“I’m not going to spin my wheels dissecting such an illiquid and ‘noisy’ year-end market”, Nomura’s Charlie McElligott said, in a Friday note.
Then, he proceeded to visually dissect anything and everything on the board.
We jest. It’s just that Charlie is a man who keeps himself constantly apprised of what’s going down (and up, for that matter) across markets, both at a granular level and with respect to the macro narrative. The very fact that he’s penning notes on December 27 in the first place is a testament to the notion that he is always “dissecting” markets, “noisy”, “illiquid” or otherwise.
In any event, Charlie endeavored on Friday to update some of his recent talking points, including the 1-month price reversal strategy he touted on CNBC earlier this month, and that we discussed in a wider context here.
He starts by noting that Nomura’s SPX sentiment indicator “shows enormous percentile reversals across all factor inputs” from the doldrums of December 2018, the worst final month to a year for stocks since the Great Depression, to this year’s holiday season trade, which has delivered more gains for already bloated benchmarks.
If you’re wondering what that usually means going forward, a backtest shows that when the bank’s sentiment index is in the 89th percentile, the median return for the S&P over the next 12 months is 11.5%
As for the gamma situation, there are just two words you need: “Gravity” (left side) and “choke-hold” (right side):
On the reversal strategy, remember that it’s actually a call on a “reversal of the reversal”, where that means Q4 represented a reversal of the vaunted “slow-flation” trade both in rates and stocks in favor of higher yields, Value and Cyclicals, while January could see reflation optimism faded via renewed outperformance of the “old” favorites (i.e., Duration Sensitives, Secular Growth, Defensives and Min Vol). A favorable (i.e., bullish) seasonal for 10-year Treasury futs helps make the case.
We won’t delve any further into that (we’ve covered it before and implementing it precisely requires access that most readers likely do not have), but we would note that generally speaking, the majority of the returns (on the factor that Charlie uses, anyway) have been front-loaded to the first week of the new year.
More germane for our purposes – i.e., from a big-picture perspective – is the third point McElligott makes when recapping the rationale behind the call. To wit:
A macro-view that the sudden narrative “paradigm- shift” back-into a world of higher growth and reflation-like thematic position for 2020 has likely “over-shot” and that in 2020, I actually expect US Rates / USTs to hold firm and NOT sell-off as many are anticipating.
That’s a view that anyone can debate and, if appropriate, incorporate into their own strategy for the new year, whether or not you intend to try and play for a tactical reversal in the early days of January.