Are retail bagholders about to get “muppet”-ed again?

Nomura’s Charlie McElligott warns that the “election narrative overshoots” continue to swing wildly on the imminent event-risk approach – and partially as a function of horrific market illiquidity, with banks / dealers on facilitation lockdown, as per Risk Management “VaR shock” muscle-memory from 4 yrs ago:

First, it was the “Extended Election Chaos” scenario as vols out into Dec and Jan went super sticky ‘bid’ into what was at the time an almost consensual “buy-in” to the worst-case-scenario of a disputed outcome with vote recounts / Supreme court involvement, fraud allegations, civil disorder and general policy confusion which in-turn scared hedgers straight and saw the bid vol expiries well past the event itself;

Then it was “Blue Wave” mania, which was based upon a rather sudden shift in market view away from “standard” Wall Street views on (negative) Democrat policy implications for the economy and market, and instead, into one where a unified Dem WH / Congress / Senate would see unpredented government spending and fiscal largesse (“Fiscal as the new QE”), in turn creating a growth- and reflation- impulse which could then theoretically offset concerns surrounding tax hikes and re-regulation in one big vol compression trade;

Yesterday, we witnessed a broad repricing of vols higher (at first blush, lots of negative COVID-related headlines especially focused in Europe) – BUT, particularly back into the election event date itself – on what I believe is the increasing concern of a “Split Leadership Outcome,” with Democrats taking the White House and holding Congress but with Republicans holding onto the Senate, where they would act as a thorn in the side of the new Administration and likely see a swing back towards fiscal conservative roots as “last line of defense” on perceived wreckless government spending and overreach – ultimately meaning less incrementally “tighter” deficit- & fiscal- spend from the government.

But, most importantly, McElligoot notes that Nomura’s “Intraday ES1 Traded Imbalance” model then too showed that “large lots” – i.e. Asset Manager type flows for lots 100-500 – showed an all day, passive VWAP / TWAP -type offer, as they seemingly reduced down from what was their 92.3%ile net long notional exposure (back to ’06).

In other words, the big boys are leaving the market…

And as SpotGamma notes, while we did get a strong rush of selling off of the 3400 break yesterday, the updated data seems to confirm last nights reading that the 10/26 OPEX flows and dip buyers forced a market recovery.

Its also clear that the selling lacked any real follow through in S&P based on little new SPX put additions. There is now a big put zone at 3300 and a large call zone at 3500. We maintain that it’s a slippery slope if markets shift lower due to the put positions at 3350 on down. The mechanics of negative gamma could push selling, but there is little dealer buying pressure above 3425 and this picture likely holds into 11/3.

For today 3400 is the key pivot area, with Combo Strike resistance at 3420. To the downside we note 3350 as first support, and expect negative gamma to increase sharply if we test that area.

…and don’t be a muppet.



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