It's been a painful few weeks for investors - large and small - as US equity markets have failed to adhere to the decade-long winning strategy of 'buying the f**king dip' whenever stocks fall away from the bottom-left to top-right plan of central bankers.

Major indices are all in (or extremely close to) correction with Small Caps down over 15% from record highs. Worse still,as Wolf Richter notes, 438 stocks on the NYSE have already collapsed between 40% and 94% from their recent highs.

And while a rate-hike in December is all but guaranteed (or the whole delusion of recovery is destroyed), doubts are building over the three rate-hikes that The Fed forecast for 2019 in September.

And, as we noted previously, with stocks now down notably from their highs, the hope for a ‘Powell Put’ is gaining traction (amid slowing global growth and subdued inflation, widening credit-market spreads and a freefall in oil prices).

As Bloomberg adds, the tenure of former Fed chief Alan Greenspan is emblazoned in traders' memories as the era of the 'Greenspan Put'. Following the collapse of hedge fund Long-Term Capital Management in September 1998, and against a backdrop of emerging-market crises, Greenspan’s interventions to cut interest rates were closely correlated to stock market swoons, and markets had only to guess the level.

But, as Goldman noted previously, investors should not hold their breaths as The Fed is likely to continue with their current pace of tightening despite the decline in equity markets.

Nevertheless, an increasing number of analysts still believe The Fed will pause next year:

“I wouldn’t be surprised if the Fed backs away from the three hikes it has built into 2019,’’ said Donald Ellenberger, a senior portfolio manager at Federated Investors Inc.

“The debate right now isn’t whether they go in December," Bank of America’s Harris said. "It’s about when do they pause next year. That’s going to be increasingly data dependent and it’s going to be a game-day decision to some degree as we go into next year."

“December is probably too early for pause, but we could certainly see it in the first half of next year,’’ said Gene Tannuzzo, fund manager and deputy global head of fixed income at Columbia Threadneedle Investments. “Markets need to adjust to lower and slower, both in terms of growth and interest-rate increases.”

But, while the FANGMAN stocks are down over 25% from their highs and panic is starting to be evident in credit flows (and pricing), JPMorgan's Nikolaos Panigirtzoglou sees little signs of broader capitulation - the type of capitulation flush that would prompt The Fed into action and mark a bottom.

As Panigirtzoglou notes, hedge funds continued to bleed red ink in November suggesting that their beta to equities remains elevated despite some deleveraging in October. The HFRX Global hedge fund index of daily reporting funds lost 1.3% in November following a loss of 3.1% in October.

The biggest surprise so far this month has been the performance of Equity Long/Short funds including the quantitative ones, which mostly belong to the Equity Market Neutral subcategory. Overall Equity Long/Short hedge funds lost 2.1% so far in November following a loss of 4.5% in October, implying that they had entered November with a rather elevated equity beta.

The subcategory of Equity Market Neutral funds saw a bigger swing losing 1.5% so far this month vs. only 0.6% loss in October. It is possible that Equity Market Neutral funds took advantage of the October selloff to build up overweight positions in Tech, which backfired in November.

Trend following funds such as CTAs are down month to date but made some money on Monday and Tuesday this week suggesting that they are modestly short equity futures at the moment. They are therefore still far from a max short or capitulation stance. This is consistent with the message from our trend following framework exhibited in the table below, which shows that while the z-score of the short momentum signal for S&P500 futures is very negative, the z score of the long term momentum signal has yet to turn decisively negative and stands currently at zero.

This implies that any short positions on S&P 500 futures by CTAs are likely to be modest at the moment.

Figure 10 (above) also shows that although Risk Parity funds lost money in November, they outperformed their benchmarks. These Risk Parity benchmarks are shown in the two rows before the last one in Figure 10. In contrast, during October, Risk Parity funds had underperformed heavily their benchmarks. This is consistent with our previous thesis that Risk Parity funds along with fundamental equity focused hedge funds had been at the core of the October correction and were forced to delever significantly during that month. As a result they entered November with significantly less leverage and were thus able to outperform rather than underperform their benchmarks this month.

However, as JPMorgan notes, this does little however to change the dismal YTD performance of Risk Parity funds who lost 5.8% so far this year, the worst performance since the Lehman crisis. This makes Risk Parity funds the worst category after CTAs in terms of YTD performance.CTAs are down 6.8% on the HFR Systematic Diversified index and down 9.5% on the SocGen Trend Index, making 2018 their worst year on record.

Critically, however, Panigirtzoglou points out that despite a very poor year for Quant funds and a pretty bad year for hedge funds overall, there is still little evidence that end-investors are withdrawing their money from hedge funds.

Redemption requests are rather limited according to our prime brokerage business. In addition the SS&C GlobeOp Forward Redemption Indicator, which represents the sum of forward redemption notices received from investors in hedge funds administered by SS&C GlobeOp divided by the assets under administration at the beginning of the month, picked up only slightly in November, suggesting that any HF redemption wave into next year is likely to be modest.

Perhaps even more interesting is the fact that unlevered retail investors played a very limited role in either October’s or November’s correction and if anything equity ETF saw inflows during both October and November.

As JPMorgan notes, this suggests that the well-conditioned retail investors are still in “buy the dip” mentality and saw the recent correction as an opportunity to buy more equity funds, providing some support for equity markets amid the correction.

However, this is not true for levered retail investors who tend to invest in US stocks via margin accounts. These margin accounts allow retail investors to lever up to 2 times. These levered retail investors had built up record high positions on US equities of $332bn × 2 = $664bn by the end of May, skewed mostly towards FAANG stocks anecdotally.

As the chart below shows, after May there has been some deleveraging which accelerated in October.

So our suspicion is that these leveraged retail investors had contributed to the underperformance of FAANG stocks since the middle of the year and the more severe underperformance of FAANG stocks in October. But despite the acceleration of deleveraging in October, NYSE margin accounts stood at still high levels at the end of October as shown in Figure 12.

Critically, JPMorgan sees this as an ominous sign as opposed to a signal of support (and hope for the Powell Put's appearance):

In our mind this means that these leveraged retail investors have still plenty of room to delever further from here, which could act as a drag for FAANG stocks and US equities more broadly.

In all, despite some deleveraging recently, there are limited signs of broad capitulation by either institutional or retail investors and in our mind equity markets look still vulnerable.

This lack of capitulation is a sure signal to The Fed 'not to panic' with a dovish rate-hike in December, as Goldman more ominously concluded last week:

“We find that the Fed responds with more accommodative policy only when other financial conditions such as credit spreads also deteriorate substantially or when growth is below potential,” Goldman economists wrote.

“Today, in contrast, credit spreads have widened only moderately, and growth remains significantly above potential, with limited recession risk over the next year.”

In other words - there's a lot more pain to the downside before Powell switches horses. Trade accordingly.