Déjà Vu: The Setup That Triggered Last Year’s Selloff Is Back
Déjà Vu
Headline risk is huge and markets will likely swing with every new development in the Middle East. But beneath the noise, the technical and positioning setup looks uncomfortably similar to last year’s “déjà vu” sell-off.
Are we there?
Our déjà vu logic continues to play out. The SPX is flirting with a break below the 200-day moving average. 6700 (futures) is the near-term level to watch, but the real line in the sand sits around 6600.
Source: LSEG Workspace
NASDAQ too
The NASDAQ is basically a mirror of the SPX chart, flirting with the 200-day MA. The lower end of the range comes in a bit lower, around 24k (futures).
Source: LSEG Workspace
Last time
The last time the 21-day crossed below the 100-day in the SPX, markets sold off sharply. We’ve just seen that cross again.
Source: LSEG Workspace
Downside
We have been highlighting the extreme demand for downside protection and the well-bid skew. Lately, skew has started to trade lower as investors monetize some of those hedges. In other words, protection is being taken off, potentially leaving investors more exposed if the SPX moves lower.
Source: LSEG Workspace
Correlations on the rise
A very similar setup is unfolding to the one we saw during last year’s “déjà vu” sell-off. Implied correlations are surging again.
Source: LSEG Workspace
Sellers
CTAs screen as sellers of equities across all scenarios over the next week and month according to GS. Estimated selling over the coming week is among the largest they have seen. Key SPX levels to watch: Short term 6894 // Medium term 6763 // Long term 6364.
Source: GS/TME
Source: GS
Losses
The HFRX Macro/CTA index has suffered its largest drawdown since Liberation Day following the start of the Iran war. But it wasn’t only quant funds under pressure. Discretionary equity long/short hedge funds were also hit as crowded trades, overweight Europe and EM, long KOSPI, underweight US small caps, and short software, began to unwind. After the recent losses, risk managers will likely be quick to order further risk reduction. In short, the déjà vu setup continues to build.
Source: JPM
