Cutting to the chase, the market is now up 30% from its March 24 lows with the Nasdaq back in the green for 2020, and yet as Goldman pointed out earlier, there is now more confusion over what the market does next than in mid-March. And since money talks and bullshit writes long-winded research reports “explaining” what may or may not happen, here is a brief rundown of what every major investor class has been doing for the past few weeks so it hopefully becomes a little more clear why stocks continue to surge.
AS DB’s Parag Thatte shows in his latest Investor positioning and flows chartpack, after an unprecedented puke in March, systematic (i.e., quant, algos, vol-targeting, and generally “machines”) strategies has been behind the modest tick higher in positioning – which is still near record lows – even as discretionary (i.e., human, hedge fund traders) positioning has turned again and is back near recent lows.
Within systematics, vol control investors have continued to rise mostly thanks to the fast drop in the VIX, which closed below 28 on Friday:
CTA positioning, while off the lows, are still short and as Nomura’s Charlie McElligott wrote on Friday, a ways away from either buy or sell thresholds.
Risk-parity funds, after the record plunge in March, have done basically nothing for the past 2 months and their equity-beta remains near all time lows.
Meanwhile, not only are institutional investors not buying, their positioning had turned even more bearish into the April/May rally, causing much pain and even more relative losses.
Predictably, and similar to Warren Buffett, hedge funds remain out of the picture, their beta to markets barely budging in recent weeks and just shy off all time lows.
In short, nobody at the institutional level is buying, yet stocks continue to soar. Why?
Well, for one, volumes have plunged making it much easier to push stocks around with odd lots..
… and as liquidity remains near all time lows, facilitating outsized market flows amid the collapse in volumes on even modest buying interest…
… it is quite easy for price-indiscriminate buybacks – like Apple’s latest $50BN stock repurchase – to ignite overall market direction: as shown below, the amount of buybacks announced in recent weeks was the biggest since last summer, led by the most important stock in the market: AAPL.
At the same time, all those funds who jumped on the short side, confident that this was finally it, have gotten crushed amid the biggest short squeeze in history (thanks, Fed)…
… with short interest plummeting back to all time lows after a modest increase in late March as shorts got steamrolled yet again.
To summarize: institutions selling, machines flat, hedge funds more bearish… but volumes and liquidity down, buybacks surging (something we touched upon more last week), shorts crushed and forced to cover and – drumroll – retail investors flooding the market and “making a killing” at least according to Robin Hood data which as Michael Krause notes, is a good proxy for what all retail US stock traders are doing.
So ironically, while the “smartest guys in the room” have failed to benefit from the recent rally, it is Joe Sixpack that has made some impressive profits amid repeated “dip buying”….
A view from the factor lens what Robinhood clients like. Top 30 stocks in increasing user counts based on what is most noteable: They like high volatility rank, *low* 2-6 month momentum (dip buying!), recent “lotto stocks”. pic.twitter.com/ZNO2qDEzzx
— Michael Krause (@michaelbkrause) May 10, 2020
… unless this is just more of the same distribution from institutions to retail we saw in late 2018 and again in late 2019, when retail investors were delirious with visions of fortunes and early retirement, only to see the market “trapdoor” from beneath them. This would mean that the next trapdoor will open just as soon as institutions have “distributed” enough to to retail investors and the next stop, according to Goldman, would be 2,400.
Finally, a familiar chart from 2019 and years prior: the S&P levitates higher even as investors pull money from stock funds, i.e., sell.
Impossible? Yes: the disconnect always eventually ends, with stocks catching down to flows. The only unknown is when.