"Extreme Gamma" - Nomura Exposes The Driver Behind This Week's Market Melt-Up (& What Happens Next)

The US equity markets - despite slumping earnings expectations, disappointing macro data, US-China trade deal uncertainty, and Brexit chaos - has surged this week (in the face of total denial by the bond market).

Every dip has been bought and every 'worry' excused - except bonds ain't buying it.

So what is going on?

Nomura's Charlie McElligott, managing director of cross-asset strategy, has the answer. First things first, the catalysts are:

  • Buybacks (Healthcare, Tech, Industrials, and Fins are the top 4 S&P sectors today and are 4 of the top 5 Buyback desk ‘executed’ sectors, with Mutual Fund Overweights / Megacaps +1.4% vs S&P +1.0% and RTY +0.8%, respectively)

  • Overwriters continue to systematically roll-out into Friday’s Quad Witch OpEx, driving a dealer “delta-grab” and further spurring mkt gains

  • Finally, VIX term-structure continues to compress and steepen further into contango, with systematic roll-down strats in “high cotton” again shorting volatility (VIX back to Oct 3rd / pre-Powell “a long way” from neutral on interest rates comment the following day)

But the big driver is more simple - its March Quad Witch Week!

The “March Surprise” window-for-stock-pullback scenario has, of course, anticipated this type of “melt-up” into Friday’s options expiration, as that’s the seasonality of “up into OpEx, down out of OpEx.”

There is ‘extreme’ gamma and delta - the sum of QQQ (Nasdaq) $Gamma within 1% of spot currently 98th %ile, while the sum of QQQ $Delta across strikes is 96th %ile), especially as the forced dealer delta grab via overwriter roll-outs CEASE and aligns with the buyback blackout commencement...

...On top of our systematic trend “sell trigger” levels being mechanically “pulled-higher” looking-out the next ~9-16 days which means only a modest move lower could risk of a repeat of last week’s “flip sellers” behavior from CTAs

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