Nomura's McElligott Sees `Max Short' Trend Quants Speeding Rally

January 11
09:04 2019

(Bloomberg) — The Federal Reserve’s dovish turn, a strong U.S. jobs report and U.S.-China trade progress have all been credited for the 10 percent rally in U.S. stocks since Christmas. Will shifting sentiment among a category of automated investors accelerate it?

They may, says Charlie McElligott, a cross-asset strategist at Nomura Securities whose prognostications have a small but devoted Wall Street following. He says trend-following quant funds known as commodity trading advisers, or CTAs, are still holding bearish positions that might reverse should the S&P 500 rise to 2,632.46

“The current ‘Max Short’ in the majority of Global Equities futures largely remains,” McElligott wrote in a note to clients. “HOWEVER, we are increasingly nearing COVER levels with significant $ to BUY.”

The S&P 500 gained 0.7 percent Wednesday to 2,593 as of 12:06 p.m., about 1.5 percent away from the supposed trigger. McElligott claims the same funds contributed massively to December’s declines as they trimmed exposure, while one of his Tokyo-based colleagues told clients CTAs couldn’t possibly be to blame.

As it relates to the present rally, which is poised for the strongest 10-day streak in the S&P 500 since 2009, quant funds have already started covering their short positions in overseas markets, McElligott says. His model, which purports to reverse-engineer returns, shows CTAs have reduced the scale of their shorts for benchmarks such as the DAX and the Hong Kong Hang Seng.

While McElligott still believes the time will come when the best move will be to fade equities with a “tactical short,” now is not the time, as there are still signs the rally has room to run.

“Right now you have to keep running the tactical ‘long’ I’ve advocated since end-Dec,” he wrote. Other reasons for a rally include “1) the approaching earnings season- and 2) contrarian ‘negative earnings revision’- bullish catalysts PLUS 3) resumption of buyback flows after the first week of Feb in your back pocket.”

To contact the reporter on this story: Sarah Ponczek in New York at [email protected]

To contact the editors responsible for this story: Jeremy Herron at [email protected], Chris Nagi

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