SPX should see an orderly selloff without extreme short gamma risks unless risk control exposure continues to rise beyond 100%. Current short or hedged positioning is low to moderate. Therefore, risk of a short squeeze is very low, unlike during May-July, when short squeeze overwhelmed macro factors and drove a market rally for three months. Model also suggests the three asset owners who typically 'buy the dip' to stabilise the market during selloffs are unlikely to help this time. Risk control funds should have large amounts to sell when volatility spikes. Risk parity could face pressure to unwind some exposures if high correlation continues. However, commodity trading advisors (CTAs) have already cut a lot in August and are unlikely to contribute to much selling at the beginning.
- UBS Strategy
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