Heisenberg Report

‘I Was Told There Would Be No Corrections’

Ok, well it’s official. It’s a correction.

And predictably, it comes just two weeks after folks finished celebrating the longest streak in recorded history without a 5% pullback by dumping massive amounts of cash into U.S. equity funds (look at January):

Obviously, the timing there was a disaster. And if you’re wondering what the breakdown on those flows is, I can tell you. The lion’s share went to, in order, SPDR S&P 500 Trust ETF (SPY), iShares Core S&P 500 ETF (IVV), Vanguard S&P 500 ETF (VOO), Industrial Select Sector SPDR ETF (XLI), SPDR Dow Jones Industrial Average ETF (DIA), iShares Edge MSCI USA Momentum Factor ETF (MTUM), Technology Select Sector SPDR ETF (XLK), PowerShares QQQ Trust ETF (QQQ).

Well unfortunately, all of the people who bought in January are now on the wrong side of “screwed”.

To be sure, in some contexts it’s impossible to be on the “wrong” side of “being screwed”. Unfortunately, this isn’t one of those contexts. 

So the question now is obviously what comes next and that depends to a large extent on i) where yields go from here, and ii) whether the fear of systematic selling pressure is overblown or well founded. Opinions vary on that latter issue, but it’s worth noting that, as Bloomberg’s Ye Xie writes, “CTAs have lost more than 6% over the past five days through yesterday, according to the SG CTA Index [and] with the stock meltdown today, it may post the worst return on record.” So you can draw your own conclusions about what might come next.

As far as history is concerned, this is a good time to remind you of the following chart from Goldman which shows that the average correction that doesn’t morph into an outright bear market lasts 4 months and tallies 13% in terms of the drawdown:

There is one caveat: “However, compared with 22 previous bull market corrections, the current pullback has been significantly faster than usual.”