A hopeful bounce in risk-assets overnight has resurrected dip-buyers bravado in US stocks, but as Nomura’s cross-asset strategy MD Charlie McElligott notes, the “bear market bounces” overnight (boosted by meaningfully weaker USD) are especially focused in “rinsed” positioning with “risk-on” optics more about underweighted positioning than a shift in sentiment per se…
Nomura notes that the vapor-move in recently “purged” Equities overnight is especially notable as our CTA model shows meaningful “re-leveraging” levels either already triggered or “in-play”: SPX, Russell, Eurostoxx, DAX, FTSE, CAC and Kospi all back in the “buy zone” – indicating to me that much of the overnight move is likely via the Systematic universe and not the Fundamental space – although the “synthetic short gamma” within Fundamentals too remains susceptible of a “force-in” trade…aka “buyers are higher.”
US bond / stock performance overnight too resembles behavior in-line with pension rebalancing flows, with estimates of significant size in Equities to “buy” (Spooz +1.2% overnight vs SPX -2.9% MTD) against Bonds for “sale” (TY -0.1% overnight vs TLT +1.4% MTD) into the month-end.
However, McElligott notes that the “reversal risk” (stocks higher, USTs lower) potential remains very high into this week’s Powell and G20 event-risk, where straddles are pricing-in big moves (Dec 7th expiration to capture the full window):
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SPX 3.1%; IWM 3.5%; QQQ 4.3%
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Tech 4.2%; Fins 3.6%; Cons Disc 3.7%; Energy (XLE) 4.8%; Energy (XOP) 7.4%
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Eurostoxx 2.7%; DAX 2.9%; Japan (DXJ) 3.2%; Emerging Mkts (EEM) 4.2%; China (FXI) 4.4%
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Crude (USO) 10.7%; Gold (GLD) 1.6%
This risk then becomes that today’s CTA Equities “re-leveraging” sees another “de-leveraging” wave out of any potential G20 disappointment, as “sell levels” remain close-below the market …
But as McElligott notes, while there remains a strong negative story to performance, investors should watch for a December “momentum longs” bounce:
US “Momentum” factor shows the performance pain from the “chop,” -7.1% MTD / -9.8% QTD, expressed by my HF L/S model -2.0% last week as “Popular Longs” significantly underperform “Popular Shorts”
HOWEVER it need be noted that December remains a +++ seasonal for “Momentum” factor due to the year-end PM phenomenon of “window-dressing” (adding winners)
The performance is largely driven by the “Momentum Longs” +2.9% on avg in Dec since 1984 (while “Momentum Shorts” squeeze against you on “bottom fishing” ahead of the new year, on avg +1.7% since ’84)
However, McElligott notes that Anecdotally, discretionary Equities managers continue to believe you get one more purge (perhaps a final quant de-leveraging) before getting long into the start of 2019.
So, do you feel lucky?
BTFD for a Santa rebound in momo stocks, bet on continued pension fund rebalancing (in favor of stocks), punt on some hopeful headlines from G-20 (or Powell), or sit on your hands as another quant purge looms?
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