Marko Kolanovic has done it again.
Last Thursday, one day ahead of the massive quad-witching where over $1.4 trillion in options expired in relatively tame fashion, the JPM quant warned of “near-term market weakness” and suggested “reducing US equity exposure. And, sure enough, JP Merlin’s Gandalf timed it impeccably yet again. To be sure, the jury is still out on what caused the selloff – lack of votes to repeal Obamacare, fears about Trump’s fiscal policy agenda, the market’s sudden realization that it is at 30 CAPE, or just a technical revulsion – what matters is that once again, like clockwork, Kolanovic called a key inflection point just days in advance.
And speaking of causation, Kolanovic is convinced that today’s selloff was largely due to technical selling, according to Kolanovic who reemerged with a follow up.
According to the JPM quant, Friday’s options expiration changed options dealers’ positions in a manner that left them more likely to sell into a falling market, which is precisely what happened today and is contrary to the market action from early March, when dealers’ positioning was skewed to the call side and helped dampen volatility.
“Following Friday’s option expiry, the gamma imbalance shifted towards puts for the first time in about 5 months and the market was ‘free’ to move again,” said Kolanovic.
Specifically, the S&P 500 option gamma imbalance turned about $20Bn towards puts as of today, creting a feedback loop and significantly contributing to the selling.
Furthermore, the modest but rising uptick in realized volatility is starting to cause outflows from volatility-sensitive investors the JPM quant calculated and, as a result, the break in short-term momentum may cause modest equity selling by trend following strategies.
In other words, in the absence of a positive catalyst over the next few days – and with uncertainty ahead of the Thursday Trumpcare vote only growing by the hour we fail to see one emerging – the double whammy of gamma positioning and the CTA momentum “flip” will be the catalyst for the next, extremely overdue, move lower.