With the S&P having its biggest down day in months at down 1.75%, so we thought that some color from our big US Equity franchise in a Q&A would be a help ...
1. What is the tone among equity investors?
Zero panic across the equity floor @ BofAML.
2. Who is selling?
Hedge funds. Zero selling from real money. Hedge funds are forced sellers based on price action, not necessarily they want to sell because of have weak hands. I call this a “buyers strike” rather than anything else.
3. Are the sells short or long sells?
Almost all of the orders that we executed have been long selling. There is no one pressing this tape from the short side. We are seeing shorting however in the yield based sectors: HYG (high yield corporate), JNK (high yield), EMB (emerging market debt), IWM and RTY Index (Small Cap), and IYR (REITs), NBI Index (Biotech). All large cap, tech, industrial, energy selling has been orderly and through ETFs, long sells.
4. Is the equity sell off fixed income or FX driven?
No. Fixed Income is flat and G10 FX is flat, the sell off started in equities and ends in equities today. Investors are reducing risk ahead of both month end and tomorrows Non Farm Payrolls print. Most of them are going to take off all of August anyway.
5. Is this the start of the autumn correction?
We don’t think so. However I do think however this comes into play here: Consensus from everyone is that we sell off 5%-10% post the summer. Although valuations still look cheap, equity investors think excesses in the credit market will spill over and we correct before a large Q4 equity rally. The mentality is to sell early before everyone else. Traders are running to the sell button even faster.
6. How much technical damage is done today?
Key technical levels were broken today 1944 on SPX and 4341 on NDX. In SPX, we are trading around this 1944 level, if this were to hold upside risks remain. If we will fail to hold this level going into the bell, then next stop is 1925 and 1902. The VIX Index breaks out from the base and may need to get into low 20s to suggest elevated vol levels are here to stay. Dealers are long a significant amount of gamma, look for this hedging flow to lend a bid to the market as we head into the close on SPX.
7. How big is the vol move?
Heading into the afternoon, we will have to see if the trend of the afternoon melt-up continues, On the margins we have seen some protection buying, but most of the downside flow has been rolling existing hedges; and the largest trade of note was another bullish risk reversal trade. Vols are up, as you might expect, with the front months increased 60/75 bps and the longer dates adding about 25bps; however speaking with the index desk they think the price action reflects the long gamma of the dealing community and like the chances we close higher than here. That massive option trade went up again, same exact trade as yesterday, buying the Oct 2050 calls ($3.5B) and Dec 2125 ($3.5B) vs selling puts. Someone is clearly bullish. The biggest trades today are calls, not puts.
8. What is the flow in programs?
Programs are seeing “opportunistic” buyers of the dip from real money accounts in smaller size. We expect this to ramp up into the bell. Seeing very active day on the corporate buy back desk, both here and away. Coporates taking advantage of these levels to buy stock back.
9. What triggered the move, what is actually new?
Argentina default, Banco Espirito capital raising, Samsung Earning miss, more unrest overseas, data was overall mixed. Chicago PMI significantly below expectations, dropping 10 points to 52.6. This contrasts with the Philly Fed and Empire State manufacturing surveys which were both quite strong in July. Within the Chicago PMI, new orders and order backlogs are both at one year lows. GDP, FOMC, NFP, and ISM when does this normally happen in the same week?
10. Is this all macro driven?
EMFX selling pressure continues, also seeing unwinds of Euro, and interest to buy $calls vs everything else CAD, AUD, JPY. In fixed income literally accounts have literally traded in and out in the same day, now we are better to buy. Swap flow has been more one way receiving. In commodities everyone is selling oil and buying vol, mostly puts.
Bottom Line: No equity panic, selective buyers of the dip, I am waiting for this2:30 bid to the markets, I think we close higher then here (time stamp 1940), as real money fills their orders for month end. Tomorrows Non Farm Payroll print is extremely important. One of the biggest firms clients told me that they are unable to actually process all of this data and it takes 3 days for the reaction to take place in the market, really stuck with me. Too much data this week. Good data, bad data, no matta. Be bullish heading into the print tomorrow, selectively adding here on the lows.