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RBC Warns Equity Markets Have Entered The 'FOMO' Stage
06-02-2017, 03:42 PM,
#1
RBC Warns Equity Markets Have Entered The 'FOMO' Stage
RBC Warns Equity Markets Have Entered The 'FOMO' Stage

<p><em><strong>It&rsquo;s risk-parity heaven right now,</strong></em> notes RBC's head of cross-asset strategy Charlie McElligott, with global equities (developed and EM) AND fixed-income all continuing their torrid rallies, but McElligott warns this is a <strong>classic &quot;from worst to first&quot; PM-grabbing into a new &quot;Fear Of Missing Out&quot; stage of the equities-rally</strong>.</p>
<p>Bonds remain well-bid on account of the ongoing &lsquo;slowing into tightening&rsquo; narrative, with commodities being the only asset class (outside of volatility, of course) that is lower overnight as a &lsquo;signal&rsquo; for the lower bond yields.&nbsp; <strong>This continues to be &ldquo;falling inflation expectations&rdquo; story for rates / bonds</strong>: industrial metals continue their struggles<em> (Chinese / PBoC deleveraging efforts, while <strong>recent efforts at STRENGTHENING yuan to stem FX outflows will FURTHER FEED global disinflation in coming months</strong>)</em> in conjunction with Crude&rsquo;s inability to get off the mat post disappointing OPEC (market still focusing on US shale supply--especially now, with the thinking post Trump&rsquo;s Paris Accord drop-out that we&rsquo;ll see even MORE US oil supply via increased drilling / deregulation).&nbsp;</p>
<p><span style="text-decoration: underline;"><strong>#FOMOROTATION: </strong></span>But today is largely an equities-centric story, <em><strong>as stocks can of course view the world in a &lsquo;mutually-exclusive&rsquo; fashion from the aforementioned fixed-income &lsquo;slowing growth&rsquo; concerns.&nbsp;</strong></em> A goldilocks interpretation of &lsquo;easier financial conditions&rsquo; (weaker USD and lower US rates / flatter curves are a POSITIVE for large cap US corporates) against still-expansive data (yesterday&rsquo;s US ADP print portending + for NFP) keeps stocks in a very &lsquo;sweet spot,&rsquo; especially as the world is still awash in liquidity despite the &lsquo;coming&rsquo; pivot tighter.&nbsp; To this point, EPFR data last night showed us that cash continues to be deployed in both equities (+$13.7B inflow in global Eq funds, a five week high absolute $ number) and bonds (+$6B inflow) as well.&nbsp;<strong> It seems like investors are appropriately taking their cues from very recent CB messaging: cautiously &lsquo;slow and steady&rsquo; tightening in light of recently &lsquo;softer&rsquo; inflation data.</strong></p>
<p><strong>&nbsp;</strong>Again, <strong>all of my conversations yesterday were centered around stocks and the &lsquo;rotation&rsquo; being evidenced</strong>.&nbsp; Remember this from my note Wednesday?:</p>
<blockquote><div class="quote_start"><div></div></div><div class="quote_end"><div></div></div><p>&ldquo;Q1/Q2 &lsquo;Mean Reversion&rsquo; strategy turning sloppy due to grinding move lower in rates, as &lsquo;Value&rsquo; and &lsquo;Size&rsquo; continue to fade against ongoing &lsquo;Growth&rsquo; and &lsquo;Anti-Beta&rsquo; U.S. equities leadership&mdash;<strong>nearing the inflection</strong>.&rdquo;</p>
<p>&nbsp;</p>
<p>and</p>
<p>&nbsp;</p>
<p>&ldquo;But everybody in the equities-universe it seems is aware of this dynamic, and<strong> fundamental folks are increasingly nervous about the potential for a reversal in mega &lsquo;pain trade&rsquo; style&mdash;because it seems the entire world is &lsquo;LONG TECH AGAINST SHORT ENERGY&rsquo;&hellip;people are ready to pounce on this trade.&rdquo;</strong></p>
