Saturday, March 27, 2021

Peak Crack High: Asinine Levels Of Risk

One year past the March lows and this central bank sponsored crack high has generated record levels of rebalance risk that comes to a head this week:

"One of the decade’s most successful quant strategies is poised for a dramatic March makeover that threatens fresh volatility for a stock market already reeling from the turmoil in technology shares.

 Almost a year after the S&P 500 hit the Covid-spurred low, momentum investors are set to pare exposures to lockdown favorites -- mega-caps and stay-at-home companies -- to join the boom in cyclical equities"

First off, as I said in my prior post and as confirmed above - momentum IS the most successful strategy of the past decade. 

This momentum-based rebalancing means that Tech stocks which are already imploding will undergo the largest rebalance-driven outflow in history.

What could go wrong?

But that is only half the story, because due to the largest one year stock rally in history (to an all time high), this week will also feature the largest stock to bond rebalancing in a decade. 

But don't worry, because according to CNBS, this is good news for stonks. Because in the land of snowflakes bad news is not allowed.

"What happens to stocks is less clear. Normally, stocks would be under selling pressure as big investors rebalance by also reducing holdings because of the stock market’s positive performance. The S&P 500 is up 4.9% this quarter, and the same investors would be trimming holdings in equities as they add to bonds."

It's not unclear what will happen, because this past week for the first time in a year, we saw Tech stocks decline even as bonds rallied. Meanwhile, if bond yields do fall, as this article seems to suggest, which sector will take the hit?

Cyclicals, which are also record overbought:

In summary, in the coming week, imploding Tech stonks will be sold to buy record overbought cyclicals, and cyclicals will get sold to buy Treasury bonds. 

Does that mean that bonds will rally? Not necessarily. If we go RISK OFF, then the global margin call will take down stocks and bonds at the same time. It's called "de-grossing" and it means that when funds that own both stocks and bonds get hit with redemptions, they are forced to sell both. So, while bonds will likely outperform stonks on a relative basis, they may still implode on an absolute basis as they did last March.

Then however, the Fed will panic and bid bonds back up. 

Below is a chart of what happened to bonds last year, for reference:

At first bonds rallied when stocks crashed, but then bonds imploded as well. When the Fed announced QE infinity, the bond market cratered, and stocks were limit down.

It took a few days for the Fed to get bonds bid back up. This time it could take even longer, but I believe they will be successful.

Unfortunately, by the time the Fed gets the bond market under control, it will be far too late for stonks, because the algos and margin clerks will be many days if not weeks ahead of the FOMC.

It's been a fun party, but now the bill for record fraud, and record market manipulation is due.