Yesterday, when looking at the latest hedge fund positioning data from JPMorgan's Prime Brokerage, we pointed to a divergence which we said appeared "extremely bullish", namely the near record collapse in rolling 4-week selling pressure among the North American hedge fund universe, which had completely decoupled not only from Treasury yields but also from the recent modest bounce in risk assets, as the smart money continued to "sell every rip."
This is extremely bullish pic.twitter.com/e2PViTY8Ww— zerohedge (@zerohedge) April 19, 2022
As JPM Prime explained, last month it introduced a Tactical Positioning Monitor (TPM) and "noted that it reached a very negative level by mid-March, which was followed by a rally in equities." Well, currently, the TPM shows a fairly neutral set-up due to strong selling by HFs into the rally (-3z in N. America and largest selling since Covid onset in late Mar/early Apr 2020) offset by positive positioning shifts across various other components since the mid-March lows. However, the risk-off tone among HFs coincides with the hawkish pivot from the Fed and sizeable spike in US Treasury yields, JPM notes. And while that is correct, it was only a matter of time before there is a reversal lower in yields which would promptly activate a major melt up across the extremely bearish hedge fund positioning.
Sure enough, today's market action confirms that at least for 24 hours or so, sentiment has turned and despite Bullard's surprising admission teaser that a 75bps rate hike is coming, which has sent yields to fresh multi-year highs, stocks are roaring higher with bulls enjoying the best day in the market in the past month.
Positioning and technicals aside, traders are asking if the bearish worm has turned and is it now time to turn bullish if only for a trade? According to Bloomberg reporter Alyce Anders, here are 10 reasons behind today's stock rally:
- Retail accounts are buying today
- Tax-day selling done
- Banks can start their buybacks with earnings out of the way
- Overly bearish sentiment has finally washed itself out
- Investors have been placing too much emphasis on risk of recession
- Some rotation out of energy into beaten up sectors (IT) that are reportedly under- invested
- Robust consumer demand
- Oil down
- US stocks benefit from a bit of safe-haven status on inflation concern
- The bounce into the close Monday, amid a low market-on-close imbalance after last week’s option expiration, foretold an up move
But while on the surface this all makes sense, the biggest concern is that the Fed itself is now a bearish catalyst, and should stocks continue to rise despite traders being aware that the Fed put is now a Fed call and ignoring clear appeals from Fed talking heads to sell risk assets (a warning which Bill Dudley made all too clear), it means that every incremental outburst by Fed talking heads from now until the midterms will be even more hawkish... although with Fed speakers entering a quiet period ahead of the May FOMC, the lack of jawboning may be the most bullish factor for the next two weeks.
That said, before bulls give themselves the all clear, a big red flag is that just one week after JPM's resident permabullish cheerleader, Marko Kolanovic said that he was "taking profits", and with stocks having done nothing but slide or, at best, move sideways...
... in his latest weekly note, the Croatian JPM quant writes that "while we slightly reduced our record equity allocation , we remain constructive on equities and think that a near-term rally is likely, particularly in small-cap and high-beta market segments" adding that "both sentiment and positioning are now too bearish, in our view."
And just to underscrore that Marko is back to being "balls to the wall" bullish, as he has been every single seek this year with just one exception...
... he asks rhetorically what should one buy: "Growth or Value?" he responds that one can "construct a ‘barbell portfolio’ of traditional growth (e.g., tech, biotech, innovation) and traditional value stocks (e.g., metals, mining) that currently have favorable attributes across most traditional factors. This is rarely the case and currently possible due to a specific confluence of macro factors such as the commodity supercycle, divergent monetary policy, and very large selloff in high-beta and growth stocks (domestic and international) in the first quarter." In short, buy everything... which should be the clearest signal that one should take chips off the table and go short.
Sarcasm aside, here is a far more objective assessment of the various forces currently in the market, this one from JPM's flow desk.
... and some additional observations on the three key cases.
- BULL CASE – A mix of Cyclicals and commodities would be included among theoverweights. Consider things such as XLF, XLI as the mix of longs. Hedges couldinclude Defensives instead of broader market hedges.
- BASE CASE – Barbell strategy with longs in Tech and commodity-related sectors. Could utilize a mix of QQQs, IGV, OIH, USO, and XME, to express the long view.Against this portfolio, consider LQD and SPYs as primary hedges. A market-neutralstrategy that takes tactical advantage of bull and bear runs, may be considered.
- BEAR CASE – Secular Growth and Defensives may outperform in this environment.At the sector/security level, would consider longs in certain FANG+, Pharma,Staples, and Utilities; and, would have a net-short bias using SPY and QQQs ashedges. Cyclicals likely underperform in this environment so could consider thingssuch as XLI and XLF as shorts.
And finally, here is the view of JPM flow trader Andrew Tyler:
I think the base case is compelling but with some upside risks. There is a sense among investors that a resolution to the Ukrainian War comes sooner rather than later. Assuming that is true, there will be near-term pressure on commodities, similar to what we witnesses Mar 14-15 and Mar 28-29 surrounding ceasefire chatter. If we see commodity prices fall, especially oil, then inflation expectations are likely to dissipate, too.
While this will not impact 22Q1 earnings season, the narrative around runaway inflation decreases and perhaps adjusts the market’s view on Fed hawkishness.
Mapping this view to data, keep an eye on the May CPI print, which could show a decline due to base effects. It was May 12, 2021 when we had the first elevated CPI print following the first stage of vaccination distribution. Fed speakers that Wednesday through the following Monday gave rise to the transitory inflation narrative, which created a near-term peak in 5Y/5Y inflation swaps as well as 5Y and 10Y breakevens.
Not everyone is bullish however, and as we noted earlier today, Nomura's quant guru Charlie McElligott believes that a "short vol, short delta" setup may work best into the May FOMC (not bullish). Here's why:
Short-term recent Equities macro headwinds over the past few weeks (higher Interest Rates / FCI tightening / earnings season “buyback blackout”) have been weighing on sentiment, especially driving resumption of large Equities downside hedging flows of late—although the local “good news” narratives are again growing more frequent as per late day conversations—with clients noting potential now for EPS season to shift attention from macro, along with “clearing” of Tax-day related sell flows, the contra-indicator of the AAII Bull extreme low and resumption of corp buybacks.
Equities are not just stuck bouncing around at the mid-point of their larger YTD range trade, but we’ve seen a broad return to “day trading” in the Vol space, as evidenced by the ever-growing popularity of short-dated Options (buying upside / selling downside into intraday selloffs, buying downside / selling upside into intraday rallies) which is making for the return of silly intraday “overshoots” on Dealer / MM hedging flows.
Hence, Equities Index / Cross-Asset ETF Options are back being whipped-around by said hedging flows, with a broad “short Gamma, negative Delta” across US Equities index / ETF majors, as well as for HYG and TLT option positioning) that leaves us prone to big swings in both directions (i.e. yesterday in ES1).
Nevertheless, “Dispersion” is killing Equities Index-level “close-to-close” Vol, with the regime pivots seen across Value / Growth, Energy / Tech, Cyclicals / Seculars etc
Accordingly, as we noted earlier, while McElligott is cautious in the short term, he thinks that after the May FOMC "there is a chance for bond stabilization, which will bring back carry demand in USTs and help Stocks get legs again rest of the year and into the economic cycle sunset, ahead of the anticipated late ’23 Contraction / Recession thereafter."