If you harbor some “misgivings” about US equities, which have run more than 45% from the March panic lows, JPMorgan will forgive you.
After all, the bank admits, the macro backdrop “is becoming muddied”, with some US lawmakers again proving they are utterly incapable of legislating and, more broadly, completely unwilling to conceptualize of themselves as employees of US taxpayers, to whom they are ultimately accountable.
And yet, a compromise is seen as likely on the next virus relief package, if only because failing to come to an agreement this week risks bedlam on Main Street and Wall Street alike. As such, JPMorgan’s John Normand doesn’t think the situation is “muddied enough to justify bearish targets or a defensive investment strategy”.
As a reminder, in the extremely unlikely scenario that no agreement is reached on the extension of extra federal unemployment benefits and the entire federal supplement simply disappears, the read-through would be the rough equivalent of “erasing the average wage income of over 15 million Americans”, to quote Bloomberg Economics.
Unemployment insurance payments rose in June, despite an ostensibly improving labor market, perhaps underscoring the urgency of the situation.
“The intersection of a US growth downshift with expiring income supports preserves the risk of a market correction in August, but drawdown should be limited due to investor positioning”, JPMorgan’s Normand went on to say late last week.
The “light positioning” thesis is taking on the same kind of generic ubiquity as “cash on the sidelines”. It’s not that it isn’t true, it’s just that it’s tossed and bandied about so frequently that one is left to question its utility. It also depends on what you’re looking at (i.e., systematic versus discretionary, etc.). Goldman’s sentiment indicator is below, for whatever it’s worth.
In any event, Normand’s colleague Nikolaos Panigirtzoglou says that after a fourth consecutive monthly gain for global equities (whose relative value he notes was bolstered by a weaker dollar), the “advantage for non-US stocks appears to have been diminished as short covering advanced” in European, UK, and Japanese shares. In other words, the short base across foreign equities has largely normalized from levels seen around the panic.
For US shares, on the other hand, “there is still a remaining short base to be covered… at an index level even as the previous short base at the individual stock level has been more than fully covered”, Panigirtzoglou goes on to say.
He flags the quantity on loan in SPY, which is still above pre-pandemic levels (left pane above), and notes that asset managers and leveraged funds in US equity futures “remain low and well below pre-virus levels” (right pane).
Commenting in a brief Monday note, Nomura’s Charlie McElligott says CTA positioning is “largely hold[ing] serve, generically long or still buying Equities” in the US, Europe, Japan, and South Korea, and “tilted near covering triggers in remaining shorts” in UK, French, and Hong Kong shares.
He reiterates that over the past couple of months, the vol.-control universe has mechanically re-risked into equities with trailing realized vol. moving lower as February and March panic days dropped out of the window. Going forward, he says “this demand is slowing to a trickle [and] if the tape were to trade sideways” we could “perversely see selling on sustained ‘up’ days”.
As for options positioning, Charlie notes that “both NDX (via QQQ) and SPX/SPY consolidated [are] showing some proper length again, with QQQ net $Delta at 93rd %ile (after having turned sharply lower last week) and SPX/SPY at 83%ile”.
Notably, he says “last week’s rallies put both safely back in ‘long Gamma’ territory”, which materially reduces the risk of “messy” price action.
“It would require a powerful (and fast) blast down to risk opening up something more insidious from a Dealer ‘pile-on’ perspective”, McElligott says.
Hopefully, Congress won’t provide the impetus for any “powerful, fast blast down”.
