Bounced perfectly on the longer term trend and the 200 day moving average. Since early January, we have closed higher once. Lower for longer turning higher for longer again?
The NASDAQ vs US 10 year gap is widening even further. Impressive, but do we warm up the pairs trading book here?
“…if positioning is the story, can it persist? The equity momentum factor has already reversed all of its gains since January 2022 in both the US and Europe. Our sentiment indicators suggest that conditions have moved from fearful to complacent. And cash has so far largely stayed on the sidelines, with weak flows into US equity ETFs, perhaps because those ‘sidelines’ pay pretty well given high money market yields. We like selling upside in US stocks to buy upside in global markets, positioning for a so far universal rally to become more dispersed.” (MS Cross-Asset Strategist, Andrew Sheets)
Macro hedge fund beta to equities has seen the biggest rise in almost 2 years. From short to long. Could get much longer though.
Morgan Stanley’s macro guru Wilson reminds us about forward EPS growth that went negative last week. He writes: “…This has only previously happened 4 times over the past 23years. In each prior instance (2001,2008,2015,2020), equities have faced significant price downside associated with the shift from positive to negative earnings growth…historically, the majority of the price downside in equities comes after forward EPS growth goes negative.” Earnings recession is basically not priced in according to Wilson.
“We have cut our subjective probability that the US economy will enter a recession in the next 12 months from 35% to 25%, less than half the 65% consensus estimate”.
The CTA dollar (vs euro) short is big. BofA has the sell trigger level at 1.0665. Things could get “ugly” quickly should the CTA crowd decide to dump euros…
“They” chased the SPX higher as well as paying up for downside protection (in terms of volatility, rising skew). Note that skew has risen further, trading at recent highs, despite the fact SPX is down from recent highs. Hedges not being monetized when the market is down is a new behavior…and means people are long and need that protection.
One of the biggest equity consensus trades has been smoked recently, the long EEM logic. China reopening is old news, and the dollar making a come back wasn’t what people expected. Add it to the list of increasing P/L pain.
Perhaps just recency bias, but more negative sentiment does seem to be manifesting in flows. On a 12-month look-back, HF net exposure to Energy decreased over the past week from the $73rd%-tile to the 41st%-tile.