Midnight Musings on the Market Momentum — 11/20/20: Will the real crash please step forward?
This one will be quite brief, since I don’t have the mental energy, but I did want to discuss some noticeable things that happened over the past week. I talk about this directly on the discord (https://discord.gg/fp6fdxCZ) and on my own twitter (https://twitter.com/nope_its_lily) more in real time of course.
Last week was interesting because it seemed to be the termination of the volatility suppression/feels-good bull run that started after the election and of course, the positive vaccine news of MRNA and PFE. In particular, PFE announced their positive vaccine efficacy in Phase 3 last Monday, leading to possibly the most dramatic momentum in “corona open” (e.g. hotels, travel, airlines, aerospace, etc.) stocks that has ever occurred in market history ($AMC opened up like…. 75%?). This led to a week long feels-good rally of all the shitty value stocks we know and love, after a pretty predictable sell off into close on Monday (who knew that SPY opening up 3% wouldn’t hold?).
More interestingly for me, this past week was the first time since mid October where I recorded anomalous readings on the indicator half of you love to hate — NOPE (Net Options Pricing Effect).
The first indicator warning occurred on Friday last week (https://thenope.info/nope/default/charts/SPY/2020-11-13) where, into close, we observed an intraday reading of 4.8 NOPE_MAD, NOPE above 90. The last time this occurred was Oct 12, 2020, which was the last “crash top” (Minsky Moment correction). In that case, we observed two consecutive days of grossly elevated intraday NOPE, which was followed by an about 10% decline across indices in the following weeks.
This ended up deflating heavily into close, leading to an EOD NOPE of about 50 (which is still, historically, really fucking high).
This was when I mentioned hedge puts might be a good idea, based on historical analysis.
The second indicator warning, and perhaps the most important, was Monday at close, when due to irrational exuberance from $MRNA’s results, we ended the day at 90 NOPE (~4 sigma), which is similarly super elevated. This, based on our actual statistical analysis (note: we have fairly comprehensive evidence dating back to 2007 of some level of correlation between EOD NOPE and SPY behavior next day) led to the second confirmation of some bad shit going down.
For the rest of the week, we seemingly held water, mostly going downwards from Monday’s zenith of about 362.57 on SPY. From one of my favorite follows on twitter, https://twitter.com/jam_croissant, the major speculation for the downwards-yet-not-too-down behavior up to 11/18 was vanna flows — or in simple English, unwinding of leftover volatility from the election fury earlier in the month (and all the puts that died along with it).
Additionally, we observed on Thursday and Friday two interesting events:
- /ZB and its associated stocks (my favorite being TLT, which tracks bond prices) both reacted strongly to Mnuchin’s conference at Thursday close that the government would pull back guarantees to the credit market from the CARES Act programs (which, to be fair, weren’t very used). This ended up leading to a massive >1% increase in TLT overnight (TLT does not move much in normal circumstances), and helped inspire malaise on Friday.
- On Friday we mostly tred water due to opex (historically volatility is muted near opex due to IV declining in the expiring contracts), with a selloff into close. As I explained on twitter, this was mostly due to last-minute delta decay of the monthly massive call skew, causing hedge unwinding (which in terms of calls, means selling/shorting shares or similar assets).
As of right now, SPY is at approximately 355.33 at Friday’s close. Some catalysts to consider for this week:
- Historically around holidays, SPY does perform well (see: Santa Claus Rally). Thanksgiving is also a short week, so the effect of theta is a bit more pronounced.
- Lockdowns are occurring again at a massive speed worldwide, which are being counter-balanced by the vaccine hopium (PFE recently announced that it will deliver the first vaccines to populations in gravest need in the US by Dec 12). It’ll be interesting to see who wins this tug of war.
My personal view: We haven’t analyzed the data yet, and right now NOPE for sure only has some correlation with next day behavior. My hunch based on forward observation is we encountered a local “top” on Monday, and I do anticipate SPY to hit 350 sometime this week. This could be rebuffed by a strong enough reaction to positive catalysts (e.g. the vaccine news I mentioned), but even in those cases there’s clear downsides (stay-at-home stocks will fall, possibly leading to a net negative for SPY like we observed in early September). I would recommend a bearish/hedge position into the coming week, but never as a main play (I am always net long).
Cheers and happy Sunday!
