Category: zerohedge

Stocks Soar On Biggest Weekly Short-Squeeze Since Election, Bonds Bloodbath

After Schocktober, November’s chaos likely left a lot of traders thinking this…

Chinese stocks saw an orgy of sudden mysterious buying pressure after Monday’s dip… (heaviest volume week since February)

 

European stocks were  higher but considerably less linearly manipulated…Everyday saw a solid open sold off…

 

US Stocks are back in the green for the year thanks to this mega squeeze…

US Markets were utter chaos on the week with plunge protection bids and short-squeezes everywhere… Small Caps and Trannies outperformed…

 

Today was all about Apple and China Trade – An initial tumble after hours (Apple) was quickly erased on Bloomberg headlines about progress in US-China trade talks. This lasted until 3 White House officials (off the record) and Larry Kudlow (on the record) confirmed no such deal progress existed, sending stocks slamming lower. Then in the last hour of the day Trump told reporters progress was being made and stocks recovered…

 

What really helped the week overall was a massive short-squeeze (an 8% surge) – the biggest since Nov 2016 (US Election)…

 

Dow made it back above it 200DMA (but failed with its 100DMA) but S&P, Nasdaq, and Small Caps all remain below the 200DMA still..

 

Obviously Apple was making all the headlines, tumbling back below a trillion dollar market cap…

 

FANG stocks rallied, breaking a four-week losing streak, but it was anything but convincing…

 

Despite VIX compression this week, the term structure remains inverted…this is the 20th day in a row…

 

As stocks tumbled during the day, bonds were also sold as it seems quant derisking remains

 

Treasury yields blew wider all week, accelerating as November started…

 

30Y took out 2018 yield highs – pushing to 3.46% – the highest since July 2014…

 

The Dollar ended the week almost unchanged after yesterday’s tumble and today’s chaotic swings…

 

But the big story was the surge in offshore yuan (and give back today)…

For some context, that 2-day spike erases a month of weakness – but we have seen this kind of manipulated squeeze a few times…

 

Cryptos ended the week practically unchanged (aside from Bitcoin Cash)…

 

Copper ripped on the China headlines, crude dumped as Iran squeeze fears abated…

 

Mirroring the dollar, Gold ended the week almost unchanged in a big V-shaped recovery

 

It seems the new Yuan peg is at 8500 per oz of gold…

 

WTI Crude crashed this week to its lowest in 7 months with a $62 handle…

 

Finally, just in case you thought October was the ‘pause that refreshes’ and encourages investors to buy the dip for another leg higher to infinity and beyond… they are already ‘all in’…

Which is not a good sign as Ned Davis Research just went beariosh on global stocks for the first time since 2009… Investors should sell stocks and buy bonds because the equity decline is only halfway done, according to Tim Hayes, the firm’s chief global investment strategist.

“In making this move on market strength, we are recognizing that the global market downtrend has not led to the levels of panic and capitulation needed to start a bottoming process,” Hayes wrote in a note late Thursday.

“We have yet to see a waterfall decline with extremely high downside volume and volatility.”

Four out of the 10 components in the firm’s model have turned bearish. If another one goes sour, Hayes said he’ll downgrade stock allocation further.

Soft survey data started to catch down to reality this week…

Tighter financial conditions still point to a considerably lower stock market…

No matter what – something changed!!

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Oil Prices Plunge As Storm Clouds Gather Over Global Economy

Oil declined more than 3% on Thursday, and extended those losses Friday, with ICE West Texas Intermediate (WTI) Light Sweet Crude Oil Futures probing lows not seen since April, due to weakening global demand at a time when the output from the Organization of the Petroleum Exporting Countries (OPEC), Russia, and the U.S. is rising.

Record crude production from the U.S. and Russia, along with a surge from OPEC, has once more created oversupplied conditions.

Russian, U.S. & Saudi crude oil production (data via Reuters Eikon Graphics) 

Oil prices started declining in early October on fears that global economic momentum was waning as the U.S-China trade war escalates, and a slowdown in emerging market economic data (primarily in Asia) was becoming more evident.

Global Crude Futures (data via Reuters Eikon) 

WTI has plunged 17% since its 76-handle probe in early October. Analysts told Reuters they anticipate more selling in coming sessions, noting that oil did not bounce on Thursday on weakness in the dollar, nor did it positively correlate with the rebound in equity markets.

WTI monthly futures (data via Reuters Eikon) 

Besides global growth momentum waning, another reason for downward pressure in oil could be that Washington just granted several waivers on sanctions on Tehran, allowing countries like South Korea, Japan, and India to continue to import Iranian crude (in other words, more supply).

John Kemp, Reuters Senior Market Analyst of Commodities and Energy, believes oil prices are falling as a broad range of financial and real-economy indicators show the global economy is slowing.

“The depth and duration of the slowdown is impossible to gauge at this point, whether it turns out to be simply a mild and short-lived “soft patch”, a longer but still positive “growth recession” with output falling relative to trend, or an “outright recession” with activity falling in absolute terms.

Recent declines in equity markets and softness in freight indicators may turn out to be a false alarm or a pause within an extended cycle rather than mark a cyclical turning point.

Most commentary about the economic cycle is still influenced by the last deep and wrenching recession which accompanied the global financial crisis in 2008/09.

But severe recessions have not been common since the end of the Second World War and most downturns have proved milder, which therefore seems a more likely prediction for the next cyclical slowdown.

In the United States, post-1945 recessions have tended to be short, lasting less than a year in most instances, and in some cases have seen business activity level off rather than decline,” said Kemp.

Kemp provides historical charts on the business cycle: 

Duration of U.S. business cycle (expansion) since 1858 

Duration of U.S. business cycle (expansion) since 1857

Duration of U.S. business cycle (complete cycle) since 1857

If the economy is at a turning point (or a cyclical peak), the sequence of events to follow by the Trump administration would likely involve some combination of fiscal expansion, monetary easing, and or possible reduction in trade tensions. A further slowdown in global growth could send oil prices much lower, as consumption growth declines while production continues to accelerate.

It seems like today could be one of those rare points in time when macro fundamentals and technicals are possibly lining up to signal that one of the most extended bull markets ever is hitting a brick wall. As of now, watch oil prices as a proxy to global growth.

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Fed’s Balance Sheet Shrinks The Most On Record; QE Unwind Hits $321 Billion

On Monday, when discussing the two key, opposing forces facing stocks this week, we said that while on one hand stock buybacks will make a triumphant return, as companies with $50bn of quarterly buybacks exited their blackout periods, and the total number of permitted stock repurchases jumps to $110bn by the end of next week and to $145bn the following…

… the offset of the favorable flows from corporate buybacks would be the Fed itself, as the largest Fed balance-sheet reduction-to-date ($-33.3B) would take place on Halloween.

And sure enough, one month after the Fed quantitative tightening entered its peak monthly unwind phase, during which the Fed’s balance sheet is scheduled to shrink by “up to” $30 billion in Treasuries and “up to” $20 billion in MBS a month, for a total of “up to” $50 billion a month, on October 31 the balance sheet declined by $33.8 billion  – the biggest weekly total yet – consisting of $23.8 billion in Treasuries, $8 billion in Mortgage Backed Securities, and a modest decline in various other assets.

As a result of Wednesday’s maturities, the Fed’s balance sheet has now shrunk by $321 billion to $4.140 trillion, the lowest since February 12, 2014; since October 2017, when the Fed began its QE unwind, it has now shed $321 billion, or just over 7% from its all time highs.

While MBS totals shifted around over the month, the Treasury decline took place in one day as there were no Treasury securities maturing on Oct. 15, while three security issues matured all in one day on Oct. 31, totaling $23 billion. Those were allowed to “roll off” entirely without replacement. In other words, the Treasury Department paid the Fed $23 billion for them, money which the Fed will promptly “shred”, digitally speaking.

Total October TSY maturities were $7BN below the $30BN cap, and while December sees $59N in Treasuries maturing, the Fed’s maturity cap means that roughly half of this amount will be allowed to rollover, while $29 billion worth of new Treasuries will be repurchased. Then, one month later,

One month later, in December, another $18 billion in Treasuries are scheduled to mature, and so forth as determined by the maturity schedule of the Fed’s current Treasury holdings (shown below) until such time as the Fed finally halts QT and/or launches even more QE.

Finally, for traders hoping to time the unwind of the balance sheet “to the day”, this is problematic as there are discrete steps in the process of actual liquidity extraction: as WS notes, the drains runs from the bond market through Treasury auctions and then the Treasury Department’s cash account to the Fed. Throughout the process, the timing of the drainage gets disbursed – as does the impact on the markets.

This week is a case in point: in a time when the Fed just saw the largest shrinkage of its balance sheet since the start of QT, the market soared higher, which once again begs the question: are stock buybacks a more powerful “flow” factor for risk asset prices than the Fed’s balance sheet unwind, and how much longer will this be the case.

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US Rapper T.I. Sued After His ‘Token’ Allegedly Fails

Authored by Ana Berman via CoinTelegraph.com,

U.S. rapper T.I., also known as T.I.P., is being sued for $5 million by a group of people after his FLiK token has reportedly failed, according to court documents obtained by U.S. celebrity news media The Blast.

image courtesy of CoinTelegraph

As per the lawsuit cited by the outlet, the group of 25 persons claims that they have invested $1.3 million in “now worthless securities called FLiK Tokens,” promoted by T.I. and his business partner Ryan Felton. The plaintiffs state that the token was actively endorsed in social media both by celebrities and experts to create an impression of  “a valuable liquid investment.”

However, the group continues, T.I. and Felton defrauded them by using the money raised to drive the token’s price up, and when the prices fell down, they dumped the FLiK and disappeared. According to the lawsuit, Felton even created a new company, stating it had acquired FLiK and telling investors he had nothing to do with it.

Now the plaintiffs want to obtain a minimum of $5 million in damages from T.I. and Felon. The lawyer for the celebrity did not immediately respond to a request for comment on the matter to The Blast.

The FLiK was announced back in September 2017 and also actively supported by U.S. actor Kevin Hart, who promoted the coin on his Twitter. As U.S. tabloid TMZ reports, the promo campaign also mentioned Mark Cuban — a billionaire and owner of the NBA’s Dallas Mavericks. According to the stats provided by CoinMarketCap, the coin was traded at its peak on Oct. 17, 2017, when its price reached 21 cents. Seeing a brief takeoff in February, it slowly declined to nothing, traded at $0.001 as of press time.

Celebrities have often become involved in crypto-related activities from time to time, but their attempts and promotions do not always succeed. For instance, another U.S. rapper Ghostface Killah — a member of renowned Wu Tang Clan — co-founded an Initial Coin Offering (ICO) that hoped to raise up to $30 million. However, his Cream Capital was later suspended “with no plans to hold the token sale in the future.”

Floyd Mayweather, one of the world’s famous boxers and the highest paid athlete of his discipline, also engaged in an ICO, dubbing himself as Floyd “Crypto” Mayweather. Later in 2018, one of the coins he backed, Centra, was charged with fraud by U.S. securities watchdog SEC.

Another celebrity to recently join a crypto startup was Johnny Depp, who partnered with crypto-powered social entertainment platform TaTaTu. Cointelegraph reported in mid-October that the American movie star is going to team up with the TaTaTu founder in order to jointly create and produce film and digital content.

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Reuters Calls It: “Growth Stock Days Are Gone, Value Back In Play” 

Thomson Reuters research desk is ringing the proverbial bell in the stock market, saying “growth stock days are gone, value back in play.”

The report underlines how the latest leg of the most-extended bull market: buy the f*cking dip (BTFD) for growth stocks paid off, massively.

For more than five years, BTFD for shares of fast-growing companies like Facebook, Amazon, Netflix, Google (FANG) worked out very well, beating their value rivals by a margin of more than two-for-one in that span.

Until November came around.

Reuters said the wheels have literally “fallen off that profit vehicle.” The Russell 1000 Growth Index, which tracks stocks that trade at high multiples relative to their earnings, entered correction territories and or bear markets in October, warning that it was one of the worst months since the Great Financial Crisis. In that same period, the Russell 1000 Value Index is down only 7%.

“That shift was cast into sharp relief last week after major revenue shortfalls reported by both Amazon and Alphabet triggered the largest drops in their stock prices in years. Nasdaq, stacked with growth names from the tech sector in particular, is in a full-fledged correction – the term for a fall of at least 10% from the most recent peak.”

According to the Reuters research desk, the gap in performance between Russell’s growth and value indexes hit the widest level in 40-years (shown below on the Reuters Eikon Datastream via Chuck Mikolajczak).

Reuters said previous instances of widening eventually led to a turning point (Dotcom Bust), where value stocks like JPMorgan Chase, Exxon Mobil, and Johnson & Johnson benefited handsomely.

