In early June, Nomura’s Charlie MacElliott warned of an expiration of an option on the sand this month, which could ruin (albeit not for long) the V-shaped stock recovery story:
“In this case, it is VERY IMPORTANT to switch our attention to the sequence of months, especially when this can happen. Two Deals Based in the First Two Weeks of June Being historically a “bull / stock” trader, trading up options on a serial / quarter of June, against the last two weeks of June in a more “defensive” position.“
Given the fall after surgery this week, it looks like a cross-asset strategist has nailed it.
However, the question is, what will happen next?
The last three weeks – that’s how it should have looked – “Trade up, trade down”, finally, the June phenomenon of the expiration of serial options came.
As history shows, the more stable the UP transaction was in June operations, the greater was the subsequent trade (since 1993):
While this week’s weakness was due to fears of the second wave of COVID, Mackelligott notes several more technical factors that are more likely for drivers:
Gamma “open” (after a large decline in quarterly options expiring last Friday) will allow a wider distribution of trading results this week due to a reduction in hedge flows of dealers who suppress the range, due to a decrease in flows of “rolling” rewriting calls. beginning of repurchase ”and a pension at the end of the quarter, rebalanced from stocks to bonds, conspiring to lower the index … just like the seasonal phenomenon made us expect at the end of June, when the period of“ protection ”for the cyclicality of the leadership is already coming.
The above catalysts have become particularly interesting due to the expected clustering this week 1). dealer level “gamma-flip” (from “long” to “short”) at about the same 3050-3080 approximate location during the week, where we also expected 2) CTA de-leverage in the inherited S & P signal “+ 100% Long”, which worked yesterday at closing below 3053 and was probably a large part of the flow down to 3005 during the night (signal S & P is now “-28% Short” FWIW), both of which will act as “accelerating” flows when moving lower.
Dealers have become even deeper “Short Range”:
And so, we are in the June counterpart of the Op-Ex days:
So, as McElligott notes, here’s some good news for long ones:
Due to the ferocity of this downward trade (-4.5% from Tuesday’s high to overnight low) we have the DOUBLE downward median typical of the Op-Ex 2-window post has already been reached
Thus, Nomura MD suggests (returning to the second chart above), we can see that the median returns on 1m, 2m, 3m, 6m and 12m come out again gradually to increase bullish – and also come with a very high “Success Rate” above 76% , 71%, 76%, 76% and 88% of the time, respectively. In addition, McElligott indicates that he expects exception TVIX (and its recent ~ 85 m Vega) to rely on VIX front futures within ~ 1 m, especially since there is no certainty that this exposure will return 1: 1 to the other remaining VIX ETN products, since it is almost exclusively a means of retail trade, and not a “holding”.
So, for now, McElligott thinks that the next deal is quite optimistic about the next 1-2 meters, with potential for “Shares up, UST down / yield up” trading – especially as clients continue to express a desire to “buy failure” in revising negative earnings (a +++ for S & P FWD), as well as with recent notable references to the ongoing redistribution of shares into volatility from Vol . The controlling universe (which, probably, then could also look like a variable annuity “sale” of flows from the UST) …
… and all with fresh CTA base “Equities Short” as a feed for squeezing into any additional macro-relief after this last crash of “wave 2” (perhaps as investors grow numb before the “rise in cases” and instead theoretically see that the level of hospitalization remains low).
Here is Charlie explaining the way forward on CNBC this morning: