A Short Summary of the CNBC Interview of Charlie McElligott (Nomura Research Analyst) with 2020 Outlook

  • Charlie began by emphasizing that short- and long-term investment decisions should focus on:
    1. a view on rates,
    2. the economic environment (reflation vs inflation), and
    3. geopolitical risk (coronavirus outbreak and the 2020 election).
  • The December 2019 China Phase 1 deal, combined with a bear steepening in rates, brought about a relief rally that took the form of a “reflation trade”.
Note(1):  Bear steepening refers to a widening of the yield curve manifest by long-term rates increasing at a faster rate than short-term rates.
Note(2):  A reflationary environment is one marked by fiscal and political policies that increase money supply, lower interest rates, and reduce taxes. The “reflation trade” is characterized by an asset allocation that emphasizes momentum over value and has a short bias for cyclicals. Typical examples include secular growth (e.g. technology, software, healthcare) and leaders in defensive instruments and bond proxies (e.g. utilities, REITs, and staples).


  • January 2020 saw a seasonal inflow into Treasuries along with a rebalancing impulse that focused on secular growth, defensives, and bond proxies.


  • There is presently a lot of market uncertainty related to stories such as the ongoing manufacturing slowdown, the global economic impact attributed to coronavirus, along with metrics suggesting an inflection point in credit and economic cycles.  This had led to investors’ large scale positioning in downside protective puts.  As a result, dealers are heavily short puts and to offset that positive delta, have had to sell S&P futures. As the market approaches OPEX, a failure to sell down to those “crash protecton” levels could force dealers to short-cover and result in “…a slingshot higher.”


  • A move left in the senate and/or presidency, this year, would likely increase government spending and regulation, would be perceived as growth negative with reductions in tax haven status and corporate profits, and together might well provide a catalyst for inflation. Those forces would impact the market by disrupting the vol curve “…because dealer gamma moves the market, not single stocks.”  From a long-term portfolio perspective, a move left would support a rotation into cyclicals, value, and commodities (“flight-to-safety” assets). Keep an eye on “Super Tuesday.” (March 3)


Reference:  The Interview

Premarket Report for Tuesday, February 4, 2020

Options Activity:  More bullish options activity, yesterday.  The gamma flip point has risen another 10 points.  Gamma-related resistance at 3300 and support at 3200.  

Valuations:  Calls now overpriced and puts on sale. Dark pools remain buyers …after 3 timid days of -3-4% changes.

Volatility:  GJR-GARCH volatility forecast for today is bullish at 9.92%.

Auction Market Process:  Buyers are in control.

Macro:  Markets are now betting the impact of coronavirus will be insufficient to exacerbate or sustain the recent selloff.  Chinese and European stocks rose overnight.  The 10-year Treasury yield is at 1.575% and gold has slipped.  Coronavirus has hurt oil markets to the tune of ~20%.

CalendarEconomic Announcements:  Redbook (08:55), Factory Orders (10:00)  Earnings:  Ford Motor Co., Walt Disney Co. and ConocoPhillips

Taken Together

Markets appear less concerned about coronavirus and essentially unconcerned about US politics. While trade taxes hang over the long-term investment landscape, satisfactory employment and rising wages provide sufficient support for trend continuation.  Looks like a comeback day in the futures market.

Premarket Report: February 3, 2020

Fears of a Pandemic, US Economic Slowdown, Weakening China, and Lower Oil Prices


Options Activity: On Friday, spot fell below zero gamma ($SPX model) making the market vulnerable to markedly increased volatility.  3200 represents a key level, still functioning as a “put floor” (support).  3250 plays the role of “call ceiling” (resistance).  Several prior tweets have looked at this, in detail.

Last week was the third week in a row that exceeded the implied move, priced by the 7-day Weeklys. The current expected move is widely expanded, owing to an increase in uncertainty surrounding coronavirus contagion and a PMI that hit a 5-year low.

Valuations:  Calls remain relatively underpriced and OTM puts continue to get a bid.  Dark pools data shows no evidence of significant selling.

VolatilityVIX futures saw an inversion in term structure. That is, volatility strategies have increased weighting in the front month to the point of backwardation. VIX futures rose to a high of 16.5 Friday.  Volatility of volatility is elevated and, on Friday, touched the critical 16 level.

Auction Market Process:  A down-auction and range extension to a low of 3215.25 on Friday.  Rotation in S&P futures overnight to an auction bracket high of 3250.  3250 is the level to watch for rejection in an up-auction. Continued liquidation at that level would signal sellers in full control.

