Savvy Managed Money Back to Stocks in 2 Weeks


Recap: all 11 S&P 500 sectors finished in negative territory, with the financials (-1.4%), materials (-1.2%), and consumer staples (-1.2%) sectors losing over 1.0%. 

Stock investors who have been whipsawed for most of August can look forward to a reprieve in the next 2 weeks, a JPMorgan Chase & Co. (NYSE:JPM) quant analyst said Tuesday.

After US Treasuries rose and the S&P 500 Index fell for 3 weeks running, the divergence left fixed portfolios 2% underweight stocks, according to Marko Kolanovic, the bank’s head of macro quantitative and derivatives research.

“They are likely to rotate back into equities to re-balance before the month is over, and that shift could push stocks 1.5% to 2% higher“, he said.

In a week when the Key part of the yield curve inverted and recession fear sparked an equity rout, systematic strategies posted $75-B of program selling, more than 50% of which came from index option delta and gamma hedging, JPMorgan’s analysis found.

The sell off pushed hedge funds’ equity exposure to near record lows and that of trend-following and volatility-targeting funds to the 27th percentile relative to history. Such low positioning is a positive signal for stock performance, according to Mr. Kolanovic.

We expect some stabilization in market volatility as dealers’ gamma positioning is now close to neutral (from a sizable Short position last week), and this may reduce volatility and marginally improve liquidity,” Mr. Kolanovic said in a note to clients Tuesday.

“Equity flows will to a large extent be driven by developments around trade, and hence the market will likely continue to be dominated by market disruptive tweets and announcements related to the trade war.

While economic and macro concerns were partly responsible for the recent market elling, they took a backseat to technicals.

More than 50% of last week’s price action that 1st sent the S&P 500 due South then triggered a reverse and impressive rebound was convexity hedging of mortgages and variable annuities, according to Mr. Kolanovic.

He echoed research of his colleagues, who last week said that convexity hedging has totaled roughly $90-M per basis-point move in bond yields since the end of last month.

Mortgages have negative convexity, and for large investors that hold them, a drop in interest rates means the duration of these portfolios goes down. This leaves the holders scrambling to compensate by adding duration to their holdings. Complex, Yes?

Tuesday, the major US stock market indexes finished at: DJIA 25962.42-173.35(-0.66%) NAS Comp 7948.58-54.25(-0.68%) S&P 500 2900.51-23.14(-0.79%)

Volume: Trade on the NYSE came in at 703.0-M/shares changing hands.

  • NAS Comp +19.8% YTD
  • S&P 500 +15.7% YTD
  • DJIA +11.3% YTD
  • Russell 2000 +11.1% YTD

HeffX-LTN’s overall technical outlook for the major US stock market indexes is Neutral in here.

Stay tuned…