"This Is Simply Abnormal" - RBC Explains The "Current Insanity Of Single-Stock Behavior"

Tyler Durden's picture

After 8 consecutive days of declines in the S&P - a losing streak that however will likely end today absent a big surprise toward the end of trading today - traders are rightfully asking themselves, what's going on, and why is the widely promised "election rally" not here? One attempt to answer what may be taking place in a suddenly very strange market is courtesy of RBC's head of X-asset strategy, Charlie McElligott, who points out that some of the moves seen in recent days are "simply abnormal" and more concerningly warns that what we are seeing now is reminiscent of what took place in the market almost exactly one year ago:

Interestingly, it’s starting to rhyme a bit with late last year—longs being built in banks on higher rates expectations against a desire to underweight the bond proxies (as we see desire to short USTs again on inflation expectations / rate hike / curve steepening talk from CB’s all conspiring against them), and despite this recent risk drawdown, we have seen tech and high-beta flying of late.  Something to be mindful of, as the last three Januarys have seen CRUSHING contrarian moves (stocks sharply lower, USTs massively ‘bid’).

If McElligott is right, then any relief rally to follow the Tuesday election will likely be faded. Of course, if the market does crash on Wednesday morning in a "Brexit rerun", then it will be up to the Fed to reinvigorate animal spirits, which however will certainly not happen with a rate hike just one month later.

From RBC's Charlie McElliggott:

RBC Big Picture: Stranger Things

THE CURRENT INSANITY OF SINGLE-STOCK BEHAVIOR: Apologies to pure macro readers for so much stocks focus of late, but it continues to be accurate to say that all of the action is taking place in equities right now…and stick with me, because there is  some good macro thought-below.  Man was yesterday a bizarre one in US equities….and even stranger, it’s happening in a relative vacuum, as the rest of the macro / cross-asset universe is lulled to sleep with much tighter ranges on the day.

The behavior in equity vol is one thing (as tails were massively bid yesterday—SPX 1m 80% moneyness was +10.2% on the session, while ‘vol of vol’ is now +34 vols / +40.1% over the past 8 sessions)…but the price-action in single-stock was the stuff we haven’t seen since the Q1 market-neutral factor unwinds ripping through the pod-shops…where for a stretch in late Jan / early Feb, teams / books were being blown-out on daily basis around the Street.

Back then, it was ‘bad-positioning’ from the buyside based on macro impact on style factors. 

  1. Everybody came into January ‘16 long growth & momentum (and thus, “high beta”), aka “story stocks” in tech and discretionary, along with major healthcare sector overweights (biotech / spec pharma / generic drug makers).  Similarly, there was a huge belief in “short bonds” to start the year too--as seemingly the Fed’s long-awaited rate-hiking cycle had just begun the month prior--as such,
  2. there was a massive long in financials / banks on expectations of higher rates.  And to put the cherry on top,
  3. there was a major quant / stat arb long in energy, anticipating a January ‘mean reversion’ (a tried-and-true back-tested phenomenon). 

In hindsight, it is absolute insanity how ‘bad’ that all was—you couldn’t construct it any worse.  As such, the pain trade “went to 11,” as risk-assets were purged under the weight of the deflation scare: China came out of the gates with further Yuan devaluation, crude was -10% on the month, and UST 10Y yields were absolutely obliterated, moving from 2.30 the last day of Dec ’15 to 1.65 by Feb ’16. With all of this, growth and momentum came unglued, the move lower in rates not only crushed bank longs but also too saw a massive rotation into the (dreaded) ‘bond proxies’—‘low vol’ factor, dividend yield, defensive sectors.  You know the rest…

So fast-forward to now: what’s so incredible about the behavior witnessed over the past few days ‘under the hood’ is that relative to all of our recent drawdowns being so clearly macro-driven (deflation / reflation events of the past two years—Yuan deval, crude spasms, Yellen “weak USD policy pivot” / “Shanghai accord,” CB coordinated messaging on “curve steepening” intent, the inflation impulse bond-beatdown etc)…is that this equities move started as simple “de-risking in front of a ‘fluorescent swan’ of a binary US Presidential election”…that has now crescendo’d into a really bad VaR outbreak. 

