They Started “Shooting The Generals” – Nomura Warns Mega-Cap Tech Holds The Key

They Started “Shooting The Generals” – Nomura Warns Mega-Cap Tech Holds The Key

Markets are loudly turmoiling this morning with stocks dumped and pumped, bond yields lower, and crypto hammered as Nomura’s Charlie McElligott warns that mega-tech companies remain the key for the market overall.

USTs are again rallying despite the multi-day hawkish parade of Central Banks (well, everybody save the BoJ, lol), as we see a bull-flattening again after yesterday’s unwind-y flows in various “Hawkish Fed Tightening” trades (hence yesterday’s curve-steepening, as the front / Red ED$ / belly led the rally, which was further contributed to by some LDI buying in the 2Y / 3Y sector), with some more Omicron / COVID case growth numbers contributing to long-end bid alongside of course the implications of the accelerated global tightening cycle commencement.

And following-up said mention of LDI flows and recent thematic price-action in the curve, where it is becoming increasingly-clear that a return to ~98% funding ratios for Pensions (as per Milliman) is dictating a de-risking rotation in cross-asset markets, where long-end / Duration exposure is being added via STRIPS, versus de-allocation in Equities (late-day “programmatic” type sell- flows—e.g. recently “heavy” sell MOCs)

Source: Nomura

This year-end rally in fixed-income will again provide tactical opportunities for those looking at attractive entry points to trade from the bearish side in coming weeks- and months-, where Darren Shames notes that on top of the obvious “Fed is tapering to hike sooner” reality, that they too will be buying significantly less UST / MBS over the next two weeks short-term window  (no buy-backs btwn Dec 22nd and Jan 3rd), with the outright cessation of QE purchases by mid-March.

And the larger point on cessation of bond buying matters tremendously from the Vol perspective, because to Darren’s point, we will see a sudden expansion of price-discovery in fixed-income, where private-side buyers will be necessary to pick-up the demand slack in Treasuries and Mortgages in particular, as the vast majority of those buyers will be hedge-kind, meaning it’s likely we get more episodic “negative convexity” periods moving forward, just as the Fed is moving off the ZLB

Turning to stocks, McElligott warns thatthe stunning 2d explosion higher in Equities post-Fed – which as outlined yday wasn’t about improving sentiment or fundamentally-driven bullishness, but instead, buying-back of short Delta / “mechanical flows” from options Dealers – got rocked by some good old-fashioned idiosyncratic US Equities EARNINGS developments—and back down we went, with further follow through this morning…despite the macro tailwind seeing UST curves “bull flattening”.

Total chaos reigns in equities as options expiration sparks a major unclenching of gamma…

WHY? 

The ADBE outlook miss was just a soul-crusher for Growth heavy positioning after the short-term relief provided by the Dealer hedging-driven mega rally in US Equities post-Fed, with the -10.2% move in Adobe shares WAY over-realizing vs the implied move going-into earnings—which mattered a lot, as the Nasdaq’s 9th largest stock and rank as the 7th best NDX performer over the past decade (+2135.2% going into yday, which also makes it the S&P’s 13th best performing stock over the past decade)…all of which shows that this name has been a core holding and “hiding place” for a long time.

SO…..that nascent bounce in “Secular Growth” / Tech / Spec-y index heavyweights as part of the “everything rally” two days ago and which was due to the aforementioned options Dealer hedging flows coming out of the Fed Vol- and Hedge- clearing event—was again snuffed-short, with “speculative” Recent IPOs -3.4%, ARKK -3.7% and Unprofitable Tech -4.4% on the session.

But perhaps most critically from the “sentiment” perspective, they began shooting against “The Generals”, or those Mega-Cap Growth / Tech names which have been doing almost ALL the index “lifting” in recent years and hence, all the focus of deteriorating “breadth” of the rally in recent weeks:  GOOG -1.7% on the session, AMZN -2.6%, MSFT -2.9%, AAPL -3.9%, TSLA -5.0%, AMD -5.4% and NVDA -6.8%…which admittedly is NOT a good look into year-end.

And what did that mean?  We saw NDX and SPX futures “large lot” selling in our imbalance monitor as the largest selling pressure of the past 1m period yday for both, i.e. “real money-” / Asset Manager- type VWAP selling to cut Eq futures exposure in a major-way.

So despite that lumpy $Gamma sitting at both the 4750 and 4700 strikes in SPX, and most critically for QQQ, the big $Gamma up at 400 and support below at 395….got absolutely BLOWN through, in particular then accelerating to the downside in QQQ’s after pushing through $392.36 (level where Gamma flipped “Short” yday) and $391.56 (level where Delta flipped “Short”), as we now see spot in QQQ at ~$383.45…OUCH.

Nevertheless, the Nomura strategist notes that the trailing / lagging “catch up” in realized Vol vs implied has been a sight to behold: 1m SPX rVol is 19.2, which is 98.1%ile—and had been the driver of the enormous Equities de-allocation from “Risk Control / Target Vol” over the past few weeks which we now estimate at upwards of -$91.3B of selling in US Equities over the 1m trailing window (how’s that for “cleaner” positioning)…

The biggest point of all though is that the Equities pain isn’t about Index, it is about THEMATIC / SECTOR / FACTOR crowded-positioning disaster…because the global Central Bank “inflation hawk” pivot has created a Rates “expensive growth / tech” multiple compression “accident” with all this crowded legacy positioning being trapped into vapor moves to the downside and with peak year-end illiquidity exacerbating the mess.

Tyler Durden
Fri, 12/17/2021 – 11:10

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