Several days ago, we pointed out a startling fact: short interest in the NYSE had risen to match the record level seen just before the collapse of Lehman!
We said that just as likely presaging another major leg down in equities, this move may simply mean the following: "a central bank intervenes, or a massive forced buy-in event occurs, and unleashes the mother of all short squeezes, sending the S&P500 to new all time highs."
While a central bank did not directly intervene, it did so indirectly when the September payrolls was a complete disaster, slamming any possibility of a rate hike in 2015, largely confirmed by yesterday's FOMC minutes which showed that the "no hike" decision wasn't close at all, and that as we first presented, a rate hike is now mid-2016's business, if ever.
Today, we got confirmation that what the rally of the past week has been all about is precisely that: a massive short-covering squeeze, when Bank of America's Mike Hartnett looked at the latest weekly fund flow data and noted a "monster $53bn MMF inflows vs redemptions from equity ($4.3bn) & fixed income funds ($2.4bn)...rising cash levels indicate big risk rally (from intraday lows last week SPX +7.7%, EEM +13.5%, HYG +4.2%) driven primarily by short-covering rather than fresh risk-on."
Here is the asset class flow breakdown using EPFR data;
- Equities: $4.3bn outflows (3 straight weeks) (almost all via ETFs)
- Bonds: $2.4bn outflows (outflows in 8 out of past 9 weeks)
- Money-markets: huge $53bn inflows (largest in 2 years)
- Precious Metals: small outflows ($0.2bn)
So now that we know what is causing the ongoing rampage, courtesy of a "green light" from the Fed, here is how the rest of the fund flows look like.
- Credit carnage: more pain in HY/IG/EM with 4th consecutive week of IG outflows, 10 out of 11 weeks of HY outflow, 11th consecutive week of EM outflow = worst stretch for credit in more than 2 years (Chart 2). But daily data show inflows Wednesday to both IG & HY for first time in 11/12 days so credit redemption shock easing.
- Cracks in “Crowded Longs”: Japan funds see largest weekly outflows ($2.0bn) since Nov’14; Healthcare funds see outflows in 5 out of past 7 weeks, worst stretch since Jun’14; watch October FMS (next Tuesday) for positioning unwind in other "crowded trades" (EU, Tech, Discretionary) or first UW in stocks since Jul’12 to suggest unwind mostly over.
- Weekly inflows to energy funds; this corroborates recent CFTC longs to Crude (Chart 1); in addition, staunching of EM equity outflows (smallest since July) illustrates that weak US payroll / $-weakness was the best news for EM/commodities/resources complex; also indicates crucial that Fed does not rally US$ in coming months.
Finally, focusing only on the various subseectors within equities:
- Japan cracks: $2.0bn outflows (biggest outflows since Nov’14)
- Worst is over for EM: small $0.6bn outflows (outflows in 13 straight weeks but pace of outflows slowing)
- Europe defiant: $2.0bn inflows (inflows in 19 out of past 21 weeks)
- US: $5.0bn outflows (outflows from both ETFs and mutual funds)
- By sector, healthcare funds see $0.9bn outflows (largest in 6 weeks); conversely, energy funds see $0.4bn inflows
How long will the short squeeze continue? It may well last and even overtake the all time S&P high, although keep an eye on an update from JPM's head quant Kolanovic: after once again correctly calling the inflection point just before the massive equity rally on September 24, the time may have come for the program traders to take some substantial profits.