While on the benchmark index level we saw a “barely a paper-cut” 9-handle move in SPX yesterday(-0.4%)…we saw 29 US Composite names with market caps north of $25B dollars which traded -1.5% or (much) greater on the day—heavy-hitters like Kellogg, Apple, AbbVie, Humana, Liberty Global, Intel, Kraft Heinz, Charter Comm, Constellation Brands, HCA Holdings, Starbucks, Target, Anthem, Pfizer, Estee Lauder, Amgen, Lockheed Martin, CVS Health, Kroger (-3.7%), AIG (-4.0%), Allergan (-4.0%), McKesson (-4.6%) and index mega-weight Facebook (5th largest weighting in SPX, -5.6% on day).  Other popular longs like CHD (-6.6%) and THS (-19.5%!) got smoked too, while more idiosyncratic political drama crushed the generic drug maker space, with PUNISHING capitulation in MYL (-7.0%), ENDP (-19.5%) and TEVA (-9.5%) amongst others. 

The tech sector has been “THE” hiding place recently for investors, on account of folks getting increasingly nervous about riding their cyclical longs much further here after the run they’ve been on (and crude rolling over sharply -9% on the WTD as the OPEC “deal” looks like anything but)--but also being hyper-cognizant of the inflation base-effect’s lagging-impact on bond prices (higher yields) and purportedly a Fed still committed to a Dec hike (with a steady-state world of course) makes putting back on the ultra-expensive ‘bond proxy’ / ‘low vol’ factor / defensive trade look quite unattractive as well.  So despite tech being such a ‘stud’ recently (XLK +10.2% in Q3), it’s received the ‘rented mule’ treatment as effectively an “ATM” of late (with ‘FANG’ -4.4% over the past 5 sessions, XLK -2.6% over past 5 sessions). 
 
But maybe the strangest thing experienced was seen amongst seemingly popular and thus theoretically winning short positions, where we saw huge outlier downside moves—BW (-10.3%), FSLR (-15.0%), FIT (-33.6%) and DPLO (-42.1%).  This is simply abnormalHow do I rationalize this?  Well in ‘max pain trade’ fashion, I think that sadly many had actually given-up on these shorts over the outrageous daily-grind higher period in Q3—remember, SPX was +3.3% on the qtr, Russell 2k was +8.7% and (drumroll please….) the GS Most Shorted Basket was +14.5% on the quarterSo what we’re seeing this week is that the right ideas that folks once had on in their short books—but were forced to capitulate on during the face-ripping rally in Q3—actually saw their short theses play-out to a tee.  The companies reported terrible quarters, and as such, were promptly hammered and punished / re-deployed by guys who originally had the trade right…but had sadly ‘tapped out!!!’  Just gutting stuff…

Ironically though this time around, we see equity market neutral funds performing very well relatively speaking to long-short or long-only.  Take a look at one widely followed quant’s open-end market neutral fund against the HFR Equity Long / Short Index, ‘High HF Concentration basket’ and ‘Mutual Fund Overweights’ baskets over the past two months:

Ironically though this time around, we see equity market neutral funds performing very well relatively speaking to long-short or long-only.  take a look at one widely followed quant’s open-end market neutral fund against the HFR Equity Long / Short Index, ‘High HF Concentration basket’ and ‘Mutual Fund Overweights’ baskets over the past two months:

Broken-record, but another ‘strike’ for active managers…as not for nuthin,’ we see equity mutual funds registering another $3.5B of net outflows last week per last night’s AMG dataThis is the 34th consecutive week of outflows this year, and makes only 3 inflow weeks YTD against a total of 44 weeks. 
 
Interestingly, it’s starting to rhyme a bit with late last year—longs being built in banks on higher rates expectations against a desire to underweight the bond proxies (as we see desire to short USTs again on inflation expectations / rate hike / curve steepening talk from CB’s all conspiring against them), and despite this recent risk drawdown, we have seen tech and high-beta flying of late.  Something to be mindful of, as the last three Januarys have seen CRUSHING contrarian moves (stocks sharply lower, USTs massively ‘bid’).

