Despite the scary stock market headlines, there was no real panic yesterday, as the selling felt fairly mechanical and controlled as the marked was pulled down through 3300 in the S&P 500…
However, “large lot” sellers were very evident as Nomura’s Charlie McElligott notes, as Asset Managers reduce their exposure from the 93rd %-ile since 2006 creating an “additional source of supply” into this move.
Additionally, McElligott warns that off the back of this “VaR shock” thought – and in a market structure where volatility acts as your exposure toggle – the multi-day jump in realized volatility (“crashing UP” to ivol)…
…means that systematic rules-based investors will mechanically generate “de-grossing” flows, because positions (in light of volatility) are now too large and have to be sized-down.
Finally, the Nomura strategist notes that index options dealers vs spot as rather significantly short gamma (with spot deeply below the “gamma neutral” level in ES at 3371 today and $283.67 in QQQ), while leveraged ETFs were approx $6B of implied selling on their end of day rebalances across SPX, NDX and RTY products yesterday – both in-turn generating a vicious feedback loop and dictating the horrific price-action into the close seen yesterday.
…for every 1% move, there is ~$700mm additional Delta to either “buy” (into an up move) or “sell” (into a down trade) – which means we’ll continue to be very jumpy in both directions out through those expirations, particularly into said deeply illiquid markets into the election event-risk “VaR-down”.
As SpotGamma notes, for today 3300 is the “pivot” strike and we are anticipating a volatile day. Implied volatility is the key signal here, if it breaks down we could see a snap back rally up into the 3360 area. To the downside we see 3265 as support but note that negative gamma keeps building with lower SPX prices.