Withdrawal Symptoms

Withdrawal Symptoms

What was truly remarkable about the first two days of trading in the new week was the extent to which they represented such a stark juxtaposition with the post-election trade.

I realize this is repetitive, but it really is quite something. Post-election, tech and secular growth favorites were back in a big way, as assumptions about divided government, gridlock, and lower government spending drove a power flattening in the curve and huge outperformance for the Nasdaq versus, for example, small-caps.

Fast forward to this week, and vaccine hopes have produced precisely the opposite. The figure (below) represents one of the more abrupt reversals of fortune in recent memory. The red bar shows the session following the election. The green bars are Monday and Tuesday.

That is a serious change of direction in a very short period of time. And, as documented here, it likely hasn’t been fun for everyone.

Treasurys bear steepened again Tuesday, albeit in far less dramatic fashion than what accompanied Monday’s bloodbath in bond land. Yields were cheaper by up to 3bps out the curve. A 10-year sale went well at first glance, but there was some debate about the underlying stats, specifically dealers’ share, which was well above average.

Remember, what happens in rates doesn’t stay in rates. The yearslong “duration infatuation” helps explain what’s worked in equities, where perennial winners are joined at the hip with the bid for bonds and long-term flattening trend in the curve.

If bonds sell off in earnest and it proves to be sustainable, leading to a serious bear-steepener, the long-term, “can’t lose” growth > value trade could finally reverse.

Value outperformed to the tune of more than 8.5% across Monday and Tuesday. Recall the following rather stunning visual which shows that after summer’s mind-bending tech rally, concentration in the Russell 1000 Growth index reached nearly 40%.

So, when you get weakness coming through in stretched, mega-cap favorites (i.e., the FAAMG cohort), it’s going to make the situation that much more dramatic in terms of growth’s underperformance.

The concern (and I can’t emphasize this enough) is that the concentration of FAAMG in the S&P and just the general sense in which “corporate America” has become increasingly synonymous with those five names, will make it impossible for the “broad” market to rise consistently during a pro-cyclical rotation. That’s precisely because the “broad market” isn’t very “broad” anymore.

Note that the FANG+ gauge was bludgeoned over the past two sessions, coming off a blockbuster election week.

The overarching message is that this could get messy. It’s not as simple as saying that tech is ready to “pass the baton” or that the market is “primed for a healthy leadership change” thanks to a brighter economic outlook in a world where a safe and effective vaccine is widely distributed.

Irrespective of any supply and demand hurdles to vaccine distribution, it may well be that the market has become so unhealthy (where that means concentrated) that transitioning back to a more egalitarian state of affairs where participation is broader will come with uncomfortable withdrawal symptoms.


5 thoughts on “Withdrawal Symptoms

  1. Man. Seems like it’s going to be choppy and volatile. Whipsaw. Sure, Monday changed…everything?

    The commodities reflation hedge. I’ve been waiting for it. (…wait…I thought reflation was over with the “blue fade”). Maybe we’re at the bottom for commodities and this is the first high and next is a higher low. I don’t know. Still plenty of time to find the good trades (of which there are tons).

    Then there’s COVID. Of course, the people who live in tents in the parks near to where I live, a “rich” city by the way, won’t have access to the miracle Pfizer cure unless there is some donation by billionaires, who, as a group, have witnessed their wealth increase by about $1T since March, by the way, to help them. Certainly, a round of two shots for these citizens, ousted by the pandemic from their jobs and dwellings, won’t come from our nation’s government, a government that seems to have forgotten that this is a land of 330M citizens, many of whom are being left behind.

    1. After market players were able to take stock of election results, it did initially look like reflation was out because stimulus and other heavy hitting Biden policies seemed untenable with a GOP-controlled Senate. Most any legislation through 2022 that will help everyday Americans requires a (seemingly impossible) Blue Swan double-victory event in the Georgia US Senate Runoffs this January. My gut says that McConnell keeps his chokehold.

      Now, this week–the vaccine news is pure, unadulterated hope. Money piling into the value/reflation trade. 90% effective with Pfizer means other vaccines will probably work too–maybe 75% or 95% or 65%…but last week we were talking about 60% needed for FDA approval. 90% is a game changer…assuming the data is accurate. Logistically it’d be tough to get 1 vaccine to billions of people–but not so difficult to get 5/10/15 vaccines to billions. That’s the real whipsaw here…how quickly reality changed with that news.

      Not sure if this whipsaw in the news means whipsawing market moves however, as your comment implies…a lot of deleveraging probably took place over the last few days due to huge spike in realized vol. Maybe H will clue us into numbers soon about dealer positioning. Likely there’s a lot of runway for momentum players to crowd into value now after witnessing “the biggest medical breakthrough in 100 years.” But why would the movement higher be quick from here on out now that we had the vaccine bombshell? Look at those charts!! Shocking moves. Remember pre-Covid the slow movement higher, day after day after day? I suspect that for value now…a slow& steady grind higher and continued rotation out of big tech into small “innovative” tech and value…of course the trendy “innovative” just meaning hopefully profitable but not FAAMG.

      My questions for the Heisenberg– will we begin to see changes in how equity volatility “operates?” Will, for example, we see a “FAAMG vix” behaving independently of a “Value vix”? Now that “the market” has become so concentrated, what implications would heightened FAAMG volatility have for the value market?

      1. You might be on to something here. The ratios between impled volatilities of different sectors could correlate to rotations between them, just like returns in the S&P500 are inversely correlated with its VIX.

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