On Monday morning, before the opening bell sounded on a new week for Wall Street, Nomura’s Charlie McElligott flagged a mammoth multi-day move in his “Pain Trade” index, which he explained is just the “simple ratio of a ‘Value’ factor proxy versus Momentum'”.
He put things in the context of the recent duration selloff, noting that Value is positively correlated with bear-steepening, while Momentum is inversely correlated to the nascent selloff in rates.
The past week and a half witnessed a 16% move in Charlie’s ‘Pain Trade’ gauge.
Fast forward several hours and this dynamic has accelerated – and “bigly”.
Specifically, Charlie’s “max pain indicator” (which, again, is just a long EBITDA/EV factor against a short Momentum factor) exploded more than 12% on the session. That, folks, is a seven z-score move, and it comes courtesy of Value shorts ripping, while the bottom falls out for secular Growth.
“Look at the factor moves and corroborating z-scores today”, McElligott marvels, emphasizing that we’re seeing four and five standard deviation “unwind explosions, as various iterations of ‘Price Momentum’ come unglued due to the complete reversal of everybody’s consensual positioning [with] long Growth getting nuked [and] short Value exploding higher”.
Just to flesh this out a bit more, Morgan Stanley’s long/short US equity momentum pair trade index suffered its biggest one-day decline since 2009 (h/t LK).
This is unfolding despite the fact that the initial catalyst – i.e., the duration selloff and bear-steepener impulse – hasn’t really accelerated all that much. As Charlie puts it, the unwind in the equities expression of the long duration trade “has clearly taken on a life of its own”.
Needless to say, this isn’t the best news for some folks.
“This would make for the worst single-day of performance in my model Equities HF L/S portfolio since February 5th / February 8th 2018”, Charlie says.
In other words, the worst single-session for the long/short crowd since Vol-pocalypse.