On Thursday, following the Fed’s “capitulation” moment, Nomura’s Charlie McElligott weighed in, exclaiming that the committee is now “de facto” easing.
“The Fed (over the course of a month and half) goes laughably ‘all-in’ on the slowdown story and markets respond with the ‘QE trade’ of old”, he wrote.
After putting everything in the context of his “fear the steepener” narrative, he noted the obvious, which is that in the near-term, Powell’s relent has the potential to catalyze a rally in risk assets by, among other things, forcing in the Long/Short crowd. At least based on a simple moving beta of the HFRX equity hedge index to the S&P, that universe is still parked on the sidelines.
“For Powell to have so utterly ‘bent the knee’ to the stock market in such abysmal fashion ABSOLUTELY changes the calculus for investor psychology near-term and as such, you have to AGAIN expect fundamental / active folks get ‘pulled-in’ over the next few weeks, with ‘don’t fight the Fed’ being the mantra against still very historically low Betas to Equities and Nets- / Grosses-“, Charlie wrote, before delivering a key CTA update. The Nasdaq model, he said, should pivot from “current ‘-71% Short’ to an outright ‘+100% Max Long’ signal by the close at current levels.”
Again, that was on Thursday. Fast forward to Monday and McElligott is back with a short note which kicks off with Charlie reiterating how pivotal the “pivot” was (pardon the pun).
“The Fed’s shock pivot last week towards the potential commence of the next ‘easing’ cycle has driven a massive unwind (looser) in US Financial Conditions, with much of the 4Q18 tightening reversed over the past month”, he writes. Here’s a visual that drives home the point re: the loosening up:
Charlie describes Powell as “ragingly dovish” based on:
- the clear reinstatement of the “Fed Put” and
- the guidance to markets that the Fed will maintain both a much larger absolute balance sheet and end runoff sooner than previously estimated by the market
With that out of the way, McElligott delivers another update on the CTA model in the context of the 1Y window. Here’s Charlie (and do note the second bullet point, as it’s critical to understanding this):
- The anticipated CTA “flip” back “Max Long US Equities” is here: the Nomura QIS Systematic Trend model sees both SPX- and Russell- futures positions likely pivoting today from the prior “~-70% Short” back to “+100% Max Long” by the close (assuming current levels hold), joining Nasdaq, which re-established its own “Max Long” position last Thursday
- As we have previously discussed, this is a mechanical artifact of Feb 2nd and Feb 5th 2018 dates “dropping-off” from the 1Y model window, as the current weight for the 1Y window is 84.3% of the overall model allocation—and cumulatively, those two days a year ago saw S&P futures trade -7.73% / front-month VIX future +20 vols (+130.3%)
The next question is whether those “flips” will “hold”. The answer is: it depends.
McElligott reiterates his Thursday call that the Nasdaq is “very likely” to hold its “Max Long” position “due to the strength of the price signal”, while the S&P should also be predisposed to maintaining “Max Long” for “another week and a half from today” thanks in no small part to the Fed’s risk-friendly pivot. The Russell, in the other hand, is the least likely to hold. This also comes with the following caveat from Charlie:
The unfortunate disclaimer is this: IF we were to see a near-term US Equities selloff, it is just as likely that we could again “flip back” to outright “Short” positions—but again, current levels holding, the models are back “Long”.
We’ll leave you with the key levels across equity benchmarks according to the QIS model.