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With the S&P trading just around 2,600, the risk of a wholesale short squeeze is imminent.
The reason: as we reported yesterday, according to Nomura's Charlie McElligott who correctly called the December algo-driven rout which saw trend-following algos switch from net long to short for the first time in 3 years, whereas CTAs for the key equity indexes, the S&P, Stoxx and Nikkei are all still in the "Max Short" bucket, all that may be about to reverse, as the first "Buy to Cover" level is right where the S&P is trading now, or at 2,594 (however, it needs to close above this level for the short cover to be triggered).
Details - Nomura - Analyst - Max - Pain
Additionally, we listed several additional details from the Nomura analyst on where the max pain levels for algo shorts are, and where the market will almost certainly rise to before retesting if the short squeeze can push it even higher, or if a new wave of selling will emerge as Morgan Stanley predicted earlier:
As McElligott also added, late last week saw Russell, FTSE, Hang Seng, ASX and KOSPI all triggered modest short-covers from their prior “Max Short” positioning at the start of the week.
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Ok, fine, but what happens after some modest short covering is initiated? After all, as Morgan Stanley's Michael Wilson explained yesterday, there is "massive resistance" just overhead in the S&P, which is why "2600-2650 on the S&P 500 is a good level to start lightening up as we enter what is likely to be a period of negative news flow on earnings...
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