“When the rotation started to go back the other way, sort of reversion to the mean, value went on to outperform growth for several years. It was a longstanding reversion-to-the-mean kind of a trade,” said Phil Orlando, chief equity market strategist at Federated Investors, in New York.

From its Sept. 20 high, the S&P 500 is now down 9%, with the risk of entering correction territory, as heavily weighted sectors, such as technology and consumer discretionary, contributed to the nasty decline.

Both sectors have been crushed in the last three week and include growth stocks such as Amazon, and Alphabet, leading some analyst to believe a full-blown rotation into value stocks has already started.

According to FTSE-Russell data via Eikon, technology accounts for a weighting of nearly 35% in the Russell 1000 growth index, followed by an 18.8% weighting in consumer discretionary.

In terms of a forward price-to-earnings ratio, growth stocks remain expensive despite the recent downturn, making the argument for value stocks even more appealing to investors.

Steve DeSanctis, an equity strategist at Jefferies in New York, told Reuters that investors probably want to own value stocks now.

“We are starting to see earnings accelerate faster for value than for growth, and if GDP is going to be north of 3%, we should see a pretty good earnings backdrop,” DeSanctis said.

Reuters made the point that this month’s shift to value could be a “full rotation as the bull market enters its late-cycle stages, or merely a temporary defensive play,” similar to earlier this year when the S&P 500 tumbled into correction territory in February.

Julian Emanuel, a chief equity and derivatives strategist at BTIG, told Reuters that the current environment versus earlier this year is that the Federal Reserve is more determined in tightening the liquidity nose, which has resulted in higher yields on U.S. Treasury securities.

“Investor psychology has shifted to the idea that long-term yields are rising. When that happens it’s an implicit negative for high-multiple stocks, which tend to reside in the growth category,” Emanuel said.

Add Reuters to the list of research firms indicating that US tech stocks have reached the top.

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Hot-Tempered Alec Baldwin Arrested After Parking Lot Assault

Actor Alec Baldwin was arrested on Friday following a dispute over a parking spot in Mahnattan, reports NBC New York. 

Law enforcement sources tell TMZ that the other man swooped into a parking spot Baldwin was waiting for near 10th Street and 5th Avenue. An argument ensued and Alec “punched the guy.” 

One witness tells us Alec yelled “F**k off” during the fight. Cops were called and Alec was arrested. Baldwin lives in the area. –TMZ

Baldwin was arrested in 2014 for disorderly conduct, and was acquitted in a battery case involving a photographer in the 1990s. 

In 2013, Baldwin chased a photographer outside his Manhattan apartment, calling him a “cocksucking fag.” 

Get away from my wife and the baby with the camera,” Baldwin can be heard yelling. “What fucking language you want that in?”

In 2007, Baldwin left his 11-year-old daughter Ireland a voicemail in which he called her a “rude, thoughtless, little pig,” adding “you don’t have the brains or the decency as a human being.”

The hot-tempered Baldwin continued: “I don’t give a damn that you’re 12 years old, or 11 years old, or that you’re a child, or that your mother is a thoughtless pain in the ass who doesn’t care about what you do as far as I’m concerned,” adding “Once again I have made an a** of myself trying to get to a phone. You have humiliated me for the last time with this phone.”

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Idiot Algos Panic-Buy Stocks (Again) As Trump Talks China Trade

After denials from three White House officials off the record and Larry Kudlow on the record, President Trump just told reporters that “China talks are going well” and he thinks “US will reach a trade deal with China.”

Trump added that he is “getting closer to doing something with China.”

The algos immediately panic-bid stocks…

Yuan also strengthened…

 

Are these markets seriously this fragile?

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Beto Responds To Undercover Veritas Video; Insists Campaign “Above Board”

Rep. Beto O’Rourke responded to allegations by Sen. Ted Cruz (R-TX) that O’Rourke staffers have been illegally funneling campaign funds to help transport Honduran nationals traveling in the Central American caravan headed towards the southern US border.

In Friday comments, Cruz cited an undercover sting by Project Veritas in which O’Rourke campaign staffers Dominic Chacon and AnaPaula Themann appear to admit to facilitating helping transport migrants to airports and bus stations. 

