Deutsche: Stocks stretched

Via Deutsche:

Range bound US equities despite two large positive catalysts points to extended positioning

Back in July, we noted that the market then was rallying on good news (data surprises) but failing to selloff on bad news (virus resurgence) and that this asymmetric response confirmed our read that equity positioning was quite low (Equity Positioning Sticks Out, Jul 10 2020). We see the situation now as having reversed. The S&P 500 has essentially remained within its 3 month range despite two huge positive catalysts in the form of the resolution of US election uncertainty and the vaccine announcement, which has strong forward looking implications, while selling off on widely anticipated pandemic restrictions and disappointments on fiscal stimulus. This asymmetric market response suggests that positioning is now extended. Our quantitative indicators for positioning and flows reinforce this read.

Discretionary investor positioning is elevated

Our consolidated measure of equity positioning has continued its steady rise from the record lows in March and is now in overweight territory (58th percentile). In particular, discretionary investor positioning has now climbed to very elevated levels (87th percentile). Positioning by discretionary investors tends to follow movements in macro growth, but at current levels it is already running ahead and factoring in further improvement. While we remain constructive on growth and earnings, the second derivative should start to turn down as we have already seen with some recent data.

Systematic strategies exposure still low as vol remains high

In contrast to elevated levels of discretionary positioning, systematic strategy exposure to equities remains low (26th percentile). This is the reverse of the divide that prevailed for most of last year (Discretionary-Systematic Divide, Jul 2019).

Allocations for Vol Control in particular are still very low, as vol remains elevated. As we noted recently, elevated vol despite the strong market rally largely reflects bullish option positioning by retail investors, and so ironically is unlikely to fall sharply pushing vol control to raise exposure (Stubbornly High Vol, Oct 23 2020).

Risk Parity and CTA exposure to equities is near historical averages. CTAs are now long all the major US equity indices as well as EM and Japanese equities, but remain conspicuously short in Europe.

Record inflows into equity funds, pivoting towards cyclicals but not yet benefiting Europe

The last two weeks have seen a record $71bn flow into equity funds, benefiting the US ($42bn), global ($16bn) and EM ($14bn) funds but not yet going towards Europe (-$0.5bn) and Japan (-$0.3bn). After exclusively going into secular growth and ESG funds for several months, flows over the last 2 weeks finally pivoted towards the more cyclical and Value funds. Across other asset classes, overall bond fund flows over the last two weeks remained strong (+$22bn) as outflows from Govt bond funds (-$5.9bn) were more than offset by strength in other categories, especially EM (+$6.1bn), HY (+$4.8bn) and IG (+$3.8bn).

Cross asset momentum breadth at the top of its historical range

With almost every asset class having rallied strongly in risk-on fashion over the last two weeks, our measure of the breadth of cross asset momentum is now at the top of its historical range, back to levels seen in early June and at the end of last year. Asset classes and markets which still lag on a relative basis and where positioning is still light, such as European equities and oil could benefit if momentum sustains and positioning and flows rotate, especially for trend-following systematic strategies.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments are hidden for Membership Subscribers only.