iftttwall

What was already a dismal year for quant funds is about to get absolutely catastrophic.

After a historic headfake, which saw the Nasdaq soar higher overnight on hopes that the Fed may have to step in with more monetary easing to offset the economic slowdown that would result from rising covid cases, this morning’s Pfizer news appears to have effectively tabled the covid threat with markets exploding to new all time highs, and unleashing an organic reflation trade in lieu of a “Blue Wave”, one which has sent the 10Y yield surging to 0.96%, the highest level since June…

… which while benefiting small caps and tech stocks, has crippled duration/growth names, i.e., the tech/FAAMG/Nasdaq complex.

And as investors scramble to cover small-cap short and flee the tech names which had massively outperformed this year, and which form the core of the momentum trade, the market-neutral Momentum factor is getting absolutely destroyed, plunging by the most on record.

Commenting on today’s action, Nomura x-asset strategist Charlie McElligott writes that following the “de-risking into the election event” which as he explained last week was mostly about the initial VaR-down transitioning to a massive “gross-up” redeployment in underlying status quo “momentum” Equities books on post-election clarity, “the the issue now isn’t directional as far as risk deployment goes…instead, for the masses, the challenge is going to be about dispersion, because the 5+ year legacy crowded-positioning of the “everything duration” goldilocks momentum trade—long secular growth vs short cyclical value—is likely going to see tectonic movement and at the very least, tactical unwind to play for this “economic reopening” forward view.”

As Bloomberg notes, even before today’s quant carnage, Sanford Bernstein quant analysts warned over the momentum factor’s soaring valuations, which they calculated at more than two sigme above its historic average in the U.S. and Europe; in the US, a measure of crowding in the factor has surged anew to multi-year highs.

Today’s historic move also represents Wall Street’s latest fiasco in a year in which it repeatedly failed to capture the market’s upside, because as we noted yesterday heading into this week and with some clarity on the election front, attention had turned to the coming covid developments as Morgan Stanley wrote last night in “With Little Or No Stimulus Coming, Pandemic Developments Become Critical For Markets.”

To be sure, the market is as usual getting ahead of itself, because even if those 40% of Americans who refuse to get immunized somehow volunteer for the vaccine, there is a very long way to go before any one of the candidates receives regulatory approval and is distributed widely enough for restaurants, offices, planes and shops to see a recovery in demand. Cited by Bloomberg, Evercore ISI estimates normal life won’t return until the third quarter of next year.

None of that matters to stocks, however, which are soaring on the twin tailwinds of a possible burst in monetary stimulus/more QE as Congress gridlock means a smaller fiscal injection, coupled with the pricing in of the reflation to be unleashed by the elimination of covid some time in 2021, and for the clearest indication look no further than the VaR-shocking move higher in Treasury yields.

“Reduced political uncertainty alongside strong results from Covid vaccine trials and improving fundamentals paves a way toward higher equity prices and a cyclical/value rally,” Evercore strategists wrote.

Going back to McElligott, he concludes that with the i) full-throttle “economic reopening” joy following the PFE Vaccine headlines and ii) the still-present risk of a “Blue Wave” dynamic still a low-delta “thing” due to Georgia run-off potentials, the “Rotation Reflation Reopening Relief trade will be insane today – but for FAR, FAR BETTER REASONS than just the unlimited govt spending expansion thesis alone” — which is why the Russell 2000 has exploded higher even as the Nasdaq remains flattish, in a pure unwind of “Secular over Cyclical” status quo trades.

To the Nomura strategist, this means that today is going to be an epic “Value over Growth and Momentum” trade of right-tail outlier proportions, which will sting multi-year consensus “everything duration” secular-over-cyclical positioning  with Size (Small over Large), Beta, Vol, Leveraged Balance Sheet, PMI Sensititives and Yield Sensitives all set to explode higher in sympathy, and which are only tactically owned but recently paired-back after the election outcomes.

Translation: the paradox of today’s explosion higher across markets is that it may result in one or more quant (and not only) funds capitulating and liquidating.

Authored by Tom Ozimek via The Epoch Times,

The Biden campaign is imploring people to wear masks and observe social distancing guidelines due to the pandemic amid packed celebrations for Democratic nominee Joe Biden.

Biden campaign senior adviser Symone Sanders, in an interview on CNN on Nov. 8, was asked by Jake Tapper about people seen not wearing masks as they celebrated what many media outlets have called a Biden win.

“New coronavirus cases are soaring,” Tapper said.

“We have just had some of the worst days for new infections of the entire pandemic. Is it incumbent upon president-elect Biden to make it clear to his supporters that crowds are a bad idea during this pandemic, even if people are wearing masks, and he understands that they want to celebrate, but they shouldn’t be filling the streets like that?”

Sanders responded by saying that “we have made it clear” that guidelines on precautions to curb the spread of the CCP (Chinese Communist Party) virus should be followed.

“I know folks are excited,” Sanders said.

“There are many people who are looking forward to a new day, actually turning the corner and getting this virus under control. But we are imploring folks across the country to be safe, wear your mask, social distance. This virus is very real, and it’s deadly.”

Supporters of Democratic candidate Joe Biden celebrate in Philadelphia, Penn., on Nov. 7, 2020. (Chris McGrath/Getty Images)

Biden was declared by a number of media outlets as president-elect on Saturday after projected victories in Pennsylvania and Nevada put him over the 270 electoral vote threshold. President Donald Trump has alleged voter fraud and said any declarations of victory are premature, with his campaign announcing a raft of legal challenges.

“The simple fact is this election is far from over,” Trump said in a statement. “Joe Biden has not been certified as the winner of any states, let alone any of the highly contested states headed for mandatory recounts, or states where our campaign has valid and legitimate legal challenges that could determine the ultimate victor.”

“Legal votes decide who is president, not the news media,” Trump added.

Biden has claimed victory in the presidential race, changing his Twitter handle to read “president-elect,” while many media outlets have begun referring to him as such.

The former vice president’s declaration of victory prompted pushback from Trump, who said in a statement: “We all know why Joe Biden is rushing to falsely pose as the winner, and why his media allies are trying so hard to help him: They don’t want the truth to be exposed.”

“The American people are entitled to an honest election: That means counting all legal ballots, and not counting any illegal ballots. This is the only way to ensure the public has full confidence in our election,” Trump said.

After Biden’s win was announced by many media outlets on Saturday, multiple video clips were shared on social media showing thousands of people celebrating in major cities across the country, with some not wearing masks and not observing social distancing guidelines.

Sen. Marco Rubio (R-Fla.), in a tweet, called out media outlets for not reporting on the celebrations from the perspective of an elevated risk to virus spread.

“And suddenly people gathering in large crowds and not social distancing is no longer considered irresponsible by the media,” the Florida Republican wrote.

White House press secretary Kayleigh McEnany similarly suggested media hypocrisy in their coverage of large pro-Biden crowds after earlier labeling Trump’s campaign rallies “super-spreader” events.

“Where is @JoeBiden calling on the massive Super Spreader events held in his name to end?” McEnany wrote in a tweet, reacting to a tightly-packed crowd outside the White House singing “YMCA.”

Over the past year, Morgan Stanley’s Michael Wilson has done something virtually none of his colleague have been able to do: he called market moves correctly before they happened and also timed the market’s inflection points with uncanny precision: turning bullish at the depths of the March crisis, when most of his peers were apocalyptic, then remaining bullish until just over a month ago, when he warned “brace for a very difficult trading environment over the next five weeks” – which followed with the early September tech dump – and then two weeks after he again correctly predicted that US stocks were due for their second 10% correction in as many months as “investors were a bit too complacent on the uncertainty surrounding the election outcome, unlikely passage of a fiscal stimulus before the election and second wave of Covid-19”, the S&P 500 has indeed fallen 9% while the Nasdaq and Russell 2000 have fallen 10% and 7%, respectively.

He was, again, right.

Then, just last Monday, he reversed his bearish bias, when as we reported he predicted that “the correction we expected is now mostly finished and adding to equities on further weakness this week is recommended.”

