Over the weekend, just as the sellside penguins were piling into the latest momentum (or rather anti-momentum) trade, predicting that 10Y yields were on their way to soar above 2%, with JPM’s Marko Kolanovic amusingly stating that rates can jump 150bps before they impact stocks, and meanwhile urging clients to buy value and dump momentum stocks as a “once in a decade trade“, and Bank of America dramatically revising its 10Y yield forecast from one extreme to another, now expecting 2.00% on Dec. 31 instead of 1.25% as per its prior forecast…
… we took the other side of the trade stating that “CTAs Are Almost Done Selling Bonds: Why The Market’s “Great Rotation” Is Almost Over” in which we explained why the violent rate selloff in the past two weeks is ending, and also why its pair trade – the liquidation of momentum factors and the surge in “value” is also almost over.
Specifically, as we said on Saturday, “after hitting a near record high net long exposure in sovereign rates which peaked right around the time $17 trillion in global bonds traded with a negative yield, the same CTAs have now shrunk their aggregate net long position in major DM government bond futures (US, Japan, Germany, UK) by about 80% from the late August peak!”
This sharp unwind of CTA long TSY positions is shown below:
The fact that Dennis Gartman – the most successfully contrarian indicator in the history of capital markets – on Tuesday repeated the now traditional Treasury bear gibberish, that “the case can be made that the three decade long bull run in 30 Year Treasuries has run its course to the end”, only gave us certainty that the Treasury selloff is now over.
The value/momentum reversal is over, buy TSYs:
“the case can be made that the three decade long bull run in 30 Year Treasuries has run its course to the end.” – Gartman
— zerohedge (@zerohedge) November 12, 2019
So fast forward to today when after reaching just shy of 2.00%, the 10Y is back to 1.87%, suddenly Wall Street’s penguin brigade has undergone yet another U-turn, and this morning none other than Goldman took the other side to the JPM trade, stating that “a major portion of the bond market selloff is behind us.”
Then, earlier today, picking up on the latest contrarian reversal – and anti-Gartman vibe – was Nomura’s Charlie McElligott who echoed what we said on Saturday, writing that “the Treasury selloff feels “tactically tired,” with positioning now well-cleansed (massive duration sale from leveraged funds in the last reporting period, plus short-term CTA model now-having established their “short” TY and ED$ positions with no proximate next “sell trigger” levels).”
And since we showed previously that 10Y yields, momentum, and value is just one big trade…
All one trade (and anti-beta has a high beta to 10Y) pic.twitter.com/1NohUu19wB
— zerohedge (@zerohedge) November 11, 2019
… McElligott next goes on to note that with the TSY selling reversing, he would now expect this recent cross-asset “Momentum” reversal in the prior 2019 “trend trades” to also normalize—particularly in Equities, where the “bond proxies” should again benefit from this anticipated stabilization in USTs.
Well, it certainly is today, and so far Kolanovic’s “once in a decade” trade of going long value and shorting momentum has lost money for anyone who put it on last Friday when the JPM quant appeared to CNBC to pitch it.
One key reason why the Nomura quant is turning bullish on rates is that as he points out, according to the latest COT data, Hedge Funds have very much “pressed” this selloff move in US Rates, as hedge funds sold a net record $32 million/DV 01 the week prior to the breakout from the high end of the UST yield range—the single largest absolute duration change in either direction since the UXY contract was introduced in 2016 (h/t Ryan Plantz).
Meanwhile, stepping back from the Rates-Value pair trade, Kolanovic also shows that “investors are back VERY long Equities (Asset Managers 98.5%ile Net $ position in SPX futures; CTA’s “ 100% Long” in 12 of 13 Global Equities futures we track…
… SPX / SPY consolidated Net (long) $Delta at 98%Ile since 2013, with Net (long) $Gamma 94%ile via resumption of large “overwriter” activity)
— which from a back-test perspective tilts risk to downside on any sort of “negative” macro catalyst over the short-term window—particularly as the US / China “Phase 1” relief looks more tenuous than previously hoped, with Hong Kong lingering in the background as well.
For those asking, here is what the back-test revealed:
- When QQQ Net Gamma > 95.5%ile AND Net Delta > 97.8%ile since 2013, expect near-term pullback and vol higher, e.g. -2.9% median return over 1m and VIX median return 37% over 3m
- When SPX New Gamma > 94.6%ile AND Net Delta > 98.4 %ile, SPX -0.3% median return over 2w and -3.9% median return over 6m, with VIX median return 55.4% over 3m
The precarious balance is not only in stocks and derivatives, but also in VIX, where positioning also remains extreme, with the “Net Vega” long position for ETNs at 99.7%ile since 2011 (back-tests like these folks are “right”)…
… while the much-discussed Non-Comm VIX Futures “Net Vega” SHORT position is 0.2%ile since 2011 (thanks to Systematic “Roll-Down” players in VIX futures) builds a base for a potential squeeze in from models short the front-end of the VIX futures curve.
In short, we are nearing a market tipping point where the slightest catalyst could sell off an avalanche of selling, especially with markets once again priced to perfection, yet as Trump’s speech at the NY Economic Club has made the crowd who was saying that the potential Dec signing of a “Phase 1” deal as a shortable event in Equities (“sell the news”) further incentivized to take profits sooner-than-later, as that unwillingness to back-down on tariffs (and thus backing-away on a “hard date” on a signing) makes it now look like “the easy money” has been made and risk is to downside with trade news / rhetoric.
So amid rising risks that the US-China trade situation may sour again, and that the HK violence could result in something even more ugly, McElligott asks “who would be taking profits in Stocks” and answers: Asset Managers, who are long $132.9B of SPX, which is 98.5%ile since 2006:
In light of all the above factors – to go long TSYs, volatility, and momentum stocks and short equities and value – why is Kolanovic urging an outright tactical “short Equities, long Vol” trade? Because, as he explains, he sees the combination of market volume which is drying-up post US Earnings in conjunction with near record Corporate stock buybacks (which we discussed yesterday) has has made it difficult for shares to go lower.
As such, his best prediction for the near term is that he is now “anticipating a real Equities “chop” over the next 2w-1m where there is heightened potential for an exaggerated -2 to -5% pullback, before resumption of “higher” seasonality into Year End, as the “dip” is bot / higher vol is sold on a reset into 2020.”
AND TODAY THIS IS EXACTLY WHAT WE ARE LOOKING AT, WITH BONDS RALLYING WHILE U.S. EQUITIES “MOMENTUM” GETS ITS LEGS YET-AGAIN AFTER A VERY ROUGH FEW MONTHS
McElligott forgot one key reason why investors should be wary of shorting the market outright: the Fed just injected $280 billion in liquidity into the market in the past 7 weeks…
… and will continue to do so for the foreseeable future at a rate of $60/BN per month.
As such, anyone who wishes to be outright bearish will have to fight not only the CTAs whose continued selling of TSYs remains a risk, but also the Fed. Doing the latter has traditionally resulted in catastrophic career consequences.