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Is This The Market Bottom? JPMorgan Explains

Is This The Market Bottom? JPMorgan Explains

Two days ago we shared the latest thoughts from Morgan Stanley’s QDS (quant and derivative desk)…

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Is This The Market Bottom? JPMorgan Explains

Two days ago we shared the latest thoughts from Morgan Stanley's QDS (quant and derivative desk) discussing what the "market bottom" may look like. Today we turn our attention to a similar line of inquiry, only this time from JPMorgan's flow desk, courtesy of Andrew Tyler (full note available to professional subs).

"When is when?" for the market bottom?

From a flows perspective Nikos Panagirtzoglou feels that a protracted outflow is unlikely and from a positioning perspective John Schlegel and team highlight both the “bear case” from the “bounce case”.

The SPX closed at 15.8x consensus 2023 ($249) estimates and trades at 17.3x CY estimates ($228); the SPX’s lifetime average P/E is 16.9x (BBG). Stocks are not necessarily cheap and it may be the case that investors require a larger discount before jumping in.

From a macro perspective, the China COVID lockdown situation will be adjudicated in a matter of weeks (or months) but one has to wonder about the RU/UKR situation now that we are seeing additional supply disruptions of commodity exports (natgas in this case), Russia beginning to punch back on sanctions (levelling their own), and with Sweden/Finland aiming to join NATO what is Putin’s reaction function?

Mapping back to the US, the more time spent at elevated inflation will increase the fear that the Fed eventually has to step-up its tightening efforts, which typically ends in a recession. The counterargument to this last point is, how much farther beyond neutral would the Fed have to go to counteract the elevated consumer cash pile?

Further, recessions typically are initiated by a credit crunch that leads to higher unemployment. Given the state of corporate balance sheets, how quickly could these conditions change to force some distress?

Next, looking at the latest equity fund flow data, JPM is skeptical of the idea that April’s equity fund outflow, the highest outflow since March 2020, is only the beginning of a likely more protracted phase of outflows in reversal to 2021’s record inflows.

By taking into account both flows and performance, the bank calculates that equity funds globally lost $6.1tr of AUM YTD, effectively  reversing 60% of last year’s increase. At the same time, bond funds lost $2.1tr of AUM YTD, reversing 80% of last year’s increase.

In addition, the younger cohorts of US retail investors, which have been investing in the equity market via individual stocks rather than equity funds, have been de-risking since at least last October and their de-risking appears to be well advanced.

Shifting away from fundamentals, in its search for a bottom, JPMorgan next look at where else could positioning still fall and how
extreme is positioning now?

As we try to assess when we might see a bottom, where are there places where positioning could still fall:

1. Aggregate positioning levels...more room to fall to get to prior extremes? The average 1-yr z-score is near a -2z level (i.e. quite low) for the 6 positioning level metrics in our Tactical Positioning Monitor (TPM). However, when using the full historical data available for each time series, the low was -1.4z in Feb 2016, -1.8z in Dec 2018, and -1.6z in Mar 2020. This compares to the latest reading as of Mon at only -0.8z, i.e. there’s still room for this to fall.

2. Retail flows...could we see larger capitulation? When we look at the single-stock flow, the shift towards less buying / more selling over the past 6 months is quite notable. That said, the magnitude of buying in 2020 (post March) through late 2021 was quite large (i.e. selling could take some time to reverse this) and the recent selling has not quite hit the same levels we saw at the end of 2018 or March 2020.

3. ETF flows...does the euphoric rise in 2021 have to fall back to earth? Looking at the rolling 12M inflows to US ETFs, the outsized inflows in 2021 are fairly apparent. Given the lows we saw in late 2011, late 2015, and late 2018, all of which coincided with market lows, could this be something that continues to deflate and generally creates headwinds for the market until it’s done falling?

As JPM concedes, these are all fairly “bear case” scenarios and not ones that have to play out per se, but given the way the market has been behaving recently, the bank "cannot rule out something like this playing out over time."

On the other hand, and from a more tactical (i.e. very near term) standpoint, the bank writes that there are multiple metrics that suggest we could be closer to a bounce than before, including:

  1. The magnitude of the drawdown in net and gross exposures (-33% for net and - 30% for gross) in N. America among L/S funds is now similar to the early 2016 and March 2020 declines
  2. Retail flows in single-stocks have been very negative over the past 3 days, which has generally coincided with short-term lows over the past 6 months.
  3. The drawdown in “risky” factors (e.g. high vol, small cap, low profitability) is one of the most extreme of the past 20+ years and the S&P has rallied over the following 1-3 months post hitting similar extremes
  4. Buying of Defensives and selling of Cyclicals is also one of the most extreme with Staples vs. Discretionary in particular looking stretched

Next, turning attention to retail traders, who as we explained previously have emerged as the marginal price setters in a market where hedge funds have massively degrossed/delevered, JPM writes that "retail traders net bought $1.1B in the equity market this past week, 1.5 standard deviations below the 1Y average of $3.3B." But more notably they turned outright sellers this week and sold a combined $1.9B in the last two days, which represented the largest two-day outflow in 14 months.

