Never Call The Top

Global equities enjoyed the largest inflow in five weeks as US stocks trekked towards new record highs.

Equity funds took in nearly $25 billion over the latest weekly reporting period (figure below).

With 2021’s only weekly outflow falling out of the sample, the four-week average rebounded sharply, from $2.5 billion to more than $14.5 billion.

The cumulative haul for this year is now $810 billion.

Stocks’ (entirely predictable) rebound from September’s mini-swoon doesn’t rule out a correction by year-end, but it certainly underscored the peril inherent in clinging to simplistic rationales and homegrown catchphrases (both purportedly informed by history) in the course of insisting that a proper index-level drawdown was a foregone conclusion.

I’ve been over the systematic side of the equation on too many occasions to count, most recently in “Why Higher?” Failing to appreciate the mechanistic ebb and flow of modern markets is destined to leave one bereft and hopelessly behind the curve. Why every equities strategist isn’t compelled to explicitly acknowledge that and otherwise incorporate it is beyond me.

Remember: The “stability” part of “stability breeding instability” can last for months. Plural. When you see what looks like a maddeningly slow grind higher on small-ish daily moves against a backdrop of very low realized volatility, systematic exposure is being toggled up. Target vol is now re-allocating as realized rolls over and spot settles in (figure below).

Eventually, the snowfall (i.e., stretched systematic positioning) becomes too heavy and some exogenous shock (the proverbial skier’s scream) triggers an avalanche. But that can take a very long time.

Beyond that, though, citing elevated multiples and what “usually happens” at this point in the cycle in the course of trying to time the market when i) cash levels are still some $1 trillion higher than they were pre-March 2020, ii) there’s no viable alternative to stocks and iii) it’s far from obvious that any kind of assumptions about the cycle (any cycle, really) apply given the anomalous character of the macro shock (i.e., the pandemic), is a fool’s errand.

That doesn’t mean there aren’t sector-level opportunities and thematic plays to exploit. Indeed, 2021 has certainly seen its share of factor volatility tied to macro shifts. We may well be on the brink of another such “phase shift” right now. My point is just that if it’s always difficult to call the top at the index level, it’s mostly impossible in the pandemic era.

Note that global equities are on track for their best month of the year. After a third straight weekly gain, MSCI’s gauge has erased September’s losses. And then some (figure above).

Although sentiment around global growth, profits and margins deteriorated markedly in the latest BofA Global Fund Manager poll, the bank’s Michael Hartnett suggested Q4 may be defined by “FOMO.”

The S&P has rallied in the fourth quarter in 75 of the past 95 years, he said, in a Thursday note.

The table (above, from BofA) is self-explanatory.

“Since the ’87 crash [there have been] just seven negative SPX Q4s, almost all associated with a wobble in credit markets,” Hartnett wrote, adding that “the good news for traders is that while LQD and HYG are modestly struggling, classic canaries-in-the-equity-coal mine [like] tighter financial conditions [are] trading well above danger levels.”