A few days ago, we brought readers’ attention to the one chart which we think is the most important in setting market tone and sentiment: that of emini liquidity, or lack thereof.
5MM is all it takes to move ES 1 tick pic.twitter.com/FnTyjvain3
— zerohedge (@zerohedge) May 2, 2022
This morning, Goldman’s trading desk also brings attention to this most important market dynamic, and in an early note from trader Matthew Fleury, he writes that “this chart should be on everyone’s radar. This is the top of book depth of S&P futures divided by 1mo ATM vol. It is flashing red. The set up for an equity market crash is as high as I have seen it.”
Echoing something we repeatedly noted on Twitter last week, Fleury also observes that top of book liquidity is as low as the worst moments in 2018 and 2020…
… while dealer gamma gets shorter on the downside and longer on the upside, concluding that “this is a sell the rally market.”
In yet another “worrisome” development, intraday volatility is trending higher.
That said it could be worse, or rather, it should be: according to Fleury, when you get liquidity conditions this impaired, the range of the VIX can be quite high. And yet, as shown in the chart below, “for the liquidity set up we are in, the VIX is arguably quite low.”
Outside of the VIX, there are flashing red lights on volatility trending much higher. Here is CVIX (measure of FX volatility):
… and MOVE (measure of rate volatility):
… IG Spreads:
… and the intraday range on SPX (high print minus low print):
Next, some more indications that despite the apparently panic, the market remains far from oversold – the percent of SPX with 14d RSI sub 30 is actually quite low:
Percent of the SPX at 52 week lows:
What about technicals: with the S&P500 down 5 consecutive weeks, that should result in a bounce right? Not really. As Fleury points out, the excellent Steve Deppe (@sjd10304) highlights the forwards returns when this has occurred. The max forward drawdowns tend to be large.
The Goldman trader next points to what we think was a far more important Friday econ datapoint than payrolls: consumer credit, where “cracks are showing.” As we first observed last week, the consumer credit data released on Friday afternoon shows the largest jump in consumer credit usage (lead by credit cards) on record. Here Fleury asks, “is the positive commentary companies are giving us on the US consumer simply a spending splurge on borrowed money?”
With most of the surge coming ont he back of revolving credit…
… the Goldman trader says that Debt levels look manageable currently, “but this increased credit usage should be a concern in my opinion.”
Finally, putting it all together, “ouplows have started”, to wit: the 4-week z-score of outlows from US markets is -2. It’s my belief that is just getting started. Losses will amplify this.
Rolling 1yr inflow/outflow highlight this shift:
Cutting to Fleury’s conclusion:
The set up for a dramatic move is significant. It should not surprise anyone if the SPX were to have a down 5% day soon. Especially as traditional hiding places start to be used as areas for raising cash, lack of retail bid we have grown accustomed to, and seasonal outflows happen into one of the most illiquid times in most of our careers.
The punchline: “valuation becomes irrelevant in liquidity crises” which is of course true, but what becomes relevant in liquidity crises is the central bank panic which is precisely what is needed to reset the cycle and send risk assets soaring.
It’s just a matter of time.
The full Goldman’s Monday morning note available to pro subscribers in the usual place.