Short interest at all time lows and passive funds booking the long trade on all time highs (chart 2).
It does not get more sell the news…
The valuation divergence between “growth & value” has never been greater than today (charts below). Interestingly on this point, the narrowness of the equity market leadership was a real concern through earlier parts of this year, but the market breadth in November & December has been as healthy as we’ve witnessed for some time. Charts below shows that premium for growth has risen and now looks extreme (Europe)
Goldman
Last week saw the largest buying of equities since March from BoAM clients (private and institutional). Strangely enough, prior to that week the equity flow had been negative YTD – and private client flow still is. This is far from a complete “flow picture” for the overall market, but it is at least a small datapoint that there is potential for more buying going into 2021 from some pockets out there.
BoAM
Has Powell come in with his order in the IPO? Ok, that did not literally happen, but his implicit overall market bid for sure was important for all ECM desks out there. The IPO frenzy of 2020 drove record $435bn in US stock sales: Volume is far above previous high of $279bn set in 2014. About a quarter of year’s bonanza came from traditional IPOs. More than 240 SPACs went public this year., raising $81bn for potential acquisitions
Bloomberg
Europe and Eurostoxx 50 continue to be big consensus longs. ECB saving the EZ, reflation, reopening etc have all been strong narratives. The initial squeeze was strong, but after the initial move higher in late Oct/early Nov the SX5E has done nothing. It actually trades pretty much at same levels we saw at June highs. The long European trade has produced much less in reality than what people perceive.
The vol move higher yesterday was absolutely brutal and killed a lot of calm Xmas plans (yes we spoke to several vol guys yesterday that basically “threw” away months of performance during the vol move yesterday).
Note that V2X stays elevated and is at early Nov levels. Not an entirely “true logic” as vol is mean reverting, but last time V2X traded here, SX5E traded some 7-8% lower.
Europe beyond consensus remains rather stressed.
Refinitiv
As we pointed out on Dec 15, European credit protection was not buying any of the latest equity bull sentiment. Yesterday, credit protection was well bid again as markets tanked. Interesting to note is that the gap between credit protection and equities has come in. The gap between the two we saw in Aug/Sep, where credit protection was much more bullish, eventually saw equities come back, but note that the gap is soon gone.
The buy protection/buy equities trade we outlined back then worked out well, but at these levels it does not provide much more.
Refinitiv
We had some huge moves across assets yesterday. The dollar spiked big initially, but gave back a lot of the early gains. Today is a more normal tape and the DXY continues higher. We all know the dollar is a massively crowded short (chart 2), and that is has moved in tandem with equities since March lows.
One of those possible 2021 surprises is a move higher in the DXY. As we wrote a few days ago;
“One of those low probability views is asking yourself; what if the vaccines do not offer the “herd immunity” everybody is busy pricing in for H2 2021?
Should this low probability event occur, the entire USD logic would quickly reverse, and affect all those hot rotation trades.
Not likely, but worth considering, especially if you can express views in a cheap fashion.”
For now, watch the inverted DXY vs Spuz chart closely.
The down trend has been very strong and CTAs have been adding to shorts. Current positioning has not been this short in ages.
On a related note, EURUSD 1 mth vols moved higher yesterday, and stay “up” here (chart 2).
So far so good, but that dollar short is very crowded…
We all know how Fed saved the world in March. The simple announcement of buying bonds gave investors confidence. Since then a record $2.5tn borrowing spree has resulted in debts to explode much higher than profits. This in turn has seen the rise of zombie companies – firms whose interest rate payments have been higher than the firms’ profits for three years.
Everybody expects Fed will be there should a new downturn occur, but a gentle reminder, Fed’s corp buying program ends on Dec 31.
Will they be there again?
Full FT article worth a read, here.
FT
Apple continues the break out move post the recent news. So far the timing has been perfect, launch the car news right on Tesla highs, when all passive funds went long Tesla on 695.
In late November we highlighted Morgan Stanley’s great call on Apple explaining their strong Apple logic.
” “We are incrementally bullish on 5G infrastructure and smartphone suppliers and raise AAPL bull case…Survey flags nearly 40% upside to consensus FY21 AAPL estimates, lifting our bull case valuation to $191”.
When MS is out with their “US and China AlphaWise consumer survey” you listen (chart 2).
We followed up on that Apple logic from a technical point, writing on Dec 7;
“…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).”
The stock is squeezing higher by another 4% today. It would be a shame if we did not print ATHs before year end, just to prove who remains the king of stocks.
From long to longer. The DM equities long is taking new highs, moving in tandem with the global Citi economic surprise index.
At one stage yesterday that position did not look overly great, but markets got saved again.
With the year wrapping up there is little to expect, but this massive long by hedge funds is worth having in the back of your head as we enter 2021.
Nomura
The Goldman Twitter Economic Sentiment index still way lower than at the start of the year. Maybe we just cannot make a “top” in risky assets before Twitter has gone all in on everything, not only BTC and TSLA
Goldman
Tracking Georgia. The latest round of Georgia polling favors Republicans – RCP polling averages have both runoff elections at near dead-even races, however the most recent polls and betting odds increasingly favor the Republican Senate candidates.
RealClearPolitics and PredictIt
Why did it happen in Japan? In an economic context, Japanification refers to Japan’s secular stagnation in the form of sluggish economic growth and anemic inflation, while from a bond market perspective it describes Japan’s protracted phase of ultra-low interest rates and subdued volatility. The chart shows overall decline in implied volatilities. Could the US ever follow the footsteps of Europe and ultimately Japan?
Morgan Stanley
You are receiving this email because you signed up for the The Market Ear newsletter using your email content@mrtopstep.com.
If you’d like to unsubscribe and no longer receive this newsletter, please click here.
