From ZeroHedge:
Yesterday's bloodbath in markets - after such exuberance on Monday - is set to continue if historical precedents are anything to go by. Nomura's cross-asset-strategy chief Charlie McElligott notes that yesterday’s equities pain via a brutal factor-unwind resembles one of the most violent performance drawdowns in recent history - that of Jan / Feb 2016 - and seemingly "idiosyncratic risk" is now turning more "systemic" in crowded Tech "data" plays as "death-by-paper-cut" now becoming a longer-term regulatory overhang of their core "data commodity."
Worrying words indeed. McElligott first breaks down just what happened yesterday - and where the real "cataclysmic" pain was felt - before moving on to 'what happens next'?
SUMMARY
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The -4.1 z-score move in “Cash / Assets” factor - the best
performing factor strategy of the past 2 years - speaks to likely forced
capitulation / book blowouts, similar to what we experienced back in
Feb 2016 as “equities market-neutral” performance was crushed in a
violently-short period of time
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“Cash / Assets” is important because it is a pure proxy of the “Growth over Value” theme which has been the dominant reality of the post-GFC period and has accelerated in the past two years to look a lot like “Momentum” factor
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The analogs of similarly extreme prior drawdowns in “Cash / Assets”
(again effectively a “Growth over Value” AND expression in its
current-form) give us both “good” and “bad” forward-looking news
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The “good” - said prior “extreme drawdowns” with this
particular “Growth over Value” proxy ( “Cash / Assets” factor) have seen
mean-reversion HIGHER at the SPX level on average from a 1w to 3m basis
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The “bad” - “Cash / Assets” factor typically continues to
underperform primarily due to the outperformance of the “short” leg from
here (“defensives”)
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The “good” - said prior “extreme drawdowns” with this
particular “Growth over Value” proxy ( “Cash / Assets” factor) have seen
mean-reversion HIGHER at the SPX level on average from a 1w to 3m basis
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This then is an equities performance risk because “Cash /
Assets” is effectively “Momentum” long-short and thus, mirrors general
Equities Hedge Fund Long-Short positioning
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Further squeeze in the “short leg” of “Cash Assets” too squeezes
the “short leg” of “Momentum” via the broad equities fund underweight /
short in the “duration-sensitives” like REITs and Utilities
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This in turn only puts MORE pressure on the March CPI print to “come
through” and hit the expected uptick off the back of the “Telco
Service” roll-off mathematical boost, likely putting rates / USTs back
under pressure
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Otherwise, further rates rally / short-squeeze will only
perpetuate the pain being felt across equities underweights /
short-books