Bonds:  Signaling an end to the “reflation trade.” (The term “reflation trade” refers to structural conditions wherein  interest rates are expected to rise a small amount and the odds of recession are widely considered to be quite low.) The yield curve for the 10-year has fallen to a level below the 3-month, marking an inversion.  In essence, bonds are underpinned by yields and policy inflection points.  The Fed has stated they will let inflation run, institutionalizing lower rates via inflation averaging.

The selloff in Junk bonds has deepened further, owing to fears of a pandemic, economic slowdown, and lower oil prices.

Macro:  Elevated asset prices and weakening economic conditions are becoming increasingly unsustainable. International exposure, while more attractively valued, is much less resilient to global economic weakness.

Calendar:  Economic Announcements: Construction Spending, Auto Sales, ISM Manufacturing.  Earnings GOOGL, after the bell.

Taken Together

While the market has been treating the coronavirus health scare as a “one off event,” fears are mounting that continued spread will expose other microstructural weaknesses and will, thus, have lasting effects on the market. The coronavirus outbreak amplifies two vulnerabilities: structurally weak economic growth and Federal Reserve policy impotence.  Add to these an exacerbation of trade tensions, a growing awareness of the economic impact of climate change, political polarization and geopolitical risk, and changing demographics.

The viral outbreak is a major economic shock and the negative economic effects are not sufficiently absorbed by the markets.  Collectively, these weaknesses should decondition those who approach selloffs as an opportunity to “buy the dip”.

Now is the time to give great attention to vulnerabilities in one’s portfolio with respect to equity exposure and liquidity risk.

Premarket Report for Wednesday, January 29, 2020

Options Activity:  A lot of dollar gamma in calls at 3250 and 3300 overhead resistance.  At the close, Tuesday, it was business as usual – selling OTM calls and buying deep OTM puts.  Aggregate GEX is up 154% over its low, yesterday.

Valuations:  Calls remain underpriced and OTM puts continue to get a bid.  Dark pools remain buyers.

Volatility:  Contango..

Auction Market Process:  Currently in balance and trading at fairest value (volume point-of-control).

Macro:  Travel, luxury and mining sectors hit by worry over the impact of coronavirus on the global economy. 

Calendar:  FOMC will have the market focus with the committee’s comments regarding its rate cuts and T-bill purchases. Pending home sales at 10 AM, a marker for momentum. Earnings of note:  MSFT, FB, PYPL, and BA.  World Health Organization announcement at 1:00 PM.

Taken Together

All three vulnerabilities resolved – for the time being.  Rates and $SPX rose and $AAPL beat with strong guidance.  By Market Profile, the market is currently at fairest price.  More events this week to contribute volatility but a more bullish near-term outlook appears reasonable.

Premarket Report for Monday, January 27, 2020

Options Activity:  Options volume was high at ~1.8 million on Friday.  After several days of traders accumulating protective puts, $SPX put in a wide-range down day.  The vast majority of transactions took place at deeply OTM puts with the put floor at 3200.  OTM put options premiums rose.  A break below 3235 would induce selling as negative gamma would prevail.  Call volume was highest at 3325 and the majority of that was short covering.  As of Friday’s close total dollar gamma was $1,073,328,213.

Dark pools remained buyers.

Volatility:  The spread between the first and third months in VIX futures is rapidly shrinking.  Realized volatility exceeded implied vol.  VVIX increased.

Auction Market Process:  Sellers are in control. The market condition is the start of distribution, following a wide range drive down. The market was previously capped at $3,337.77.   On Friday, Jan 24, fairest price was $3,275.  A break below would likely find support at $3,225.

Macro:  China’s coronavirus worsens to a grave situation as the death toll rises and contagion becomes the issue, globally. Brent crude dropped about 6 per cent over the week, reaching its lowest level since early December. News reports of rocket attacks on the US embassy in Baghdad add to geopolitical tensions. Gold-to-oil ratio is the highest since June 2017, which suggests more downside for indices.

Notably, the US 10-year yield has fallen to 1.62%, which could clear the way for 1.51%, along with revived concerns about yield curve inversion. The Yen leads in Forex trading.

Calendar: January 28: 6:00 a.m. US FOMC meeting begins, January 30: 7:30 a.m. US Jobless Claims and more tech earnings this week. New home sales are due today.

Taken Together  

The growing coronavirus outbreak, has claimed at least 80 fatalities and has sent the number of confirmed cases to 2744.  Fears of contagion and the economic impact of global infection is sending risk trades down.

Friday represented the steepest drop in more than 3 months the majority of metrics point to continuation to the downside.  Financials are already down ~2.2% YTD, a strongly bearish indicator.  Junk sold off hard, on Friday, while safe havens got a bid with utilities leading Treasuries. 

CBOE $SKEW is at 127, a level associated with a 14.5% probability of a 2-standard deviation move to the downside.  

The Fed meets in Washington for their first policy-setting meeting of 2020 on Wednesday.