Tuesday, January 12, 2021

The Efficient Explosion Hypothesis

Gamblers are wondering what will be the catalyst that explodes the biggest asset bubble in human history. Great question. COVID resurgence, fake recovery, vaccine clusterfuck, rampant speculation, mass complacency, extreme overvaluation, Disney markets - pick one, and rest assured all of these ignored risks will soon matter...

In addition to the risks listed above, the record Wall Street pump and dump in 2020 has accelerated in 2021:

"The acronym LMFAO, laughing my fucking ass off, which we can’t print [I can], is a pretty good description of the state of play in Spac-land these days...Some $80 billion in Spacs were listed in 2020, meaning the year turned into an epic bonanza for investment bankers, lawyers and companies looking to go public in a Spac deal"

"More than two dozen SPACs (special-purpose acquisition companies, or blank-check companies) were priced last week, raising nearly $7 billion – a record in the number of deals and the dollar volume raised, according to SPAC experts at Renaissance Capital and SPAC Insider. On Thursday night, Jan. 7th, an astonishing 14 SPACs were priced"

Put it this way, the $ amount raised last week - the first week of 2021 - is more than 50% of what was raised in all of 2019 from SPACs. We are told that this record Wall Street pump and dump can go on for years.

These are the top performing SPACs of 2020. The #1 top performing SPAC of 2020 was an electric vehicle charging station play, called Quantumscape.

It goes downhill from here.

However, as I have said many times, the biggest risk to Disney markets are Disney markets themselves. The past three of four Mondays has been hard down in the Casino. This should come as no surprise for those of us who have been tracking the manipulation of stocks using weekly options. The way it works is quite simple, starting at the beginning of the week, speculators bid up call options on their favourite stocks which forces market makers to buy the underlying stock. The hedging ratio is determined by a factor known as "gamma" which is the second derivative of delta - rate of change in delta with respect to the change in the underlying stock. As stocks accelerate higher towards the most popular strike price(s), the "wall of calls" causes momentum to peak and pin the strike at weekly expiration. Then, on Monday, the invisible bid disappears and stocks crash back down to reality. Rinse and repeat. All of this market manipulation has been well documented and well ignored by regulators. Now, however, Nomura is warning that this insanity is peaking this week due to the monthly options expiration. 

"Nomura MD notes that it is Op-Ex week, and the options positioning is absolutely going to matter"

McElligott warns that there is a TON of Gamma set to roll-off, which matters when Delta is this “extreme long” and thus could very likely be monetized as a “supply source” to potential correction in price"

This is a fancy way of saying that there is a lot of options open interest expiring this week due to last week's seminal election. As those options approach expiration, the options driven melt-up will peak and then rollover. The selloff doesn't have to wait until next week, however, because gamma is a function of time to expiration and price. As long as price momentum remains higher, the options melt-up continues. If momentum reverses however, then the gamma squeeze reverses and begins to unwind, selling down the underlying stocks. Per the article cited above:

"We have to be ready for the “down trade” window opening around Wednesday’s VIX expiration and thereafter, with Gamma coming-off"

SpotGamma puts the selloff acceleration zone a mere 50 S&P points below the current level, at 3750, which is only halfway down the rising wedge (red line). As we see, the S&P is doing battle with the upper trendline:

Bond yields continue rallying higher monkey hammering the bond market. However, we see here that banks just finally filled their open gap from last February lockdown:

Big cap Tech is trading like a brick, but so far the market hasn't done anything "wrong".

Which means that gamblers have no warning as to what is coming, other than their own tomfoolery. Yes, that's a word.

EM Currencies are already rolling over hard. Emerging Markets/Global RISK OFF is the BIGGEST near term risk heading into the U.S. long weekend:

Below, on the weekly, we see new highs on both major exchanges at or above February 2020 levels. Which means that Tech stocks will not be a safe haven from implosion this time around...

Bulls are convinced their latest reflationary Disney narrative has staying power this time, entirely unaware that it's their own belief in delusion that is now the biggest risk.