Stocks Slide After Catalyst Confirms It Was Behind The Market Ramp

Confirming what we detailed previously, the levered option fund 'Catalyst' CEO just announced that their forced-buying has concluded.

In a statement issued to CNBC's David Faber, Catalyst Fund's CEO admitted that it had a number of short call options for Feb S&P500 expiration this week but that it no longer has kind of position "at this time", adding that it had taken action "to buy back options, though wasn’t forced to sell" which caused some losses to the fund and has had some drawdowns, though not under duress "or anything like that" currently and its positions are "pretty neutral."

Per the Catalyst statement provided to CNBC:

… we no longer have that type of short position at this time. Consistent with our overall risk management strategy we have some draw-downs where we decided to take action and we are pretty neutral with our positions at this point.  

 

We finished adjusting the portfolio.

 

I've seen some things in the press about the fund and short term forced-buying, we've had no margin issues.

 

The fund is under no duress or anything like that. We weren't forced to sell."

The Catalyst Hedged Futures Strategy Fund (HFXAX) net asset value has tumbled 13.5% YTD, and has $3.4b assets under management, according to Bloomberg data,.

And just as we warned was likely, once that forced buying ended, stocks tumbled:

So now we find out, just how much of the last 150 S&P points are due to the liquidation of 'Catalyst' (and strategies like it)?

As RBC's Charlie McElligott warned:

This equities upside short-gamma grab has taken out a ton of ‘bid on the downside’ in equities index, in the case that we were to see any sell-off post a Trump speech disappointment.  This lack of cover-demand on a vacuum-move could see sloppiness develop, as it seems that the data and Fed itself are no longer dictating the market story at this stage – whether stocks, fixed-income or vol.  “Policy” is now firmly “in the driver’s seat,” and that is where I see the least degree of confidence in the market.

 

I’m worried that this stock ‘melt-up’ move is extraordinarily mechanical right now – almost entirely the aforementioned forced-covering, not high conviction induced-buying – and may be sending a “false signal” which is potentially dragging-in new buying on the breakout to new highs.

As he concludes: "This could lead to a scenario where a market can “collapse under their own weight." Indeed, because if one removes the forced buying from the "blowing up fund", there is certainly a long way down.


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