Thanksgiving travelling has officially started. Coming few days will be the super spreader event of the autumn. The median incubation period for COVID‐19 is four to five days, so if this proves to be a super spreader event we should know by next weekend.
Given the surge in the rotation trade where people are busy chasing laggards (these have recently turned to leaders) as the positive vaccine news and the reopening narrative, Russell has managed exploding to the upside, absolutely and relatively speaking. What if markets start refocusing on the inverse logic should we get a super spreader event, if nothing as a short term narrative?
Seasonality is very strong for NASDAQ, and the Russell vs NASDAQ ratio has turned around violently several times. Sure, the tech momentum from earlier this year is not present, but a quick relative trade could reverse abruptly.
Note how seasonality is much stronger for NASDAQ than rest of the indexes going into year end (second chart).
We outlined the potential super spreader logic in the earlier post.
Another way to play a possible hiccup should the overall market get stressed is via relatively cheap volatility.
Global vols have all crashed recently, the first 7 day period post the elections was the biggest 7 day drop for VIX ever. Not only have vols crashed, but the entire term structure has steepened massively as demand for short term, hedges has imploded (recall, "bro hedges only cost money").
Nobody wants protection here, especially not short term protection. Either play a possible super spreader event with cheap short term options, or via term structure trades (long short end of the curve vs short little further out).
Both gross and nets have been at extreme levels (100%-tile over the past 3 years). There was only "adding to risk" into the election and post-event. So, the below data is interesting and somewhat "new". Is there a "travel to arrive" on vaccine? Are we throwing in the towel on year-end rally? Or is it just noise? Remember that HF VIPs have been performing very well this year.
BoAM
EUR approaching the 1.20 level as mighty USD has problems attracting solid bids. During this last global cross asset volatility crash EURUSD vols have been smoked as well. The question is whether vol is trading too low if the dollar starts "collapsing" below the huge 92 level in the DXY and the upper range of the EUR, around 1.195.
EURUSD 6 mth implieds have been declining steadily in November, offering relatively cheap vol plays on the possible "all hell break loose" possibility.
Refinitiv
Bitcoin has "proved" the dollar debasement logic. This last parabolic phase is probably more about mania than the dollar debasement story, but that is another question.
Gold, seen as the dollar debasement hedge only a few months ago has had terrible px action recently and it broke below the big 1860 support recently. Catching falling knives is not a strategy we adore, but we are asking ourselves if gold is becoming the relative "value" play on the possible further dollar debasement?
The parabolic phase in gold a few months ago that ended in tears was discounting the dollar debasement too eagerly (maybe this is what we are seeing in BTC at the moment), but note that bigger moves down in the DXY usually have been accompanied with gold moving higher. Over past months we have had both the DXY and gold moving lower, but as DBK writes today;
"gold and the USD have become 'strange bedfellows', with the vaccine environment favoring weakness in both, despite the typical short-term USD TWI – gold correlation being negative."
GS: "we expect gold to go higher when more evidence of inflation emerges. It may, however, take some time for this to materialize as the market may need a few solid CPI prints in the US or a large move in oil to reprice inflation higher. Until then gold may continue to face pressure from reflationless cyclical rotation. Our medium-term bull thesis is unchanged, and we maintain our 12m $2300/toz target"
Gold has been shaking out some weak hands lately, but note the bounce right on the 200 day moving average (chart 2).
Fed buying of corporate bonds will end in 2020, which together with a shifting legislative and regulatory backdrop creates uncertainties:The Fed HG bond buying program has become somewhat furtive in recent months as the Fed has only bought $100mm/week since late July. That said, the backstop that it created was undoubtedly the most significant positive factor to have occurred for HG spreads in 2020. The impact of the program announcement and then about $14bn of subsequent buying over 7 months sparked a 247bp rally which has brought spreads to within 15bp of where we started 2020. Most of the spread tightening tied to the precedent set, not the activity itself
Federal Reserve
Fundamental LS alpha is down -3.8% MTD, and November is on track to be the worst alpha month for Fundamental managers since GS started tracking the data in Jan '15. A significant portion of the alpha degradation MTD is driven by short positions
GS
Presented without comments, but these two live in different economic realities…
Refinitiv
The rotation trade has been absolutely massive where every dog has been chased. The Russell vs SPX ratio has exploded to the upside. The gap between the spread and US real rates has widened big time in just a few sessions. If Russell (and the ratio vs SPX) is the best forward looking "instrument", then yields look too low, but what if yields are better at indicating the future this time around?
Chasing dogs here is most probably a late trade. TME ran a chase dogs series only few weeks ago, here and here. Chasing those names here looks rather late…
Several ways to play this gap, one way is reversing the IWM vs SPY trade and/or a combo involving bonds.
Refinitiv
On the similar subject as the previous post, bonds are not "buying" the recent excitement. One has to give…
Refinitiv
Spain: November surge almost totally reversed. Hospitalizations coming down too.
France: cases coming down hard.
Italy: clearly passed the peak in cases.
iTraxx main (inverted) breaking up after the big consolidation we have seen over past months. As we have pointed out since this summer, European credit protection has been rather "unstressed" vs equities that have been lagging. The most recent melt up in European equities have caught up to credit protection, but the "gap" remains rather wide still.
Refinitiv
Apple, one of the biggest "squezers" earlier this summer has been extremely boring over past months.
The effect of retail and Softbank chasing upside calls, resulted in Apple volatility getting way too high during the early autumn. On Sep 1 we wrote:
we also pointed out volatility was way too rich and was a great overwriting candidate for the crowd that "must be long", but can earn yield on overwriting.
Tech went out of fashion abruptly and has recently been replaces by the rotation chase. During this time names like Apple have consolidated, but Apple is now getting rather close to deciding whether to stay in this consolidation or break out.
Our most recent logic is that people should start chasing tech on a relative basis again. Apple could get interesting should it start breaking above the negative trend line that has been in place since Sep 1.
Note how Apple volatility has come off, offering interesting long premium plays now (opposed to early Sep). Second chart shows a simple Jan 120/130 call spread, that has a max payout of some $X the money.
Rotation bonanza or not, but the latest melt up in small caps has been extreme. Everybody trying to do the same trade in a matter of a few days does not work. Another misconception among many is that small caps space still is a laggard, which is totally wrong.
IWM was leading SPY from March lows even before this last ramp up, but people love narratives and not facts (chart 2).
Small caps is stretched here and there are definitely better alternatives than chasing ex dogs here.
VIX at new post Corona lows, and MOVE pointing lower again.
Time to start thinking about those long volatility/options trades soon, but first some turkey.
Refinitiv
We have had 3 vaccine announcements, apparent OPEC rollover and upside breakout on CL from a multi-month price range and spot CL is up $8.57/bbl or +23%, impressive!
Meanwhile open interest is up just +51k or +2.5%, volume is terrible. Liquidity and money flows are out of sync with price action. Let's see how this plays out…
MPAS
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