 and recent highs at 4320. Supports are 4200 and
then the 4100 level.

SOURCE: REFINITIV

NASDAQ - another perfect reversal?

NASDAQ reversed right off the negative trend line. First real support is at
12900. Noteworthy is the negative divergence in the RSI.

SOURCE: REFINITIV

Kostin travelled to arrive

King Kostin: "The S&P 500 has reached our year-end target of 4300 four months
ahead of schedule. Looking ahead, upside risks to the index seem limited given
this macro backdrop. But downside risks loom...." (GS head of strategy)

The pillars the squeeze stood on...

MS US Chief Equity Strategist Mike Wilson highlights that the surprising
magnitude of this bear market rally has been driven by a combination of better
than feared 2Q earnings, light positioning, and continued hope for a less
hawkish Fed path. Maybe these support pillars are starting to "crumble" now.
Q3/Q4 and 2023 numbers are starting to get revised down, positioning is not as
"light" as 6-8 weeks ago due to massive short-covering and CTA buying and
lastly, while inflation appears to be peaking, it's not likely to come off at a
pace fast enough to spur the type of sustained Fed pause the equity market is
already discounting (Morgan Stanley)

VIX looks so tiny - bond vol edition

Can VIX stay this "tiny" if bond volatility, MOVE, makes such a "comeback"?

SOURCE: REFINITIV

VIX looks so tiny - FX vol edition

The most recent move in FX volatility is actually huge. VIX was up on Friday,
but there is much more potential for VIX to move as equity people realize that
"systematic" funds chase momentum and the fact cross asset vols have picked up
lately...

SOURCE: REFINITIV

The bitcoin "connection"

If crypto still is a good indicator of the "aggregate" psychology of the market
then you should pay close attention to the latest px action in the "crypto
majors". The BTC vs NASDAQ correlation perfection is less perfect these days,
but it revived on Friday. Third chart shows NASDAQ vs ETH.

SOURCE: REFINITIV

Systematics - short gamma, but no theta?

Systematic strategies have traded like they are running huge short gamma, but
they have not received any theta. Most of these strategies are trend/momentum
based, and when there is no real trend, they end up pressing lows and chasing
highs. We have seen huge buys from this crowd over past weeks, but they
are running out of dry powder...just in time when people decided to front run
even more buying.

SOURCE: GS

They can sell as well

CTA momentum chasing works both ways. Things could get "nasty" if the CTA
community starts reversing the latest buy flow. Reshuffling risk is not overly
easy at the moment, especially not if you want to do it quickly. Scott Rubner on
the CTA flow from here: "$13B to Buy over the next week in a flat tape ($3.3B in
S&P) / $17B to buy over the next month ($5.7B in S&P)… -Over the next month…Up
big tape $48B to buy...Down big tape $147B for Sale…"

SOURCE: GS

September is approaching

We all know September is not a great month from a seasonal perspective.

SOURCE: GS

Ready for VIX

Gentle reminder about the VIX seasonality.

SOURCE: EQUITY CLOCK

This buyer is slowing

Gentle reminder via Scott Rubner about the corporate buyers: "...Corporate
blackout window begins on Sept 15th – one of the biggest buyers in the market
slows – reminder they have 10b5.1 plans in place but pace reduces by about 1/3"

Short pain in a pic

The latest short covering has been extreme. As GS outlines: "On a percentage
basis, the cumulative 20-day covering from 7/20 to 8/16 is still very large and
ranks in the 99th percentile – omitted the 17th and 18th as we’ve seen modest
“re-shorting” in the past two sessions."

Max pain market continues...

SOURCE: GS PB

At least we saw greed

Recall we touched greed territory briefly earlier this week...

SOURCE: CNN

Bulls beware

Goldman's positioning indicator is way off extreme lows and actually at one of
the least extreme levels of all of 2022. The GS "Sentiment Indicator" measures
stock positioning across retail, institutional, and foreign investors versus the
past 12 months.

SOURCE: GOLDMAN

Talk the bearish talk....

....but maybe not walk the bearish walk......Investors say they are extreme
bearish in surveys, but still have relatively high portfolio allocations to
equities and are still running elevated leveraged positions. It's like listening
to the "All In" podcast - they have been hysterically bearish now for a while,
but they are all intrinsically long....

SOURCE: TOP DOWN CHARTS

Never forget - we move into short gamma on sell offs

We had a relatively big "gamma roll off" post this expiration, the "stabilizer"
is gone. Don't forget that we also flip into short gamma should the market move
lower. Absolute levels to the downside are not big at the moment, but demand for
downside protection could "kick in" again, leading to vol becoming bid, dealers
selling deltas to delta hedge and the entire short gamma dynamics play out
again.

2 days ago at 13:10

--------------------------------------------------------------------------------

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