Since then, the S&P is up +13.5% to a new all time high, the Nasdaq is up +10.8% also to a record high, and after today’s Pfizer news, the Russell has exploded 16% higher.

In short, he was right again.

In his latest note, which was published before this morning’s Pfizer news, Wilson writes that he has remained a “committed bull” based on his thesis since late March that “bear markets end with recessions as new bull markets begin.” As he adds, “when bull markets simultaneously begin with a new economic cycle, they typically last for years, not months or quarters. As such, we believe this bull market has a long way to run both in time and price. Our calls for a 10% correction in August and then again in October were under the guise that we needed a pause / consolidation of the extraordinary gains during the first stage of this new economic cycle and bull market.” He quantifies his bullish view by saying that his “S&P 500 range of 3150-3550 is based on both technical and fundamental analysis” although with the S&P now trading well above this bogey, he will probably have to reassess, although in light of the positive covid news, it is likely that he will materially increase his price target.

Following this intro, Wilson takes a well-deserved victory lap writing that in last week’s note, “we recommended adding equity risk given we were so close to the low end of our range. While that advice worked well, we must admit we didn’t expect to return to the top end of the range so fast.”

The reason Wilson thinks markets reacted so quickly and severely is that they were not expecting the election to result in a divided government outcome. More specifically, that the Republicans would hold the Senate. At the end of the prior week, markets had (appropriately) started to contemplate what a big blue wave might mean for equity and fixed income markets – i.e. that maybe it wouldn’t be so great, at least initially.

To be sure, even Morgan Stanley was among those who warned that the lack of a blue wave would be bearish:

We held that view in our election preview note published on October 19 with our macro research colleagues (Exhibit 1).

Interestingly, our probability weighted forecast for the S&P 500 going into the election was 3222, which is almost exactly where the S&P 500 bottomed on Friday, October 30th. In other words the market was more properly priced for the most likely probabilities of the various outcomes as markets opened last Monday. Hence our advice to start adding risk in last week’s note.

What’s next? Well, if one excludes today’s Pfizer news, Wilson writes that aspects of the actual election result remain unclear: “While it appears Joe Biden has the requisite electoral college votes to be the next President of the United States, this outcome is being litigated by President Trump, a process that could drag out for weeks even if it doesn’t change the outcome. More importantly for markets, the Senate now stands at 50 Republican and 48 Democrat seats and the uncertainty as to the final 2 seats will have to wait until the runoff elections in Georgia on January 5th.”

While Wilson agrees with most clients that “when all the dust settles, we should have a Democrat President with a Republican Senate and Democrat House” he recognizes the consensus hasn’t exactly hit the nail on the head with regard to election outcomes. Wilson also notes that at current prices, a divided government outcome appears fairly priced now. Furthermore, it is worth remembering that we won’t know the official outcome for another 8 weeks, a period that encompasses the all-important year-end measuring stick for investment managers, which can lead to big positioning swings, or higher volatility

And while the market may decide it already knows the outcome and look forward to next year, Wilson recommends “investors keep their head on a swivel, as this market likely has a few more cheap shots in it before year end.”

Here Wilson takes a detour in delineating covid-linked risks, although judging by today’s market reaction those can be discounted. In any case, according to Wilson, “in addition to the election uncertainty that still remains, we are now in the midst of the second wave of the COVID-19 virus. Europe has reacted to this second wave with aggressive lockdowns and the US may do the same thing in some states as case counts rise. Such a risk is not priced at current levels, in our view. In short, it’s not clear that the consolidation that began in August is over.”

One can naturally counter here that markets are now openly ignoring any near-term covid infection spike risks by pricing in the inevitable vaccine, which while delayed in 2020 will surely be rolled out in early 2021:

That said, Wilson then says that he relies on technical analysis to tell us what’s next: “we highlight an interesting pattern that has now developed in the S&P 500 known as a wedge or triangle (Exhibit 2). As already noted, since peaking in early August, we have experienced two separate 10 percent corrections and recoveries. With last week’s strong rebound, the market finds itself at a critical juncture. Can it break through the top end of the wedge in Exhibit 2, or not? We make no prediction but we are leaning toward another rejection here at resistance. As such, we will let the market speak before recommending investors add more risk at prices that are far less attractive than last week.”

