“Active managers have generally moved to the sidelines [leaving] inelastic model-based players and passives chasing the tape,” JonesTrading’s Mike O’Rourke remarked, in his latest daily missive.
The absence of discretionary, carbon-based lifeforms set against an illiquid, summer market can be a perilous conjuncture. But it could also be virtuous, depending on your definition of the term.
“While the fundamental bear case sits and waits for this ‘negative revisions’ impulse, the systematic world is absolutely lifting global equities futures in size,” Nomura’s Charlie McElligott wrote Tuesday.
On the bank’s estimates, CTA trend added more than $33 billion across global equity futures over the past week (figure above), covering legacy shorts and “even outright flip[ping] long,” McElligott remarked, noting that “buy” triggers are proximate across some overseas benchmarks, even as the next big “add” levels for US stocks are “out-of-the-money higher.”
He then posed a question: “So, systematically speaking, where does the next wave of potential equities flows come from?”
One good candidate is the vol control universe. As the figure (below) shows, three-month realized may have some catching down to do.
One-month trailing realized has now receded to the ~64th%ile (one a one-year lookback), while three-month is still loitering in the ~99th%ile. McElligott called that an “enormous” gap which “looks likely to collapse.”
That matters. Nomura’s model uses the higher of the two triggers and, as Charlie went on to point out, several anomalous days (and particularly a few big down sessions) will soon drop out of the sample window, which could “allow for substantial mechanical reallocation flow looking out past two weeks.”
He put some numbers to things. 10-day realized is 17, implying ~1.1% daily moves on the benchmark. Projecting that “magnitude of daily change out for the next month, we would expect nearly +$21 billion of US equities buying from vol control over that one-month window,” McElligott wrote.
With discretionary investors sidelined (or on vacation) and corporates in buyback blackouts, that could be helpful.
Buyback Blackout. Is that a real thing?
Does anyone have a chart of buyback activity, week by week, going back two years?
Interesting article regarding buyback blackouts.
https://www.cnbc.com/2018/04/11/rumor-buyback-blackouts-mean-weak-stocks-fact-not-really.html
It’s too bad we don’t have clear information from the mega caps as to when they are doing their buying.
They give quarterly numbers but they don’t give more specific breakdowns.
I mean, yes, there’s data. It’s not like they’re sneakily executing these on E*Trade. Wall Street’s buyback desks track this every day. So, no, this isn’t a mystery.
For example: https://heisenbergreport.com/wp-content/uploads/2022/07/BofACorpClientFlowsJun212022.png
Today, the market was acting like the bottom is in. I guess it’s possible.
Sure, for one day. But it seems that many fund managers and such are sitting below target allocations and are frightened by the risk that they miss the bottom.
A look back at 2009 and the post 1929 bear markets suggests that you can see many of these “come on in, the water’s nice” type rallies. Then the early birds bail and the rest of us are left looking at each other. Like on an airplane trip with massive turbulence. “Is that guy gonna puke? Hope he doesn’t because if he does, I will too!”
And it is hard to shake the “buy any dip” mentality which made total sense when the Fed was your friendly fat uncle rather than Uncle Scrooge.
But, as you say, it just might be the bottom.
Appreciate your perspective, Derek. It’s funny (to me) how looking back at the market, especially the swoons, reminds me of a really good rollercoaster ride. It feels violent, but time enables perspective. As we went through the ups and downs during the last 30 years or so, it didn’t feel like it would result in a happy ending at the time.
Folks, Tuesday was meaningless. Here, read this: https://heisenbergreport.com/2022/07/19/mood-check-everything-is-better-than-feared/
Thanks, H. I certainly agree. When there are so many variables and wild cards in play, and time is a factor too, there’s no way that one decent day will prevent all of our collective butts from being dragged in the market mud for some months to come. We may or may not be close to the bottom. But even if it is, the overall market is likely to bounce on the bottom for months to come, depending on the broader circumstances that will impact the market on an ongoing basis.
There are just too many questions hanging over the world and our country, and all of us who invest. How long will the war be extended? Will it remain within the borders of Ukraine? Will the Russians run out of bullets and/or conscripts and resort to nuclear weapons? What will happen to the price of fuel through the year? How about next year?
Which party will dominate in the US election, winning the House or Senate or both in November? Will the US government provide incentives for US companies to bring more factory production onshore to the US? (This is ongoing already, but perhaps it could be expanded with more incentives.)
Will the system of government in the US, wherein House Members and Senators engage across party lines to build legislation, ever work again? (I have to add that republicans, in the old days, supported the well-being of American businesses. Now they just seem to want money from anyone who will give it to them. I suggest the democrats, who also have a conservative history, should more forcefully put their shoulders into supporting American business constituents.) How will the US government address negative economic impacts right now, recession or not, on the growing class of white, black, and brown people of very limited means and security?
Will China invade Taiwan? Will the Chinese stop closing down cities and just deal with Covid like normal people?
Will the European Union hold together in the face of fuel cutoffs and shortages imposed by the Russians?
Maybe next year, before the summer, maybe some of the BS will unwind. But enough questions overhang the economy and our world that may linger and create uncertainty well into 2023.
Yes, obviously, macro is a big question for me. But then, of course, apart from that, there’s always the question of how well do individual companies in which we invest manage their business through the inevitable macro turbulence.
I really enjoy your articles. I am not sure that we will get the capitulation sell off that will give an unmistakable green light to getting back into the market. This bear market did not start with a blowoff bubble (at least not one that I benefited from). It was as though the air just went out of the thing. In retrospect, I believe it was the trading algorithms reducing risk as asset prices started going down. As they went down more, more risk was sold. At some point active traders realized that the short trade was more profitable than a long position, so that increased the downward trend. Now the reverse appears to be happening – at least for this week. The missing piece – the data – will come out with the Q2 GDP numbers next Thursday and the CPI numbers on Friday. Investor sentiment as objectively measured by the CNN Fear and Greed Index appears to have bottomed out on May 12th (with a 7 out of 100).
We have scraped a bottom. I look forward to the Q2 GDP. But this is a weird downturn. My fear is that job losses, which are strong today, will increase. I was just released by a premier technology corporation that doesn’t want to take any chances. They foresee a real possibility of recession in the economy.
I expect to find other work without too much of a problem because there’s a lot to do in tech. But I believe the market will have some slogging to do. Suggest we all take a deep breath and exercise patience.
Pardon the ambiguity. I meant to say the job market is strong, but job losses can be expected to grow.