US equities are coming off their worst week since June and the fourth-worst week of the year.
In fact, stocks will open the new week riding a five-session losing streak (figure below).
Out of context, that sounds bad. But in 2021, the fourth-worst week of the year for the S&P amounted to little more than a paper cut. Last week’s “dramatic” losses came to 1.7%.
At this point, measuring from the pandemic panic lows no longer makes much sense. The gains are so large as to render any “analysis” mostly meaningless. After five straight days in the red, the S&P is still up ~99% from the darkest days of March 2020.
I pride myself on restraint these days, but indulging in a chuckle at the expense of so many household names is a guilty pleasure. “I’m certainly in the camp that we’re not out of the woods. I think a retest of the low is very plausible,” Jeff Gundlach told CNBC, on April 27, 2020. He elaborated: “Actually I did just put a short on the S&P at 2,863.”
Around the same time, a veritable who’s who of the “legend” pantheon delivered similarly cautious outlooks, where “cautious” is me being (very) generous. Many industry “brand names” suggested an outright calamity was imminent, despite unprecedented policy support.
The figure (above), shows how things developed from the time so many dark prognostications were delivered on national television, with CNBC serving as the go-to conduit for doom prophesying.
In any case, daily moves of 1% or more have been rare at the index level of late. Since mid-July, the S&P suffered just a single session of losses in excess of 1%. On the other side, it’s been 34 sessions since the index notched a 1% gain (figure below).
Part of this is attributable to options dynamics keeping spot pinned. “Spot US Equities index continues to be a story driven by the options market, where we currently see S&P futs banging around the 4,500 strike which now houses the largest $Gamma on the board,” Nomura’s Charlie McElligott said, in the course of suggesting that a window for a pullback could open soon.
And yet, as quiet and subdued as things are, a “broken” vol complex makes it a somewhat eerie calm. “The only client options buys are almost exclusively of medium-dated Index / ETF downside which, mind you, is not available in abundant supply, thus screens as very expensive, because Options Desk risk management is not keen on being short that,” McElligott went on to say. “So even on these relatively negligible intra-session ‘selloffs’ in spot Equities, iVol is quick to act stressed and mark higher in a jump-y fashion, while Dealers holding ‘long Gamma’ against this are not getting relief from that end either because Equities volatility isn’t ‘realizing,'” he added. The latter point is a reference to months spent grinding along with small daily moves and the attendant collapse of realized vol (first figure above).
Below the surface, though, the market has been a semblance of efficient this year. At various intervals, particularly extended themes, sectors and individual names where the froth had spilled over the brim, de-rated. Morgan Stanley’s Mike Wilson noted that more than half of S&P 500 constituents have seen declines of 10% or more over the past several months. For small-caps, 90% of the index has seen a correction. In an article documenting the same general narrative, Bloomberg noted that “as of Friday’s close, the average stock in the S&P 500 was down 10% from their 52-week highs.”
But the disappearance of large single-session gains for the index, drawdowns for individual stocks and sector-level turbulence tied to the ever-changing macro theme du jour, have hardly translated into capitulation on the bullish side. In fact, the opposite is true. One by one, bearish forecasts on the benchmark are being marked to market. BofA’s somewhat begrudging “update” was representative.
“Wall Street’s consensus equity allocation has been a reliable contrarian indicator over time,” the bank’s Savita Subramanian wrote last week, in the course of raising her year-end target to a still relatively bearish 4,250.
“At 59.5%, Wall Street is neutral on US stocks, but remains closest to a ‘Sell’ signal since 2007, indicating tepid 12-month returns,” she added.
As Bloomberg’s Lu Wang put it Friday, “overt expressions of bearishness are few and far between, after sellers were punished amid this year’s 20% runup.”
It would be ironic, but entirely predictable, if a dearth of “overt bearishness” presages an overtly bearish outcome as summer gives way to autumn.