Indeed, as we discussed on Tuesday, the retail buying impulse showed signs of slowing before this latest burst of selling. After adjusting for inverse ETFs, not only is the May MTD net flow negative for the first time since Mar-2020, but also the monthly inflow in April was smallest since Sep-2020.

According to JPM, "the recent market performance undoubtedly played an important role in retail traders’ bearish turn." Looking ahead, the bank estimates that retail traders collectively made approximately 6% return since Jan-2020, significantly underperforming the 24% return of the S&P 500...

... although they appear to be outperforming the much more "sophisticated" risk parity funds who are red since Jan 2020.

Much of the gains made during the pandemic were given back in the last six months. Their activities have also declined, and currently account for approximately 12% of the market volume, down from around 20% at the peak in Jan 2021.

In the options market, retail traders bought $1.6B of delta. SPY/SPX accounted for ~$900MM of the imbalance, and QQQ ~$400MM. TSLA contributed to another $400MM in delta, mostly in the form of put selling. Gamma continued to be in demand (+$1.1B  imbalance). UVXY remained one of the retail favorites, and represented a net buying of ~9MM Vega in VIX futures.

Non-retail market order net sold -$11B this past week. Rotation was observed in favor of the Energy sector (1Y Z-score +2.5) over Technology (-1.9z). Similarly, in the factor space, Value was bought (+1.5z) vs. Quality sold (-2.5z).

* * *

Finally, going back to a point we made earlier this week, that the bottom this time won't be a capitulatory puke, but more likely consistent selling which fades as it burns out, to wit:

... signs of a market bottom are unlikely to resemble traditional "capitulation" that’s played out in the last few years. Why? Because traditional capitulation is typically marked by a quick de-grossing by hedge funds + systematic macro strategies, where positioning is already light. Instead, the next leg of de-risking is likely to be more gradual, coming from asset allocators/real money/retail and is therefore likely slower to play out, making a precise bottom more difficult to call.

... we first note that as of this morning, the max drawdown in the Nasdaq from its all time high to today has surpassed 30% and is now more than the March 2020 pandemic crash...

... and according to SpotGamma, "it seems clear there is major delevering/degrossing (aka “natural sellers”) and that may be what is bringing the large, persistent selling. Put holders aren’t materially closing positions, and they aren’t doing much buying either."

As SpotGamma further writes, this is still a tale of “many markets” wherein stock correlations have not moved to one, and as a result, there hasn’t been any index capitulation (yet) with certain stocks fairing relatively well. Take AAPL for example which is “top quality”, and you can see that IV’s are elevated but not “jumping” increasing despite lower-lows.

Still, with this last SPX move lower, SpotGamma's Delta Tilt reading now matches that of previous major lows, suggesting again that we are at “peak puts”, and (barring a massive rally) there is little to change this signal before 5/20 wherein we’ll lose about 25% of total S&P500 gamma.

Looking ahead, SpotGamma predicts that there is no reason here for volatility sellers to step in, or for puts to be covered, until the May 20 op-ex. That expiration will force some put covering, and the question is will the positive deltas flowing from OPEX be enough to overwhelm whatever “natural sellers” remain.

For more, please read the full JPM note available to professional subs in the usual place.

Tyler Durden Fri, 05/13/2022 - 17:11

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Lab, crab and robotic rehab

I was in Berkeley a couple of months back, helping TechCrunch get its proverbial ducks in a row before our first big climate event (coming in a few weeks,…

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I got previews of a number of projects I hope to share with you in the newsletter soon, but one that really caught my eye was FogROS, which was just announced as part of the latest ROS (robot operating system) rollout. Beyond a punny name that is simultaneously a reference to the cloud element (fog/cloud — not to mention the fact that the new department has killer views of San Francisco and frequent visitor, Karl) and problematic French cuisine, there’s some really compelling potential here.

I’ve been thinking about the potential impact of cloud-based processing quite a bit the last several years, independent of my writing about robots. Specifically, a number of companies (Microsoft, Amazon, Google) have been betting big on cloud gaming. What do you do when you’ve seemingly pushed a piece of hardware to its limit? If you’ve got low enough latency, you can harness remote servers to do the heavy lifting. It’s something that’s been tried for at least a decade, to varying effect.

Image Credits: ROS

Latency is, of course, a major factor in gaming, where being off by a millisecond can dramatically impact the experience. I’m not fully convinced that experience is where it ought to be quite yet, but it does seem the tech has graduated to a point where off-board processing makes practical sense for robotics. You can currently play a console game on a smartphone with one of those services, so surely we can produce smaller, lighter-weight and lower-cost robots that rely on a remote server to complete resource-intensive tasks like SLAM processing.

The initial application will focus on AWS, with plans to reach additional services like Google Cloud and Microsoft Azure. