Not a very *constructive* looking setup to the downside- ...the way I'd view it:
IF SPX breaks through 5050 to ~5010-5020... then 0DTE hedging influence is going to start acting like an accelerator- While these numbers aren't *extreme*- negative gamma is a stronger case than "lack of gamma" ...hedging flows can slingshot price through the option strike pretty easily and especially when book depth is otherwise strained (as it has been this week)
The long node below would show up like a proper put floor- the mirror image of the "call wall", and provide support to absorb selling flows from the market- *BUT* IF price nears the long strike/gamma zone around 4955-60 as we head into the final 1hr of the day, THEN charm acts like a magnet, as dealers sell out the long futures hedge they accumulated on the way down...
Fundies have gone ‘full bull’. Is it time to sell?
Bank of America’s latest global fund manager survey says investors are almost all-in on risk. That might be a worry.
Apr 18, 2024 – 9.16am
Can anything dent the optimism of stock pickers? Not according to Bank of America’s latest survey of global fund managers, which suggests they remain wedded to the good news story that’s driven the market rally of the past six months.
Forget Federal Reserve chairman Jerome Powell’s tough talk. More than three quarters of fundies expect the US central bank to deliver two rate cuts this year.
Any talk of a recession is dead; for the first time since December 2021, a majority of investors say global growth will accelerate from here.
Just 7 per cent think a hard landing is possible, down from 30 per cent last October, and the majority (54 per cent) are banking on a soft landing.
And perhaps most bullishly of all, cash levels have fallen to just 4.2 per cent of assets under management, with equity allocation surging to a 27-month high.
There’s just one problem. As Bank of America’s veteran strategist Michael Hartnett explains, sentiment is now so strong that we are getting perilously close to a reliable contrarian signal – when fund manager cash levels get to 4 per cent, it’s time to sell.
“Bull sentiment is not quite at ‘close-your-eyes-and-sell’ levels,” Hartnett says. “But risk assets are tactically much more vulnerable to bad news than good.”
The publication of the latest global fund manager survey on Wednesday night came ahead of another tough session for Wall Street, where equities fell for the fourth straight day, extending the drop from the S&P 500’s recent record high to 4 per cent.
It’s a similar story on the ASX, where five days of selling pressure has left the benchmark ASX 200 down 3 per cent. Profits disappoint
It needs to be taken in context; both equity markets suffered similar dips in January and bounced back to deliver big March quarter gains. Indeed, the 10 per cent rally on Wall Street over that period was the best start to the year since 2019.
That markets might be headed for a period of consolidation after such an impressive run (the S&P 500 remains up 22 per cent since the start of November, while the ASX 200 is still up 12 per cent) is hardly a surprise.
But events of the last week do suggest that two important messages are starting to bite for equity investors.
First, the hot inflation numbers out of the US, compounded by Powell’s message that the Fed will stay the course on taming inflation by holding rates higher, has added to a move higher in bond yields.
While the yield on the benchmark 10-year US Treasury dipped on Wednesday night to 4.59 per cent, it remains above the 4.5 per cent level that Morgan Stanley strategist Michael Wilson has argued would start to see equities react to bond yields.
The other factor to consider is the potential reaction to the March quarter earnings season that is getting under way in the US.
On Wednesday night, several underwhelming results – notably from lithography giant AMSL, which sells tools to the world’s key chipmakers, and two big US transport businesses – suggested investors’ expectations on profits might be overdone.
As JPMorgan’s Marko Kolanovic points out, the market expects earnings to climb nearly 20 per cent from the March quarter to the December quarter as that global growth impulse kicks in. But that could leave plenty of room for disappointment in the coming weeks.
For weeks, Vantage Point’s Nick Ferres has been trimming his equity exposure and pointing out that the equity risk premium – that is, the gap between the earnings yield of the S&P 500 and the 10-year Treasury yield – suggests that the compensation that investors are getting for owning overvalued equities is extremely poor. Indeed, Bloomberg reported on Wednesday night that ERP has hit a 22-year low, falling into negative territory.
Lower ERP can be a predictor of a big upswing of earnings, which is exactly what the market sees. But can that be delivered in the higher-for-longer environment that bond yields are predicting?
After an impressive run on markets, Kolanovic says investors should be wary.
“For a market reliant on immaculate disinflation, a dovish Fed reaction function, and diminishing tail risks on growth, the continuation of hot growth and inflation data can bring us to a tipping point where a tighter stock versus bond risk premium finally produces a market correction.”
