For much of 2023, re-leveraging and re-risking was the purview of systematic investor cohorts mechanically allocating to equities in a trending market where volatility was moving lower.
What was missing, until late May anyway, was buy-in (figurative and literal) from discretionary investors.
The turning point was Nvidia’s epic guide and the resolution of the debt ceiling standoff in D.C. As the YTD rally morphed into a summer melt-up, fundamental investors begrudgingly moved off the sidelines. At times, the “crash-up” dynamic felt like panic — under-exposed investors grabbing for upside into a market that never sold off.
As I wrote in the latest weekly+, it may now be the case that discretionary positioning has peaked unless and until there’s an unequivocal green light or some definitive sign that we are, in fact, in a new secular bull market.
Sure enough, Deutsche Bank’s measure of aggregate equity positioning just fell a third week, and as the bank’s Parag Thatte wrote, “the decline has been driven by a sharp unwind in discretionary investor positioning.”
As Thatte went on to say, discretionary positioning has now “retraced more than half of the steep climb it saw from late-May to mid-July and has now returned close to neutral,” in the 51%ile.
So, at least on one bank’s metric, the panic grab into stocks from fundamentals-based humans is now over. We’re quickly retracing the run up catalyzed by Nvidia and the debt limit deal.
As a consequence (and as mentioned above), Deutsche’s overall positioning measure now sits at a two-month low (shown on the left, below).
As you can see from the figure on the right, systematic positioning is still loitering at elevated levels (juxtapose the “stuck” purple line with the declining green line).
The apparent falling away of support from the discretionary universe could be bad news if some trigger event comes along and conspires with the negative gamma backdrop+ to expand the daily, close-to-close distribution of spot outcomes, thereby dictating mechanical de-leveraging from systematics.
Thatte mentioned that latter possibility, employing a diplomatic cadence to make the point. “Vol control funds kept their equity allocation around the 69% mark this week,” he wrote, adding that “their sensitivity to selloffs remains high.”