Cruz referred to the video while campaigning in Fort Worth, telling a crowd of about 300 that “a video broke this morning of his campaign staffers taking campaign money and apparently using it to give it to people coming here illegally.” –Dallas Morning News

O’Rourke responded, telling the Dallas Morning News “We’re looking at this, but anyone who is trying to politicize this is trying to win an election base on fear. I want to make sure that we’re focused on the issues that matters most to Texas.” 

“I am comfortable that the campaign is above board, that everything is being reported to the FEC and I’m going to also make sure that I understand that’s going on, but from everything I’ve heard, that’s the sum of it,” added O’Rourke. 

James O’Keefe of Project Veritas challenged O’Rourke on Friday to “make the records public.” 

Staffers for O’Rourke were captured on undercover video telling O’Keefe’s undercover operatives amontg other things “Don’t ever repeat this and stuff but like if we just say that we’re buying food for a campaign event, like the Halloween events…” adding “I just hope nobody that’s the wrong person finds out about this.” 

Perhaps sensing that the Veritas video would cement a victory for recent Trump ally Ted Cruz, O’Rourke picked up an endorsement Friday from former CIA Director, John Brennan, who tweeted: “I believe Beto O’Rourke is the type of individual Texans need in the U.S. Senate to represent their best interests. He has the integrity, intellect, and character that is in short supply in Congress.” 

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$700 Million Hedge Fund Closes Most Of Its Positions

In a time when underperforming hedge funds – that would be most of them  – are doubling down in hopes of undoing recent losses and catching up to the S&P, and avoiding a flood of redemption requests, one fund decided to take money off the table.

Rhicon Currency Management – a $700 million FX-focused hedge fund – closed out most of its positions roughly three weeks ago, according to managing director Peter Jacobson. The fund’s intra-month strategy is “completely flat,” while roughly half of the money in its one-week-or-less book is invested, Bloomberg reports.

Why? One simple reason: according to Jacobson, “nothing looks compelling.”

The refreshing honesty from the hedge fund manager, who unlike his peers does not try to justify his fees by being invested at all times, comes amid recent turmoil in the US stock markets which however has failed to inspire volatility in the $5.1 trillion-a-day foreign exchange market, making life for traders especially difficult. With the “risk off” Yen refusing to act as a “risk off” currency – that honor has now been handed over to the Chinese Yuan, however good luck shorting it with the PBOC occassionally pushing overnight rates to a level that destroys all shorts – and the euro sliding as European growth has slowed to a crawl, Jacobson is steering clear. As for the US dollar, Rhicon believes won’t take another leg higher unless benchmark 10-year Treasury yields spike to 3.3 or 3.4%.

Jacobson said the firm doesn’t often completely shut down its positions. However, in recent years it’s become a more frequent occurrence as extraordinary monetary stimulus on the part of global central banks compressed volatility, not to mention made a mockery of fundamentals-based trading.

“Not trading is actually a trade decision,” said Jacobson. “I don’t see anything that makes sense to me, so there’s absolutely no reason why I should have positions on.”

Trading decisions such as this have served Rhicon well in 2018, a year in which the hedge fund is up nearly 5% even as most of its macro peers have stumbled. That compares with a nearly 4% year-to-date slump in a BarclayHedge index of currency trading programs, following a record 11% plunge in 2017.

According to Bloomberg, Rhicon was previously bullish on the dollar, a profitable trade for much of 2018 as the greenback gained over 7% since mid-April. In May, Jacobson also turned bearish on the Euro, expected the bulk of the dollar’s gains to come against the euro, a good trade as the common currency fell as low as $1.13 in October from a seven-year high of $1.2555 in February.

Now, however, the narrative is less clear: “With a four percent correction in equities, you would have thought that risk-off currencies would perform really well,” Jacobson said. “So I’m in a holding pattern until things become more clear.”

Looking ahead, Jacobson believes that should stocks continue to churn and a “real sense of panic” bleed across markets, his most likely next trade would be to short the USDJPY, even though the Yen has stubbornly refused to trade a risk-off currency in recent quarters.

In the meantime he’s content to sit the market out and keep his powder dry.

“There is always another trade, you just have to wait for it. But if you’re losing money, you may not have enough capital to trade that in the end,” he said. “So just be patient.”

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Nomura: ‘Jaw-Dropping’ Risk-On Surges Signal “Soul-Crushing” Stress In Stock Funds

We “cannot overstate the movement overnight” is how Nomura’s cross-asset strategy MD, Charlie McElligott, begins his note to traders today, reflecting that the markets’ moves are “blistering.”