Wilson’s bottom line, “we like it when technicals line up with the fundamentals and this wedge is a perfect representation of the current situation – balancing the near-term uncertainties that remain in 2020 with the increasingly bullish outlook for 2021. As such, we continue to be bullish over the next 6-12 month but very cognizant and disciplined about price in the short term.”

Finally, in terms of actual trades, even before today’s Pfizer news, Wilson said to overweight procyclical sectors, and growth at a reasonable price (GARP) stocks while remaining careful with high quality defensive or secular growth stocks that may be overpriced for such an outcome:

“As we have shown many times, perhaps the best representation of our viewpoint can be seen in the performance of an equal weighted S&P 500 over a market cap weighted version (Exhibit 3) as well as small caps over large (Exhibit 4). These remain two of our highest conviction calls over the next 6-12 months.”

Considering the S&P is now well above 3,600, or the upper bound when the Morgan Stanley strategist wrote the note, and that small caps are soaring while defensive and tech stocks are barely in the green, it appears that Wall Street’s most accurate strategist will be correct once again.

After a massive spike overnight, US equity markets have been selling off since the cash open…

An opening spike has now fallen to a negative tick…

And that has apparently sparked a widespread outage across most major retail brokerages…

Source: DownDetector

You can buy, but you can’t sell?

Authored by Steve Watson via Summit News,

With a Senate runoff in Georgia potentially determining which party takes control, GOP Senator Ted Cruz warned that if the state falls to Democrats, along with the Presidency, Americans will face a “socialist abyss”.

In an appearance on Fox News, which has already called the presidency for Joe Biden much to the disgust of many Republicans, Cruz demanded that the rule of law be followed.

“At this point, we do not know who has prevailed in the election,” the Senator said, emphasising that “The media is desperately trying to get everyone to coronate Joe Biden as the next president, but that’s not how it works.”

“The media does not get to select our president. The American people get to elect our president,” Cruz urged.

“We’ve got numerous states that are very closely and vigorously contested — from Pennsylvania to Georgia to Arizona to New Mexico to Michigan to Wisconsin. In all of those states, there are serious disputes about the vote totals, and there’s a legal process to resolve those disputes,” Cruz declared.

“So at this point, we should allow the rule of law to operate. We should allow the legal process to move forward. And when that process is concluded, which it will be in a matter of weeks, we will know who prevailed in the elections,” Cruz added.

The Senator then warned of a scenario in which the Senate and the Presidency could fall to the Democratic Party.

“If we have a Chuck Schumer Senate and a Joe Biden presidency, they will pack the U.S. Supreme Court; they will end the filibuster; they will pass massive tax increases; they will pass the Green New Deal, destroying millions of jobs,” Cruz warned.

“If we have a Republican Senate, none of that happens,” he noted.

“If you want a check on Joe Biden, if you don’t want to go over the edge to the socialist abyss, Georgia is the big enchilada,” Cruz proclaimed.

Both Senate seats in Georgia will be contested in a run-off in early January.

The GOP currently holds 48 Senate seats, with Democrats on 46, in addition to two independents who are aligned with Democrats. The GOP leads in two states that are still counting votes, in North Carolina and Alaska.

With a majority of 51 seats needed to control the Senate, this means that Georgia is the key, with strategists estimating that $500 million could be spent on the two races there.

There has not been a Democratic Senator in the state for 20 years.

Senate Democratic leader Chuck Schumer told a crowd in New York over that weekend “Now we take Georgia, and then we change America”:

The S&P 500 surge to a new record high at the cash open this morning amid vaccine exuberance, but there has been selling pressure since the open that has pushed Nasdaq back to unchanged…

Notably the uptick-downtick spike at the open was disappointing – below last week’s highest opening panic-bid levels – and is fading fast…

And even Pfizer is sliding…

So, is this a dip to buy?