‘Gammachasm’ opens under Australian dollar

See the latest Australian dollar analysis here:

Macro Afternoon

DXY is off the lows and EUR falling:

The Australian dollar was smashed:

Gold was buffeted buy held:

The oil canary croaked:

Metals were hit:

And miners:

EM stocks are now gapping lower:

US junk has rolled but EM will be the final confirmation of a serious correction to fakeflation:

US yields fell:

Stocks were routed with Nasdaz -4% and SPX -3%:

It’s the ongoing ‘gammaquake’, via ZH:

Simply put, as Nomura’s Charlie McElligott has been detailing over the past few weeks, today’s early trade action sees an extension of last week’s “dealer (negative) gamma tremor”-induced price-pain in trend/consensus equities positioning, and the “net-down” exposure trimming off the back of the dealer hedging looks to be metasasizing.

This is best exemplified this morning by the uber-crowded US Equities “long” in secular-growth Nasdaq futs -290bps vs everybody’s cyclical / economically-sensitive “short” in the Russell 2k “just” -30bps, while USTs are bull-flattening once again in sympathy with the optical “risk off.”

Nasdaq net $delta is still holding positive as well, but reduced massively from the prior “extreme long” (+$1.3B, 47th %ile from last week’s +$16.2B, 100th%ile rank, as that delta is now “gone”), while the now “short $gamma” position corroborates the market price-action in NQ / QQQ, pre-open trading well below the gamma-neutral “flip” level (287.39 flip vs current 273.70 spot) as QQQ Delta too has “flipped short” below 282.27.

Interestingly, McElligott also notes that a fresh idiosyncratic pain-point within the Nasdaq / momentum tech trade is TSLA’s surprising non-inclusion into the S&P late Friday, with the stock down over 15%.

This matters, warns the strategist, from a “knock-on” sentiment perspective with regard to the “trade from home” speculative frenzy, because TSLA is the “retail gamma proxy” with its multi-month furious scramble higher thanks to almost self-fulfilling short-dated (1 wk) OTM upside buying from the Robinhood set, creating these hyper-convex “crash up, crash down” moves.

Summing everything up – there’s a supply issue now that Softbank is out…

What a pump and dump by the whale. I’m encouraged that there is further to fall as the HODLers howl:

Stocks don’t always go up, I’m afraid. A lesson each generation learns anew in its own way. Neither does the Australian dollar. The only chart that matters is back:

A gammachasm has opened beneath stocks and AUD.

David Llewellyn-Smith
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Comments

    • The Fed is allowed to print another $6.2 trillion under the existing rescue plan.

      Will they bail out the small traders or only the big ones?

    • Stewie GriffinMEMBER

      When people buy Call Options, being the right but not the obligation to buy stocks at a certain price, the organisations who write the Call options are under the obligation to sell the stock to the purchaser of the Call option if the purchaser chooses to exercise their option.

      To Hedge this obligation, the Call issuer will buy some of the underlying stock so that they don’t have a naked position (think of Tesla going up $100 and someone with a Call option deciding to exercise, the issuer is then called short and has to buy stock). The mechanics of the hedging process is called ‘Delta Hedging’ it is a first order derivative (in the mathematical sense) of the change in the price of the underlying versus the change in price of the option.

      However, this delta ratio and delta hedge is not stable over time, as the price continues to move around the amount of underlying stock that needs to be held to offset a change in the value of the option will change, this is the rate of change at which the delta ratio changes, it is a second order derivative referred to as gamma.

      What has happened is that Robinhooders have gone crazy over the past 3mths buying Call Options on FAANG and Tesla, etc, which has caused those issuing the options to have to go out and hedge their exposure, by buying up the underlying stock, which has in turn caused the price to go up, the Calls to be worth more and encouraged more Call buying in something of a feedback loop, especially as more out of the money Calls get closer to being in the money (ie likely to be exercised).

      Eventually what happens though is that the rate at which people are buying the underlying stock or Calls slows, and the need to buy more underlying to hedge changes in Delta slows and gamma flips, and to maintain the hedge you need to start selling the underlying stock – this is where we are now.

      • RobotSenseiMEMBER

        So this is like one of those “fish in the pond” questions you used to do in high school where you start with two fish and, if the breeding time is 5 days, within three months the fish outweigh the earth because nobody considers that there might be a finite food supply/pond size (or in this case, money/shares)?

      • Thanks Stewie….explained very well even i could understand whats happening…much appreciated.

      • Thanks very much! #icomehereforthis
        So as i understand it then, it is the same as the Australian RE 30 yr ponzi feedback loop compressed in 3 months .. now unwinding due to a declining rate of greater fools…

        • Stewie GriffinMEMBER

          Thanks all – all good. It is probably a bit more like RobotSensei and the fish analogy than Aust housing market. Basically delta hedging and gamma trading has to end sometime or the fish in the pond end up weighing more than the rest of the planet or in this case FAANG and Tesla end up worth more than the rest of the worlds stockmarkets combined. Eventually no one will buy another call at such an absurd price and the rate of change in those 1st and 2nd order derivatives flips from positive to negative and the market from buy to sell.

      • I was being sarcastic. One Harry Dent has predicted huge deflation and gold to $700.

        Someone forgot to tell Harry that in a world where central banks can print infinite quantities of money, deflation is highly improbable.

        • Depends on how fast it’s flowing and where it’s going.

          If velocity is near 0, or as we see here, it’s mostly going into shares, it’s possible.

          • Velocity is irrelevant although I agree there are many ‘experts’ who get frothy over the connection between velocity and inflation.

            The formula for velocity of money is: GDP / Money Supply

            As GDP has declined this year and the money supply has set course for Mars that has meant that Velocity has plummeted.

            Anyway, you’ll be able to put people straight in future now armed with the facts.

    • Showing surprising resilience considering the carnage in other assets. I would’ve expected a bit of a sell-off in this climate, like back in March. Even volatile silver rallied.

      PMs holding up well so far.

      • Yep, it looks a fairly positive sign to me. Suggests there are only few weak hands in the trade. In the next couple of years though I think the PMs will do a Nasdaq-style ramp and that’s when a lot of spec money will come in – then timing an exit will be necessary.

    • Totes BeWokeMEMBER

      I moved half a million dollars out of unhedged to hedged because I couldn’t watch it go higher. Frustrating. I made a stupid error not moving it at AUD $0.55 in march.

      I made a lot of money at the other end when it fell from parity so I can’t complain too much.

      • I hear you; though dealing in smaller amounts, I only sold around ~50% of my US dollars (mainly ASX:YANK) between 57 cents and 62…should have sold it all, having ridden the wave down from ~81 cents

      • Don’t feel too badly. AUD didn’t hang around 55 cents for long before it was on the way up again.

    • He’ll be ok, will just have less lotsa money. Its the fools on income support or cant pay the rent now, who listened to him that will neck themselves….. doncha love social media ??!!