<p>&nbsp;</p>
<p>--Me, Wednesday&rsquo;s &ldquo;RBC Big Picture&rdquo;</p>
</blockquote>
<p>When I wrote &ldquo;HOW WE GOT HERE / WHERE WE&rsquo;RE GOING&rdquo; Wednesday, I certainly didn&rsquo;t think that my key market / trading-takeaway&mdash;<strong><em>that being a pending and equities factor-rotation with significant portfolio positioning (and thus performance) impact</em></strong>&mdash;would commence within the following 24 hr period!&nbsp; Nevertheless, Thursday &lsquo;happened,&rsquo; and &lsquo;it was indeed quite the &lsquo;pounce.&rsquo;</p>
<p><span style="text-decoration: underline;"><strong>This was classic &ldquo;from worst to first&rdquo; PM-grabbing into a new &ldquo;FEAR OF MISSING OUT&rdquo; stage of the equities-rally.</strong></span>&nbsp; For example, this year&rsquo;s bottom three performing factor market neutral strategies which I track&mdash;&lsquo;Size,&rsquo; &lsquo;Value&rsquo; and &lsquo;Earnings Revision&rsquo;--were the day&rsquo;s three best-performing strats; and on the flipside, the YTD&rsquo;s top four performing factor market neutral strategies&mdash;&lsquo;Anti-Beta,&rsquo; &lsquo;Growth,&rsquo; &lsquo;Momentum&rsquo; and &lsquo;Quality&rsquo;&mdash;were the days four worst-performing strategies.</p>
<p><strong>&lsquo;WORST TO FIRST,&rsquo; AS WE SEE YTD FACTOR M/N LEADERSHIP ROTATE SHARPLY YESTERDAY:</strong></p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/06/01/20170602_RBC1.jpg"><img height="232" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/06/01/20170602_RBC1.jpg" width="600" /></a></p>
<p>This also was expressed in the form of <strong>many thematic and sub-sector dynamics reversing their YTD performance trends as well.&nbsp;</strong> For instance, five of the bottom six performing US equities themes or sub-sectors for Thursday&rsquo;s session which I monitor--&lsquo;Nasdaq 100,&rsquo; &lsquo;High Beta Tech,&rsquo; &lsquo;Cloud Computing,&rsquo; &lsquo;EM Levered Consumer Staples&rsquo; and &lsquo;Semis &amp; Semicaps&rsquo;&mdash;are amongst the best-performing segments YTD by far, up anywhere from 17.2% to 30.4% YTD.&nbsp; <strong>It would be reasonable to assume that these sectors were being utilized as a &lsquo;source of funds&rsquo; to move into those areas largely &lsquo;left behind&rsquo; in 2017.</strong></p>
<p>As such, we saw YTD laggards like &lsquo;SMID Cap Consumer Staples,&rsquo; &lsquo;Autos / Auto-related,&rsquo; &lsquo;Food &amp; Staples Retailing,&rsquo; &lsquo;High Short Interest,&rsquo; &lsquo;High Beta Industrials,&rsquo; &lsquo;Russell 2000 Small Cap,&rsquo; &lsquo;Low-End Consumer,&rsquo; &lsquo;Media,&rsquo; &lsquo;Domestic Consumer,&rsquo; &lsquo;Food,&rsquo; &lsquo;Airlines&rsquo;, &lsquo;Refiners &amp; Integrateds,&rsquo; &lsquo;Regional Banks,&rsquo; &lsquo;Oil Services&rsquo; and &lsquo;High-End Consumer&rsquo; as many of yesterday&rsquo;s top performing subsectors.&nbsp; Mind you, that laundry list of spaces shows YTD performance from +4.0% to -24.9%.</p>
<p><strong>SIGNALING THE &lsquo;FOMO&rsquo; STAGE OF THE EQUITIES RALLY--REACHING INTO THE &lsquo;STUFF THAT&rsquo;S BEEN LEFT BEHIND&rsquo; (VIA YTD LEADERS AS &lsquo;SOURCE-OF-FUNDS&rsquoWink AS WE KICK-OFF A FRESH PNL MONTH:</strong></p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/06/01/20170602_RBC2.jpg"><img alt="" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/06/01/20170602_RBC2_0.jpg" style="width: 600px; height: 398px;" /></a></p>