From a macro-perspective, McElligott notes that it certainly looks like the accumulating “real pain” of the escalating trade war (as indicated in “wrong way” global PMIs / US ISM ‘New Orders’ declines vs leap higher in ‘Prices Paid’ / lower U.S. corporate margins per Q3 EPS / survey data amongst others), and ultimately, the sensitivity of both U.S. and Chinese leadership to the optics of tanking stock markets (ESPECIALLY into mid-term Elections in the US) – has forced what he would call “movement,” with reports late last night saying that President Trump asking his cabinet to begin drafting potential terms of a trade deal.

However, just as we are skeptical (and reports suggest correctly), McElligott notes that the sequencing of events (recent US Equities selloff and timing of said Midterm Elections) has SOME viewing this as another “scheme” to ensure a U.S. stock market rally into the Elections to boost the Trump platform.

Additionally, McElligott points out that the rumor coming from Trump’s side also now “boxes-in” Xi as far as high expectations for an eventual deal – which can then too position him as the “fall guy” if the “deal” ultimately falls-through, especially with the incredibly-complicated 1) “Intellectual Property” forced-transfers- and 2) competitive advantages via subsidies for Chinese SOEs – issues at the core of the spat.

Nevertheless, the markets moves are blistering:

  • Hang Seng closed +4.2% for its largest move since Nov 2011; HSCEI +4.0% for its largest move since Feb 2016; KOSDAQ +5.1% for its largest move since Sep 2011

  • In Germany, Autos are again +3.8%; in Europe Consumer Durables are +3.4% and Banks are +2.4%

  • The move in Yuan is jaw-dropping; the 2d move in CNY is now a -6.5 SD event back to the Chinese revaluation of Yuan / ending of the fixed Dollar peg in July 2005; CNH is seeing the 2nd largest 2d move since 2010 on capitulation from crowded shorts.

Separately, McElligott points out that the purported trade deal breakthrough came amidst two other “risk-bullish” catalysts:

  • Another pledged upgrading of Chinese stimulus measures for the private sector from President Xi at an “unprecedented” symposium with business leaders on Thursday, including substantial tax cuts and bailout funds, “encouragement” of bank lending and an “ordering” of local governments to “rescue” troubled private sector firms.
  • Reports that the U.S. is “said to” give 8 countries—including Japan, India and South Korea—oil waivers under the Iran sanctions to continuing buying their oil, in exchange for continued import cuts so as to not drive up oil prices—net / net a “growth lifeline” for Asian economies which need to import oil.

Incredibly lost in the all the bullish developments overnight was:

  • Another hawkish impulse from the Bank of Japan, which again “stealth tapered” purchases in the 3y-5y JGB bucket – this too is part of the selloff in global Rates overnight, not just the “risk-on” news-flow alone.

  • Similarly notable for the “Bearish Rates” trade per Darren Shames – BIG week-over-week decline in foreign custody holdings indicating UST liquidation flows, with the largest change since April and before that, Oct ‘16.

However, while mainstream business media heralds the gap-higher-opens and short-squeeze spikes as ‘wealth-enhancing’ for average joes everywhere (as if average joes were in the market), McElligott notes that these collective developments are potentially “soul-crushing” for Equities funds which have massively de-grossed / de-netted / de-beta’d their portfolio risk over the past month’s market calamity, literally low-ticking exposure in the period ahead of S&P Futures’ +6.2% rally since the Monday overnight lows:

  • Street PB data showed that Tuesday was the largest day of Equities L/S “gross-down” in 3+ years, selling longs (in ‘most crowded’ Comm Services, Tech and Healthcare) and covering shorts (especially ETFs)

  • Monday showed to be the largest underperformance in the top 10 ‘most crowded’ longs vs the SPX since 2010 on forced-deleveraging

  • Again per Street PB data, both “gross-” and “net-” exposures @ ~ 2 year lows, with 5Y delta-adjusted “gross” just 25th %ile and 5y delta-adjusted “net” at just 9th %ile

  • This speaks to my initial “point #1” a few weeks ago on the case for a re-risking move into Equities through year-end—that a “positioning-rinse” will PERVERSELY drive a violent mechanical “re-racking” of exposure from “first-mover” Systematic rules-based strategies, themselves too having de-risked throughout October (i.e. our CTA model showing “outright short” positions in SPX across 2w, 1m, 3m and 6m models through the end of the month)

