No, Positioning In Equities Is Still Not Stretched. ‘Mania’ Talk Notwithstanding

In case you haven’t noticed, expectations for a continuation of the historic rally in US equities from the lows hit in late March hinge to a great deal on the assumption that positioning is still generally low.

The idea is that as long as volatility remains reasonably well-behaved and there are no new macro shocks, systematic strategies will mechanically re-leverage and discretionary investors who may have missed the move will become more comfortable participating.

I’ve spent quite a bit of time in these pages lately going over this dynamic (see here and here), and it’s generally still true. That is, the setup still holds.

“Positioning remains relatively low with Hedge Funds’ beta in its ~25th percentile, CTAs ~25th percentile, and Volatility Targeting ~5th percentile”, JPMorgan’s Marko Kolanovic wrote Friday, in a short note out just ahead of the weekend.

“After month-end and going into summer months, we expect volatility to decline”, he added, noting that “lower volatility should drive equity inflows (e.g., volatility targeting) and all else equal be supportive of risky assets”.

All of this comes with a set of obligatory, familiar caveats. For example, any dramatically bad outcomes on the virus front will weigh on sentiment. US cases rose 1.6% from Friday to Saturday, the largest increase in three weeks. New cases exceeded 30,000 for the second day in a row. Florida cases jumped 4,049 on Friday (including non-residents), the biggest spike on record, the state’s department of health said Saturday.

Those are the kinds of statistics that unnerve investors, although as long as fatalities stay low and hospitalizations don’t rise to levels that indicate the health care system is on the verge of being overwhelmed, risk assets will likely prove resilient.

As discussed here on Friday evening, the data remains mixed in the US, but the market is more concerned with the trend than the levels, for obvious reasons. While jobless claims (and particularly continuing claims) are uncomfortably elevated, other data is moving in the right direction. One can (easily) make the case that reading too much into PMIs is a fool’s errand, but ISM will probably bounce on the next print.

“Equity positioning does not move in a vacuum and is historically strongly correlated with measures of growth, such as the ISMs and retail sales”, Deutsche Bank wrote, in a positioning update on Friday. The bank says that while positioning has, of course, rebounded from the panic levels in March, it’s still “close to levels implied by macro growth”.

(Deutsche Bank)

The bank goes on to write that “current levels are in line with the composite ISM rising back to 50 [and] commensurate with retail sales growth (YoY) of -1%, not too far from the -1.4% already reported for May”.

The point, essentially, is that as long as the macro data continues to improve, discretionary investors will likely lift their exposure.

Incidentally, one reader recently asked if the divide between discretionary positioning (which isn’t as depressed as systematic positioning) could be attributable to Robinhood investors spending their stimulus checks on stock trading. I’m not sure where that interpretation came from, nor am I particularly clear on what the question really is, but note that on Bloomberg’s calculations, Robinhood traders only account for around 1% of equity volume. So, as ever, be careful were you get your information, folks. “Consider the source” is more relevant in today’s world/market than ever.

In any case, Deutsche’s consolidated positioning indicator (which uses the weighted average of z-scores for CTA beta, Risk-Parity beta, Vol control allocation, L/S HF beta, active MF beta, US and rest of the world equity flows, AAII Bull-Bear spread, cash equity short interest, ETF short interest, S&P 500 futures positions, equity put/call volume ratio, and S&P 500 option skew) sits at -1.2 standard deviations (see the left pane below).

When that’s been the case historically, the bank notes that “weekly forward returns have been positive on average” to the tune of 0.5% despite “considerable variation” around the mean. More importantly, forward returns on a one-month horizon are “more strongly positive on average” at around 3% and even the low end of the range is positive (see the right pane below).

(Deutsche Bank)

You can make of this what you will, and I suppose what I would suggest in that regard is making no more and no less of it than what is apparent from the excerpts and visuals.

Positioning overall has not recovered all that much from March, despite what you may have been led to believe from the media coverage of “manias”, “bubbles”, etc. It’s true that there were signs of “froth” earlier this month, but the dramatic selloff two Thursdays ago likely let off some of the built-up steam. Positioning on Deutsche’s consolidated indicator was around -2 standard deviations on March 23 in equities. It’s -1.2 now.

For those wondering, BofA’s oft-cited “Bull & Bear” Indicator is still nowhere near bullish. In fact, it’s still squarely in the contrarian “Buy” (i.e., “extreme bearish”) zone.

(BofA)

While the list of things that could go wrong is obviously quite long, I wouldn’t get too caught up in whether or not speculative trading on retail platforms does or doesn’t signal a bubble. It’s good for clicks, but nobody with any real money to throw around is buying shares of bankrupt companies on Robinhood.