To The Moon

Over the past few months, several articles referenced Bank of America's "Fund Managers Survey", which is a very revelatory document for fund managers' sentiments about markets. However, this doesn't necessarily translate into action: fund managers have a duty to inform their clients about their sentiments. However, this doesn't mean clients are obligated to change their instructions. For a sense of change in instructions, examining the likes of "Flow Reports" that are either issued by the banks' Macro Research Desk or their Prime Brokerage desks - which predominantly cater to the likes of hedge funds and wealthy investors - would be in order.

By the end of the month, JPMorgan indicated that bond portfolios have shown significant shrinkage over the years. At present, cash is king, instead of bonds.

It bears noting that the meaning of "cash" is different in the language of financial institutions. Holding an asset over the long term generally implies some tax advantage. A short-term holding, on the other hand, has greater tax implications. An intent to capitulate a position (basically "sell") is known as a "cash position". 

The overall positioning in bonds shouldn't be all too surprising. As Morgan Stanley indicates, bonds were increasingly unattractive to individual investors since the end of 2008 Financial Crisis. 

The primary players in government bond markets have largely been reduced to foreign central banks (who tend to stock up on US Dollars and Treasuries to build up their foreign currency reserves), mutual funds and insurance companies. As a result, bond traded volumes relative to outstanding US Treasuries (as indicated in the top half of the image above) has seen a significant decrease in the present day. 

As a result, JPMorgan indicated that market depth - a signal for how active bond markets are - for the highly-popular 2-Year and 10-Year Treasury Bonds (also referred to as "Cash Bonds") had almost completely evaporated in the present day.

Since bonds have basically no takers among individual investors (and indeed, many hedge funds) and even major institutional investors typically go no more than 15% in total holdings, the argument could be made that this has benefited stock trajectories. While this might have been true in the years following the Financial Crisis, this has not been true in the present day. 

Morgan Stanley indicated that total exposure by its clients to "single names", i.e. stocks themselves, are at Year to Date (YTD) lows as of the end of September. 

Incidentally, as of last week, the "classical" model of the 60/40 Portfolio of the S&P 500 ($SPDR S&P 500 ETF Trust(SPY)$) vs US Bonds was down 21% in 2022, which meant that the current year will be the 2nd worst year in history for this style of portfolio after 1931. 

Since the stocks' valuations are trending downwards, the dominant argument would be to go short stocks. As it turns out, Morgan Stanley indicated that their clients are showing an increasing preference for shorting the entire market via ETFs over "single names".

The bank also indicates that there has been a slight cumulative shift towards holding "Large Cap" stocks and "Quality" factor stocks.

This is a supplementary sign of the overall outlook by high-volume/high-value investors expecting a recession. The argument is that in times when public consumption decreases, only large companies or companies with robust fundamentals are likely to perform. 

The primary sign of an outlook expecting a recession is a shift towards holding defensive stocks, which was indicated as being most favoured in last month's article that discussed September's Fund Manager Survey. As it turns out, this is exactly what high-net worth clients did throughout September. 

This might bring about a question in most investors' minds: if the recent CPI numbers exceeded market consensus, what might be the reason for the rally going on since that has carried over into this week (so far)? There are two attributable reasons:

1. Given that this week is full of Q3 earnings releases, there will be some churn in volumes, usually bullish. There is a nearly even expectation that this optimism would peter out by the end of the month. 
2. If the "short profit-scalpers are switching from "single names" to "index products", so are investors in the "long". Since ETF issuers have to physically hold the underlying, there is some momentum being imparted as they buy up the stocks to create new ETF units, which is imparting a type of "false positive" in a bear market. Beware the "false positives"!

All in all, it might make sense to either stand by the sidelines or participate in short-term profit-taking via "leveraged inverse" Exchange-Traded Products (ETPs), which offer a magnified exposure on the daily movements of the underlying. Deploying ETPs limit losses to the initial amount invested and doen't require maintaining of a margin.

For the S&P 500, $LS -3X SHORT SPY ETP(SPYS.UK)$ offers a -3X exposure on the S&P 500 while $LS -3X SHORT QQQ ETP(QQ3S.UK)$ offers a -3X exposure on the downside of the "tech-heavy" Nasdaq-100 ($NASDAQ 100(NDX)$ which can be expected to have a comparably rough time in a short while.

For articles on broader economic events that are tangential to tactical market movements, visit asianomics.substack.com. The latest article provides a detailed landscape on exchange-traded products originally produced for publications in Asia as well as the full video of an hour-long webinar I conducted last month about the mechanics of ETPs and some examples of profitable strategies. The webinar was unique in that Asian investors were the majority of the attendees and participated in a rather lively Q&A, which is also in the video.