Headed into the December FOMC meeting, there was some (ok, a lot) of chatter to suggest equities were a precarious proposition on the heels of a six-week melt-up that pushed the S&P to within shouting distance of record highs.
As I put it in “Fearless Fear Gauge?“, I wouldn’t brave a categorical repudiation of that contention, nor would I necessarily suggest “complacent” is an inaccurate description of the prevailing market mood.
Nuance is important, though, and for reasons discussed in the linked article (and others like it published here in recent days), I do think sweeping qualitative assessments about unbridled bullishness (or dangerous complacency) may miss some key underlying dynamics.
But nobody ever made it big in the (media) world preaching subtlety, restraint and nuance, which goes a long way towards explaining headlines like this one, from Bloomberg on Wednesday: “Sell S&P 500 in ‘Every Scenario’ Looms as Rally Is Overheating.” That’s what happens when you combine the media’s web traffic maximization business model with a sell-side sales and trading note. It’s like a five-year-old snorting Pixy Stix. (I’m just joking, Bloomberg.)
The article referenced a two-day-old positioning update from Goldman’s Cullen Morgan, and specifically the table below, which is just simulated CTA flows under different scenarios looking out one week and one month.
As the e-mini row shows, CTAs would sell S&P futures over the next several sessions regardless of outcome — “in every scenario,” as Morgan put it.
Crucially: These are simulated flows. Even the realized flows (i.e., buying/selling that’s already happened) are simulated. Nothing’s preordained, and even the backward-looking estimates are just that — estimates.
If you felt absolutely compelled to glean something from Goldman’s CTA estimates, it should probably just be the modeled $200 billion in re-leveraging estimated for last month (~$55 billion in the S&P).
The figures above, from the same Goldman note, show the evolution of modeled CTA equity longs in global equities (left) and SPX (right).
To their credit, Bloomberg did manage to extract the key point. “A speedy switch from short-to-long equities by commodity trading advisers, who usually trade on market momentum, has been a major factor behind the $4.6 trillion rally in US stocks since October 27,” Jan-Patrick Barnert and Michael Msika wrote.
Commenting earlier this week, Nomura’s Charlie McElligott said the sprint higher from the October lows was “in large part due to a massive systematic fund mechanical re-allocation.” On the bank’s estimates, the cumulative notional purchase across equities inclusive of CTAs and vol control, was $104 billion since early last month.
