Nomura’s Charlie McElligott is amused on Friday morning.
It would appear that his call for a mini-melt-up/local peak followed (perhaps) by a “tipping over” starting next week and continuing into month-end has been at least partially realized as equities look to cap off a good week (documented here early Friday).
“We see the gravity of the 2825 large OI strike currently ‘pulling’ Spooz higher, pinned exactly at the $3.6B SPX 2825 strike”, Charlie writes, in his latest daily missive, adding a “LOL” for emphasis.
Those who have followed his “March surprise” narrative know that going forward, things could get a bit dicey based on a “down-out-of” post-Op-Ex seasonal combined with three quarters of the S&P being in their blackouts and the mechanical pulling higher of pivot levels for Nomura’s CTA model (the higher those sell trigger levels are pulled, the lower the threshold is for a minor selloff to cause CTA de-leveraging).
One of the points McElligott has made while elaborating on this “Ides of March” thesis is that given the “flow-less” nature of the YTD surge (i.e., a lack of participation by key investor groups), the potential exists for folks to start chasing at just the wrong time.
Well, according to the latest EPFR data, we may be seeing the beginnings of that.
“They’re ‘coming for it’, with last night’s EPFR $flows data showing that the remarkable prior redemption trend OUT OF risk assets – despite the massive YTD rally – has now forced a developing capitulation BACK INTO both risk-assets AND US Treasuries”, Charlie writes.
Specifically, North American equity funds registered an impressive $25 billion inflow for the week – that’s a 2.6 standard deviation event (3M z-score – see the table below).
You’ll note above how McElligott emphasizes that Treasurys too saw inflows. That, he says, is indicative of the QE trade making a comeback. “Flows this week felt QE-like [as] bad news is good news for all assets”, he pseudo-quips.
Drilling down into the equity flows data, here is the breakdown:
- US Equities Passive inflow was the largest 1w flow of the past 12m
- US Equities Institutional inflow was the largest 1w flow of the past 12m
- US Equities overall inflow was the largest 1w flow of the past 12m
Unfortunately for “the industry”, Active suffered a large outflow.
And speaking of market participants latching onto the idea that the QE era is back (or, perhaps more the point, that last year’s pernicious dynamic has either reversed or is set to reverse in the minds of traders), Charlie notes that collapsing real yields are indicative of a “de facto” easing regime, ushered in by the new forward guidance on rates (i.e., the pause/patience story and the idea that the next move from the Fed could just as easily be a cut as a hike) and concurrent relent on the balance sheet (i.e., the imminent announcement of an end date for runoff).
“Over the past year and a half, I’ve used real yields to reflect (what previously had been) tighter US financial conditions throughout 2018, but since late 2018, we’ve instead witnessed a ‘one-way’ trade which represents ‘de facto easing’ being priced by US equities, and which is picked up by the incredible inverse correlation between SPX and 5Y TIPS yields at a staggering -92%”, McElligott marvels.
Ultimately, then, one wonders whether the desire to chase the “de facto” start of Fed easing (specifically) and the YTD rally (more generally) will be a lemmings over the cliff-type moment into the end of the month given the technical factors that comprise Charlie’s “March surprise” thesis, the possibility of trade disappointment and the rally just plain, old running out of gas in the absence of some new catalyst to latch onto.