“Days like yesterday express the challenge for managers right now, as the ‘everything duration’ trade proxy that is the ‘Momentum’ factor continues to work like a hedged portfolio”, Nomura’s Charlie McElligott wrote on Tuesday, underscoring precisely the points made here in “Rip Van Winkle And Escape Velocity“.
Tech’s blockbuster rally to start the new week reversed most of last week’s underperformance and served as a reminder that big-cap tech benefits from a “heads I win, tails you lose” dynamic. It holds up better on risk-off days, but also does fine when the mood is risk-on.
The Momentum factor, McElligott notes, has “upside on Equities rallies as the Nasdaq/Tech train rolls on, but [offers] downside protection too in the form of the positive UST correlation of longs vs shorts on a ‘risk-off’ trade” and “particularly” into a bull-flattener.
Occasionally, the market will pivot decisively pro-cyclical, but it’s rare. Last year, the pro-cyclical lean showed up primarily on long-end selloffs (e.g., early September when rates snapped back higher after the dramatic downside overshoot in yields that played out in August when convexity flows exacerbated an aggressive bond rally) or on constructive US-China news (mid-October/early November).
This year, fleeting pro-cyclical trades have been tied to days/weeks when the re-opening narrative is ascendant and/or vaccine news is positive. The most dramatic example was in late May and early June.
With few exceptions, though, a rotation away from secular growth “winners” into long-suffering, downtrodden value/cyclical laggards remains elusive.
And, for the reasons outlined in the linked post above, there are good reasons to believe it will remain elusive in the post-pandemic world, barring a vaccine.
To be sure, tech’s strong rally on Monday (which pushed up Jeff Bezos’s net worth by $13 billion) was part reversal from last week’s rare underperformance (top pane below). But the fact that it came on a day when European leaders were poised to agree on the first manifestation of fiscal burden sharing raised this question: “If a fiscal union in the EU won’t catalyze a rotation, what will?”
“The market behavior equated to a reversal of the rotation that unfolded over the past week as momentum was back in favor, and value was crushed”, JonesTrading’s Mike O’Rourke wrote, commenting on the juxtaposition between Monday and last week, and adding that “the behavior we are witnessing now is very similar to that which occurred in early 2000”.
On many levels that’s true, but the leadership now is concentrated in what I’ve called “an oligopoly over almost every facet of human existence”. The big five are embedded in virtually all aspects of social interaction and commerce, and they generate most of the sales growth and most of the profit growth.
Nomura’s McElligott notes that with US equities momentum, secular growth, and tech (synonymous on many metrics) now “essentially being ‘market’/’Beta’ and crowded, the best hedge on an upside breakout with leadership rotation… still looks to be owning calls in Value, deep-cyclicals and/or economically-sensitive small caps, which have continued to underperform”.
I agree, with the caveat that we have yet to see a rotation that has proven to be anything other than “nascent”/”burgeoning” in character.
Perhaps the most poignant line from McElligott on Tuesday is the following, which I’ll present without further editorializing:
… thus the recent observation from [our] Japanese Quant team that “Momentum” returns resemble a 5% protective put strategy or just a straight-up 60/40 portfolio.
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