<p>Fact of the matter, this still wasn&rsquo;t a completely SEISMIC shift (from an absolute-move perspective) and was obviously just &lsquo;one day&rsquo;&mdash;after all, the S&amp;P Energy sector still muddled-along just +0.7% on the day (fourth-worst S&amp;P sector on the day).&nbsp; <strong>BUT to my point in recent notes and as a sector-specific example, there are a lot of folks increasingly worried about missing a move in &lsquo;energy&rsquo; too because it is a placeholder short / underweight, and will thus &lsquo;hurt&rsquo; performance on the way back &lsquo;up.&rsquo;&nbsp;</strong> As a random-sampling, by the first hour of Thursday&rsquo;s session, the market had already seen XOP put spreads SOLD, while ECA, OAS, HAL and WLL all saw signif upside calls trade.&nbsp; <u><strong>Again, classic FOMO.</strong></u></p>
<p><em><strong>The larger story from a client-perspective was hyper-crowded &lsquo;Technology&rsquo; as the S&amp;P&rsquo;s worst-performing sector </strong></em>as it inherently meant both hedge- and mutual- fund performance lagged index due to the sector&rsquo;s enormous overweight.&nbsp; <strong>Tech underperforming on the day wasn&rsquo;t &lsquo;outright pain&rsquo; per se as it was still &lsquo;up&rsquo;&hellip;but obviously the buy-side is watching this very closely on the &lsquo;follow-through&rsquo; because as noted earlier, it&rsquo;s the natural &lsquo;source of funds&rsquo; for ongoing rotation into laggard factors / sectors / themes.&nbsp;</strong> My guess though is that there is still too much &lsquo;momentum&rsquo; here to see these winners outright &lsquo;pitched&rsquo; aside yet&hellip;and &lsquo;tech&rsquo; too will benefit from other sectors contributing to doing some of the heavy-lifting for the broad index on account of the sectors weighting.</p>
<p>The key question then: was this then a true rotation?&nbsp; Judging by the tape&rsquo;s overall &lsquo;burst&rsquo; higher (and follow-through globally overnight in both DM and EM), this clearly wasn&rsquo;t any sort of &lsquo;grossing down&rsquo; behavior (selling longs and covering shorts).&nbsp; <span style="color:#ff0000;"><em><strong>So to me, this WAS opportunistic re-deployment of capital through &lsquo;high flyer&rsquo; sources-of-funds into the beaten-down stuff that has clearly struggled in 2017.&nbsp; This is classic PM &lsquo;reach&rsquo; behavior, looking for anything that hasn&rsquo;t really participated in the CURRENT rally but is now set to participate in this potential NEXT leg.</strong></em></span></p>
<p><u><strong>I also continue to believe though that the key to SUSTAINING the move higher in YTD laggards (for example &lsquo;cyclicals&rsquo; / &lsquo;value&rsquo; / &lsquo;small cap&rsquoWink ultimately still requires a move higher in nominal rates / steeper curves.</strong></u>&nbsp; Obviously yesterday I made a case for a re-test or even break of the low-end of the &lsquo;macro range trade&rsquo; coming first PRIOR to any potential bounce higher in rates.&nbsp; Equities do indeed have a knack of getting &lsquo;ahead of&rsquo; the trade though, <strong><em>and that&rsquo;s exactly what yesterday was: a fresh month of PNL and opportunistic PM behavior looking to juice returns by scooping losers</em></strong>.&nbsp; We saw this Wednesday too after I sent my note: our high touch equities desk flows showed energy as the 2nd most active sector overall and at 68% better to BUY, while tech flows were 70% for sale and almost entirely hedge fund driven.</p>
<p>I will continue to watch relative factor market-neutral strategy performance as an indicator of this ongoing &lsquo;turn&rsquo;&mdash;especially &lsquo;value vs growth&rsquo; and &lsquo;quality vs size.&rsquo;</p>
<p><strong>FWIW, yesterday&rsquo;s decline in &lsquo;quality m/n vs size m/n&rsquo; ratio was a two standard-deviation move, and the third largest since 1Q16&rsquo;s mega market-neutral unwind.</strong></p>


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