As a group, investors are not overextended in equities despite the surge from the March lows.
It’s a familiar refrain reflected in positioning, and JPMorgan’s Nikolaos Panigirtzoglou reiterates the point in the latest edition of his weekly “Flows & Liquidity” series, which carries the rather straightforward headline: “Still plenty of room for equities to rise further from here”.
“We continue to find that, collectively, investors are still underweight equities and signs of overextension are confined to momentum traders, such as CTAs and only with respect to their positioning on US equity indices”, he writes. The visual illustrates the latter point.
(JPMorgan)
At the risk of trafficking in silly oversimplifications, trend-following robots (usually the “first movers”) are extended in US equities, and that’s helped the rally along. But, outside of momentum traders, there’s little sign that investors are collectively piling in.
Panigirtzoglou repeats a point he’s made on a couple of different occasions recently – namely that the bank’s short interest proxy (Quantity-On-Loan on all stocks and equity ETFs globally), still shows that “of the around $500 billion of the additional shorts that were placed between mid-February and mid-March, around 60% has been unwound so far, with the pace of unwinding stalling over the past month”.
Meanwhile, Quantity-On-Loan data for SPY suggests short interest remains very elevated, with almost no unwind evidenced over course of the now two-month bounce. “It thus remains firmly in oversold territory”, Panigirtzoglou says.
(JPMorgan)
The bank also reminds you that asset manager and leveraged fund positioning as a percentage of open interest is still stuck near the low-end of its historical range.
Panigirtzoglou’s overall conclusion is (basically) the same as it’s been for at least two weeks. CTA positioning on US equity futures is, in fact, elevated, but there’s a short base in equities that still “needs” covering.
Finally, Panigirtzoglou updates a framework for implied asset allocation for global investors. This is something that pops up from time to time in his weekly notes.
Without delving into the specifics (you can get a sense of how the measure is derived from the subheader on the chart), the takeaway is that, to quote Panigirtzoglou one more time, “non-bank investors… have an allocation to equities of 40% currently, still at the low end of the post-Lehman crisis period despite the big rally in global equities since March 23rd”.
(JPMorgan)
The post-Lehman high was 49% in early 2018, just after the tax cut melt-up (which quickly morphed into a “meltdown” following the implosion of the VIX ETP complex).
JPMorgan thinks that high will be seen again over the next several years due to – you guessed it – “the structurally favorable backdrop of high liquidity and low interest rates”.
It’s the liquidity. It’s always the liquidity.
How does all that “liquidity” reach the stock market? In recent years companies took advantage of it to issue debt to fund share buy-backs. That has been throttled back. How else does that great lake of liquidity actually fund the purchase of stocks? Curious.
Via the bond market. QE and now ETF purchases along with Repo facilities ensures that spread between the Fed’s Fund Rate and “private” (and the pips are intentional) rates for corporations (bonds) and overnight lending between banks and hence all other interest rates remain close, stable and therefore predictable. With the bond market stabilized a whole variety of programmed investing strategies such as “risk parity” become very predictable especially when volatility is squeezed (the Fed as reticulated python may not be such a bad image here). This encourages (although I think we may want to say “incites”) “momentum” investors to build a wave and ride a wave ever upwards. Couple these dynamics with corporations able to meet their funding needs via the bond market rather than by issuing equities and there is not a big supply of new issuance to dilute share prices. Whether it can be sustained on Hopium Momentum alone without buybacks is a great question. It is not as if the Fed is demanding the corporations whose bonds it’s buying cut dividends or suspend buybacks. And then there is always the logical conclusion to all of this that the Fed will ultimately purchase equities and so a whiff of front running the Fed may be faintly detected.
For 10 years, buy backs were the “only” source of new buying of equities. the other flows netted out. For a number of reasons they are dropping off.
Now the stock market is being dominated by momentum “investors” via trend-following and correlation models.
Buy-backs have a longer-term impact on supply and demand. From reading these columns it is clear that the model-driven systems have no long-term impact. They can and do turn on a dime. This explains why stocks are no longer “forward-looking”. The models just look at and act upon current price movement.
The Fed won’t be in buying unless/until the market craters again and the models flip. That would have a good headline effect, but BOJ buying has not exactly sent the Nikkei and Topix flying.
Ah well.
Through Feb 2018, since the Great Financial Crisis, JPM was fined $43.7B. I would suspect that in the two, subsequent years, the total volume of fines imposed on JPM has increased. Why should any sensible person listen to a research note from JPM? The organization does not have a lot of trust in the community of citizens at large. Further, the charts don’t matter.
All that is matters is the Fed balance sheet. We all are familiar with the superlatives being used to explain the situation the US is in. Let’s just say riots and looting and all the rest are bad. Yet, the market is up this morning. Using my powers of deductive reasoning, the Fed’s balance sheet expanded.
JPM units and and such are substantially “a lot of empty mouths that are being fed.” They are not adding to the productive economy.