According to Nomura strategist Charlie McElligott, the recent decline in US stock prices has put equities in a danger zone that could trigger "mechanical selling" pressure and accelerate a downward move.
McElligott said the S&P 500, which is near a four-week low, is on the verge of triggering a "mechanical sell-off," or a sell-off of stocks by some trend-following investors, including options sellers and commodity trading advisors.
"Expensive" US stocks have reached a position that could trigger potential downside "accelerator" flows," McElligott said in an investor note, predicting that the S&P 500's fall below 4,400 would place dealers in "short gamma" territory.
The sell-off has also pushed the Cboe Volatility Index, an options-based gauge of expected stock market volatility, to its highest level in nearly four weeks.
According to McElligott, this means that dealers selling VIX call options, which investors use to insure against selloffs, could be squeezed as the VIX rises above 17 and 20 levels in particular.
US stocks are in dangerous territory!
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