Another day, another early ramp higher in stocks amid a flurry of optimistic headlines/news that the trade war with China is slowly moving toward a potential resolution, including ii) Trump's pledge to intervene in the Huawei CFO arrest - who yesterday was granted bail in a Canadian court - if it helps the trade deal with China; ii) Trump's statement he could meet with Xi again; iii) reopening of Soybean trade with China (pushing prices 13% higher off Sept. lows), iv) a WSJ report China may be scrapping "Made in China 2025" strategy which has been widely criticized by US trade hawks; v) ongoing work behind the scenes by China related to ease "implicit FX control", vi) optimism by Pompeo that he expects positive headlines regarding China in the coming weeks.

There were further bullish signals out of Italy which according to media reports is ready to propose a 2% deficit target to the EU (which however were denied by the prime minister's office), and today's CPI print where the core number confirmed that there is little reason for the Fed to step off the rate hiking gas for now, iii) Theresa May will supposedly survive the vote of no-confidence today (which however will leave Brexit in continued limbo as the proposed deal still has little chance of passing).

Alas, just like yesterday's early ramp (which was fully reversed and then some as aggressive sellers emerged in the afternoon), as Nomura's Charlie McElligott writes, today's latest move higher in Equities comes to the chagrin of investors (particularly in US stocks) "who have purged net exposures / leverage and are watching this latest ~+3.4% S&P futures rally off the Monday lows from the sidelines, due to the horrible run of performance and proximity to year-end effectively “shutting-down” most funds—with zero willingness to “hold risk” in light of the headline violence (not just US / China but with Brexit, France and Italy all remaining “in play” as well) and into increasingly deteriorating year-end liquidity with balance-sheet constraints."

Meanwhile, despite approaching key bullish triggers from a systematic CTA trend perspective, as the S&P did not close above the 1Y bucket “trigger” level yesterday (despite intra-morning “breach”), McElligott notes that "the CTA flip-zone from current “-100% Max Short” to “+26% Long” remains very-much in-play—requiring a close above 2666 to generate large notional buying", with a move above 2722 to get to “+67% Long” and triggering “+100% Max Long” re-leveraging over 2755 all outstanding (spot being 2661).

For now, the lack of clear directionality and market patterns, is why the SocGen CTA index has not only gone nowhere since the Powell Oct. 3 speech, but remains moored at 4 year lows, making them especially "itchy" to jump on even the smallest suggestion of upward momentum.

And while bulls wait to see today's closing price, they now have charts working in their favor, because as the following chart shows, the S&P has just breached above the post G-20 resistance level.

Yet risks remain, primarily the market's inability to hold rallies (Calls again being sold tapped) as a result of what the Nomura strategist sees as year-end timing and the performance realities, which continue to dis-incentivize pursuit of higher US Equities over the next 3 weeks "and in fact, against ongoing signs of S&P futures deleveraging into rallies (notable “asset allocation” trade flows out of SPX into TY ~ 9:45am EST during a number of days this past week)", which is why he expects more up / down “chop” through the end of 2018…but with a lot of “puckering” and concern on a breakout

Another potential risk is that real US yields continue to suggest a "tightening" in US financial conditions, with 5Y TIPS yields just a few bps from 9.5 year highs again, as nominals hold while inflation breakevens chop around new 1.5 year lows. Meanwhile, with decelerating growth- trajectory—and now, what seems to be a “latent bid” in the long-end (as Nomura rates traders raise suggestions that Japan Lifers are continuing their USTS purchases unhedged) "it does feel like upside in US yields remains capped, especially with Term Premium fading to multi-year LOWS alongside the diminishing impact of the US fiscal stimulus going-forward", according to McElligott.

So having predicted a potentially explosive rally higher as a result of a "massive short squeeze", and funds chasing performance, has the Nomura cross-asset strategist capitulated on his upside call, which earlier today was echoed by Gartman who similarly sees up to 1,000 points in upside for the Dow Jones? The answer - no, but the rally may be postponed into the new year.

As McElligott writes, he now expects January to see the larger attempt to push Equities "tactically higher" with "funds no longer PNL- / VaR- constrained and needing to play “offense” especially in light of the “positive movement” on China trade (with a potential heavy “leak” period from both sides during the ongoing negotiations) and the recently destroyed valuations (Cyclicals pricing-in outright recession) seeing investors nibble on their high conviction favorites again." He also sees three other key tactical catalysts that would push risk higher:

Positioning / Flow dynamics: the result of underexposure from fundamental investors on Nets- and Grosses-, while the outright “net short” positioning from short-term trend CTA which is now nearing ‘pivot’ to cover / buy as a very large notional demand catalyst

the result of underexposure from fundamental investors on Nets- and Grosses-, while the outright “net short” positioning from short-term trend CTA which is now nearing ‘pivot’ to cover / buy as a very large notional demand catalyst Technical signs of life: the recent re-test didn’t see SPX / Russell components making “new 52 lows” worsen, while neither SPX, Russell or Financials broke to new lows yesterday when given the opportunity, and finally today’s breakout to the upside of the two week resistance in Spooz (see top chart)

the recent re-test didn’t see SPX / Russell components making “new 52 lows” worsen, while neither SPX, Russell or Financials broke to new lows yesterday when given the opportunity, and finally today’s breakout to the upside of the two week resistance in Spooz (see top chart) Macro catalysts: US corporate profit growth is slowing but it is still growing YoY; the dovish Fed and recent bull-flattening of US Rates curve will work to help offset recent powerful tightening of US financial conditions, while increasingly activist PBoC will ultimately generate a pause in the down-trend and potential delayed reversal higher in China growth- data—‘after the darkness comes the dawn.’

One last potential bullish catalyst is the collapse in the term-premium, which according to McElligott implies a relaxation in the recently elevated cross-asset vol.

Which brings us to the key punchline for a market which virtually everyone now agrees is dominated by quants, algos and other pattern and momentum-chasers: the key CTA buy/sell and trend levels. Here, courtesy of Charlie McElligott, are the most important levels to keep an eye on to determine if today's buying will persist: