The Great QE Unwind Compression Trade(s)

Tyler Durden's picture

Now that the market is finally starting to digest the end of QE2 (if not yet pricingin the inevitable transition to QE3), investors are wondering where the most violent "regression to the mean" snapback will occur. And whereas many talk about the dispersion between equities and commodities and speculate about this and that compression trade, the truth is that within equities themselves there is far greater dispersion between one of 9 traditional equity sectors. To wit, as the first chart below demonstrates, since the Jackson Hole confirmation of QE2, energy stocks have outperformed utilities by an 4x order of magnitude. An almost as pronounced dispersion can be observed between financials and industrials/consumer discretionary stocks. For those who believe that the market still has to price in the end of quantitative easing part 2 (and ignore the inevitable roll out of QEx), a compression trade which involves a long Utilities/Fins and short Energy/Industrials/Consumer Discretionary would seem quite appropriate. There is however one caveat. If the market, in its traditional stupidity and irrationality, proceeds to go ahead an unwind not only the impact of QE2 but go all the way back to QE1, than the compression cohorts change drastically. While utilities are once again the worst performing sector since March 2009, and bested just barely by healthcare and consumer staples, financials are by and far the best peforming sector, having returned over 150% in the past 2 years, with consumer retail and industrials following behind. Thus, it probably makes sense to avoid any long Financial leg and focus purely on Utilities and Consumer Staples as the long led in a compression trade, while shorting Industrials and Consumer Discretionary, leaving Financials alone (John Paulson's projections of Bank of America hitting $30/share by the end of 2011 notwithstanding).

Relative performance since QE2:

Relative performance since QE1: