Markets stocks volatility

Nomura’s Charlie McElligott: There’s A ‘Remarkable,’ ‘Tectonic’ Shift Occurring In US Equities

"This is obviously what the market is debating right now in real-time".

"Some remarkable things [are] occurring, particularly within the US Equities space", Nomura's Charlie McElligott writes, in a Thursday note. As documented extensively over the past two sessions (here and here), markets are undergoing a violent rotation from secular growth favorites to value, cyclicals and high beta. The shift comes amid rampant optimism around the US reopening story and giant fiscal stimulus strides in Europe and Japan. The trade has propelled some down-trodden sectors to huge gains, both in absolute and relative terms. Outperformance from the laggards comes at the expense of the market's darlings, some of which are now imperiled by a new executive order from Donald Trump targeting the tech titans. As McElligott writes, this represents "a tectonic 'de-grossing' of short books and overall dynamic hedges, acting to propel both indices and prior 'Value' laggards violently higher, while crowded 'secular growth' hiding-place longs acting as an ongoing source-of-funds for this nascent rebalancing". Note his use of the term "nascent". Last weekend, I used that to set up a long piece called "The Only Debate That Matters", in which I noted that "nascent" and "burgeoni
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12 comments on “Nomura’s Charlie McElligott: There’s A ‘Remarkable,’ ‘Tectonic’ Shift Occurring In US Equities

  1. “The market” = one algo follows another, which draws in three more etc. No deep thought here.

    • Ohh derek,the fix is in and you know about it….what to do…half the cards are face up if you have the amazing X-Ray glasses from the comic books or Mr H&Co. Gotta admit that this is exactly where human buyers go when coming out of a “Bear Market”…value….only the computers and Fed did not let us get rock bottom prices…and time to think

      • The flow numbers above and in recent commentaries suggest that automated system trades currently dominate the daily trading volumes and flows. ESPECIALLY with the buy-back bid severely reduced. Buy-backs were the principal conduit for abundant liquidity to reach the stock market.

        No human thought is involved, except by journalists needing a headline to “explain” the daily price action.

        This trade will reverse when the early algos start to take profit or even flip. The others will follow. Because that is what they do.

  2. The only debate is how many zombies can be kept “alive” –nothing can be done with bankruptcies –just like pensions there really are still obligations that must be met. Last time I checked we all still have to eat.

  3. I still struggle with articles such as this. Bear steepening? Value Long? Value factor market-neutral? vol compression? overwriter flows? duration trade?

    • Could someone please have a kind heart and explain at least some of these terms to me here? I have asked many times for more background but to no avail. Are there any kind people on this site?

  4. Anonymous

    D Price,

    Bear Steepener – long end of bond market rises in yield (bond prices go lower) causing the spread of Short term bonds vs Long term bonds to increase in basis points.

    Value Long – being long or owning value stocks defined as “cheap” based on factors such as PRice Earnings ratios, free cash flow (FCF) yields, price to book value, etc

    Value Factor Market Neutral – going long some value stocks and short other value stocks to be market neutral so if the market declines the short stock gains offset long stock losses (theoretically)

    Vol Compression – implied volatilites in option prices decline leading to a lower price for an at the money option

    Overwriting flows – those that sell calls on stocks they own trying to capitalize on implied vols being higher that what realized will be. Also, income generating to take in premium (if course upside is limited then)

    Duration Trade – stocks are long duration assets where future cash flows are out many many years. So a 10 yr bond you get 10 years of interest payments then you get your money back (in the meantime susceptible to market interest rates affecting the price of that bond). A 1 yr bond/note has less duration as you only get 1 year of interest payment then your money back (and you buy another bond at prevails rates. A biotech stock where the free cash flow might be available for dividends 10-30 years out) or a growth stock where the future cash flows are low now but will be large in many years. Since a person can earn .67% on a 10 year instead of 3% in Dec 2017 those future cash flows are more attractive and the stock should be worth more as you are not going up as much current income as you were in Dec 2017.

    Hope that helps a little.

    • Helps a lot. My mind had tried to fill in the gaps but did not do a good job. These definitions even go so far as to teach me about market dynamics I did not even knew existed.

    • Thanks for the answer. This was very helpful for me as well and thanks to D Price for asking!

      • There is only so much that can be learned by osmosis. Some has to be defined. I will suggest the editor add a definitions page to help a person along in interpreting this language. The above is a start but I can suggest others to add in time if the page I envision has a comments section for suggesting additions.

        • Amen to this idea. Such a page of definitions, if written by H, would fortunately contain complete sentences using subject and predicate with appropriate verbs, and not collapse into terse phrases which don’t always clarify terminology.

          Investopedia has a lot of information, but lacks all the jargon used by the likes of Mr. McElligott.

          • Dealer insider talk is what it is. I really benefit by this but the jargon trips me up. The definitions above will help lots. I can understand how this may be in a way making it too easy for competition to dilute or even spin this away from it’s intent. However that is beyond this chicken to assess. Jargon does keep talk amongst the knowledgeable and has served this purpose since the start of time.

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