"Dip-buyers" remain active in markets the last week or so since the big (rate-spike-driven) plunge in US stocks, but nothing is holding as momentum ignition keeps failing.

While Nomura's Cross-Asset Strategy Managing Director Charlie McElligott confirms the "upside story" is still the right tactical trade, he explains below that the market remains more likely to chop around for another week or two...

Clients intellectually voice a desire to “want” to trade for the tactical SPX bounce on the same catalysts I’ve been noting over the past two weeks:

  1. MUCH “cleaner” positioning with both systematic- and active- / discretionary- funds;

  2. Fodder for a “short squeeze” re-accumulated (“Most Crowded Shorts” / “High Short Interest” / “Most Shorted” baskets -7.5% to -10.5% MTD as they are pressed into the move lower);

  3. The return of corporate buyback flow as the “blackout” is lifted through EPS season in coming weeks;

  4. Q4 seasonality / “performance chasing” narrative;

  5. The contrarian VIX curve inversion “bullish” signal;

  6. +++ U.S. midterm election historical SPX returns analog;

  7. Still robust U.S. growth with GDPNow printing 3.8%, Consumer Confidence at 18-year highs and Leading Economic Indicators YoY at 8-year highs;

  8. New “low bars” being created by “negative earnings revision” trend to EPS into Q4, especially the “air-cover” provided by tariff talk to “sand-bag”

This has been driving behavior seen late last week where client flows favored selling Puts / buying upside Calls in singles, as well as selling / monetization of index hedges.

However, despite these positive catalysts, McElligott believes the market will remain rangebound for a considerably more powerful reason - at least in the short-term...

The “chop” should persist another week or two, as the recent spike in volatility is “dragging” trailing realized volatility higher, creating a dynamic where despite their desire to play for a rally, traders are being forced to “gross-down” books as position limits are exceeded on both “up” and “down” days –similar to some of what we saw in March / April post the VIX-event (although this time around on MUUUUUUUCH smaller overall exposure)

The Nomura strategist also points out that this chop will continued to be exacerbated with Asset Manager “Longs” in SPX still at +$80B (through last Tuesday), even after they sold -$25B WoW—i.e. “more flow to work through.”

SPX / SPY Consolidated Gamma in the market now “less of an issue” with regards to mechanical hedging swings, with Gamma down from -$26B to now a more manageable short of -$18B (delta -$332B)

Additionally,  McElligott notes that the larger more “systemic” story of increased funding pressure through the year-end “turn” continues to be watched, as technicals highlighted last week:

1) increased Treasury bill supply;

2) repatriation pressures impacting prime fund flows and thus, commercial paper markets;

3) pick-up in EU-Italian “stress” aggravating EUR xccy basis;

4) seasonality of YE funding;

5) the larger Fed normalization and...

6) balance sheet run-off / QT à all bleeding-into...

7) LIBOR’s move higher

All of which should continue to drive lower USD liquidity, which in-turn means higher cross-asset volatility - all in-line per my structural “Financial Conditions Tightening Tantrum” phase 2 “end-of-cycle” game...