“Goodbye, March ‘pullback-window’, hello, April ‘party time'”, Nomura’s Charlie McElligott writes on Friday afternoon, treating his adoring fans to one more short missive as Q1 melts away into Q2.
On Thursday, Charlie set the stage for a reasonably bullish take on the prospects for equities in April as the “window” closes for the “Ides of March” risk to materialize. By definition, any quarter-end rebalancing flows (out of stocks and into bonds) will roll off as the new quarter dawns and the potential for the mechanical “pulling higher” of CTA trigger levels to reduce the threshold for trend-follower de-leveraging will also abate – at least for a few days.
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Nomura’s McElligott Talks ‘Now Or Never’ Moments, Surging Rates Vol. And April Analogs
Headed into the close on Friday, he expands a bit, but first, he notes that since he delivered the “Ides of March” thesis late last month, “we have experienced two violent 100- and 80- handle moves lower in SPX, as ‘supply / demand’ flows shifted over the course of the month.”
That said, the S&P and the Nasdaq 100 managed to stay above levels that would have triggered CTA de-leveraging and dealers remained long gamma (the “flip” would have been ~2790, according to Charlie’s estimates), helping keep things “pinned”, as it were.
As far as April is concerned, McElligott says “we have a situation building for a very constructive month in US Equities”.
He reminds you that April “is the best monthly return for the S&P over the past 30 years (+1.64% on average) and actually possesses the second-highest % hit-rate of ‘positive return instances’ of any month over the past 90 years (!)”.
So, there are some interesting factoids for you.
Going a bit deeper, Charlie notes that ongoing worries about global growth contributed to a “positioning purge” among the Long/Short crowd and also in the Macro hedge fund universe. Based on current very low betas to the S&P, forward returns are bullish:
(Nomura)
In addition to that, he rehashes the “out-of-rebalancing” trade as documented on Thursday. Recall the following table which “shows a very POSITIVE out-trade as a ‘post April 1’ SPX upside catalyst–especially looking out the 5-6 days after.”
(Nomura)
And then there are earnings considerations.
“Part of the overall month of April ‘+++’ seasonality is driven by earnings, particularly when revisions are NEGATIVE” as they are now, he writes, before proceeding to suggest that “the overall April seasonality too is then partially due to said EPS commencement, which then of course means that corporates begin to emerge from their ‘Buyback Blackouts'”.
All of that said, don’t you think for a second there aren’t some “large risks” to the bullish view, because there certainly are, and McElligott recaps those too, by God.
For one thing, next week brings a raft of key data that could “make or break” things when it comes to the global slowdown narrative. China PMIs are on deck, as are retail sales, PMIs, ISM and payrolls stateside, as well as CPI and German IP across the pond.
Obviously, the worry there is that whatever part of recent action in rates was being driven by a growth scare, things could accelerate if the data rolls over.
“The risk is that a material breakdown in data next week can again drive that ‘power inversion’ in the front-end which makes folks think that we’re pushing from ‘Goldilocks’ and instead accelerating into ‘Real Recession Risk'”, McElligott warns.
Finally (and we mentioned this on Thursday), the respite from the dynamic wherein the threshold for CTA de-leveraging is lower by virtue of the trigger levels in Nomura’s model moving higher (i.e., as the trigger levels get pulled mechanically higher, it takes less of a selloff for spot to move below those levels) is brief.
“An additional ‘FLOW RISK’ in April will be a potential US Equities overhang from Systematic Trend models, with ‘pivot triggers’ in SPX & NDX futures ‘dangerously’ AGAIN moving mechanically-higher as we look-out two / three weeks”, Charlie says, wrapping things up.
(Nomura)
There you go – food for thought as you plot your strategy coming off the best quarter for US equities since 2009.
he was wrong about a bear in march, he’s probably wrong about a bull in april…
he didn’t call for “a bear” in March. he laid out a multi-point, largely flows-based thesis for why there was a window for a pullback. i’m sure you’ll be providing your incisive critique of that thesis in short order because, you know, that’s what “constructive” commentary is all about.
Yep, and that’s for sure. Or not.
I myself can’t shake this image of Goldilocks on LSD.
It is real difficult in a “Teflon ” market such as this is to come as far out on the limb as Charlie has. Even with his high level of quantification timing is near impossible at best. The last of the big Bullish items on the shelf is the China trade deal and they will beat that furiously next….as they will earning interpretations….