  • This “lunge higher” exposure rebuild was only able to develop after Macro funds (who have gotten the “bearish Rates” trade correct and thus had PNL to “play offense” with) were able to profit on downside Equities hedges – which meant YARDS of Equities delta to buy over the prior 48 hours – and quickly pivot into outright “upside” expressions through early Dec—painfully, all ahead of the fundamental universe, which are collectively licking their wounds and “frozen” with redemption concerns

  • And thus my key observation over the past two notes: ULTIMATELY, the fundamental Equities community  (both MF and HF L/S) is now a massive “synthetic” short-gamma in the Equities-space, turning forced-buyers the higher the tape goes—and as expensive as options have become after last month, this means outright “spastic grabbing” of index futures and ETFs in an attempt to rebuild any semblance of exposure to this explosive gap-move higher

On a related note, McElligott warns that indications are that redemption flows and “unwind-y behavior” continues in the quant strategies universe…

VERY CONCERNING cross-asset “Momentum Reversal” price-action in the most-crowded CTA-Trend positions yesterday,  which could very reasonably be interpreted as REDEMPTION-related with proxy trackers of industry performance anywhere -6% to -15% YTD now

These strategies again proving to be more susceptible to “crowding risk” than their “risk diversification” marketing claims, as the market regime shift’s ”rolling vol events” chops their “calm-dependent” strategies

Yesterday’s most obvious “Max” position liquidation candidates:

  • All “long USD” tied trades were nuked, as our model showed recent re-accumulation of “Max Shorts” URUSD, GBPUSD, AUDUSD and NZDUSD / “Max Longs” in USDJPY, USDCAD, USDCHF, USDNOK, USDSEK, USDCNH which all traded violently “backwards” yesterday

  • Gold and Metals (both precious and industrial) had recently again moved-back to “Max Short” status, but yesterday and again today continue squeezing powerfully higher (Gold a +3SD move yday, while the 2d move in Industrial Metals is a +2.5SD move relative to past year’s returns)

  • “Max Long” in Brent Crude being destroyed, with the prior 4d move a collective -2.5SD drawdown

Additional assets “at risk” going-forward from CTA redemption flow:

  • MAX SHORTS in Eurostoxx, DAX, CAC40, Hang Seng, HSCEI, ASX, Kospi, Nikkei; EUR / JPY / GBP/ AUD / CAD / NZD / NOK / SEK / CNH; ITA 10Y; Industrial Metals, Precious Metals

  • MAX LONGS in Brent Crude; EUR 10Y, JPY 10Y, GBP 10Y, AUD 10Y, CHF 10Y, FRA 10Y

And remember when in my mid-June structural / trading behavior “Downshift” note, where the macro regime shift from “Cyclical Melt-Up” into the much more difficult “Financial Conditions Tightening Tantrum” meant that the trading environment too would then transition from a period of “high Sharpe” directional trades to instead a hyper-tactical stance, with called for monthly “mean reversion” trades / hedges?  Well….yesterday exemplified that perfectly within the Equities quant space, with widespread “stress” apparent–

Yesterday’s U.S. Equities factor-behavior was indicative of “stress” as well – as we have discussed to pain seen in some high profile “quants” YTD:

  • “1m Price Reversal” factor finished +3.5% for its largest move since Nov ‘17 and now +7.0% QTD; the return was almost entirely from this month’s “Reversal Longs,” meaning that the largest “losers” of last month’s capitulation via de-gross, de-net and tax-loss selling were the biggest “winners” yesterday

  • “1Y Momentum” was crushed -2.5% on the session, its 10th ~-2SD move since late June

  • Recently defenestrated “Beta” and “Volatility” exploded higher, +2.5% / +3.6% on the day respectively—largest 2d positive move in “Beta” (+5.5%) since the U.S. Election, largest 3d move in “Vol” (+7.7%) since March ‘16

  • “Size” factor (small cap over large) saw a +3.6 SD move, largest since Nov ‘16

  • “R&D / EV” factor sees a +3.1SD move, largest since April ‘16

  • “Conditional Reversal” factor sees its 5th largest move in its history

  • “Default Risk” factor largest move since Nov ‘16

As we noted previously, volatility is not going away as this stress, de-risking, and re-rising panic is far from over.

 

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