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buzzsaw99's picture

Abby someone. [/Igor]

buzzsaw99's picture

I'm almost sure that was the name. [/Igor]

Doña K's picture

Even casinos do not mess with the odds. They are constant.

Stocks, between HFT, ETF hidden fees and decay, bonds and weird hedges, pair trades with a little FX thrown in, Joe blow has no chance.

Nid's picture

ZH...."drawdown" is an inaccurate, "financial industry PC" term....it's akin to "cash on the sidelines". 

Holy hand grenade of Antioch's picture
Holy hand grenade of Antioch (not verified) Nov 4, 2016 11:51 AM

Yellen did the 23 hour nose-route to the top of El Capitan in 6 hours and 18 minutes! ~ She can make THIS work!

lasvegaspersona's picture

solo and free too...right? Lynn will be jelly...

Holy hand grenade of Antioch's picture
Holy hand grenade of Antioch (not verified) lasvegaspersona Nov 4, 2016 12:55 PM

lol

LawsofPhysics's picture

How long is the average stock actually held in this "market"?  Like a microsecond...

 

LMFAO!!!!

KnuckleDragger-X's picture

Sanity is for the weak, so double down on your bets.....

The Fonz...before shark jump's picture

Really some of the moves made the last couple of days seems abnormal!?!?

GTFO of here buddy where have you been since 08.....

When someone calls themselves a market strategist or stock analyst...you might as well be telling me you have a degree in palmistry or can divine the future by feeling the bumps on a persons head......

Like those clowns at the track who always go on about their "system" while they're bumming a smoke off you...

s2man's picture

Hey!  Are you knocking phrenology?

RusBear's picture

They really try to annnnooolise the stocks?

Good luck if you are not part of in-sider club!!

anarchitect's picture

"The behavior in equity vol is one thing (as tails were massively bid yesterday—SPX 1m 80% moneyness was +10.2% on the session, while ‘vol of vol’ is now +34 vols / +40.1% over the past 8 sessions)…but the price-action in single-stock was the stuff we haven’t seen since the Q1 market-neutral factor unwinds ripping through the pod-shops…where for a stretch in late Jan / early Feb, teams / books were being blown-out on daily basis around the Street."

FFS, am I the only one who has to read this multiple times to even get an inkling of what it means?  Who is the author trying to impress?

 

Going Loco's picture

As long as this kind of bullshit is promulgated there is no hope of returning to a market where ordinary people with savings to invest will consider doing anything other than buy an index - and as a recent article explained the proliferation of inex-tracking is bound to lead to a crash one day.

A good rule of investment: if you can't explain your thesis on the back of an envelope so that a ten year old kid can understand it, it's a dud.

BTW there are lots of examples (including Isaac Newton) of people who think a particular bullmarket is bullshit, but who either buy in at the last minute because they can't stand watching it from the sidelines any longer, or (as in this case) sell their shorts too soon. Timing is everything if you are trading.

 

Conax's picture

You're right, I didn't grok that. At all. I am ignorant of the meaning of most of wall street's confusing lexicon.

The whole article reads like old-time grifter double-talk, intended to reinforce the meme amongst us muppets, that they are smarter than us. They have the knowin'.

and That's why they're richer.

I think it's all bullshit.

OneOfUs's picture

Well you can sleep easier because now there ain't no one who can grok it.

Iconoclast421's picture

There is nothing shocking about a test of the 200dma. If it breaks hard below that, then it would be shocking. Especially if Hillary wins. If Trump wins, then obviously a break below the 200dma should not be shocking.

Jus7tme's picture

RBC is talking nonsense: Why should anyone be surpised that "single stocks" are valued differently than the rest of the market?

By the way, the RBC "single stock" definition appears to be  "any big-cap stocks, especially those that are severely overvalues, like the FANG/FNATA group and a bunch of others, too"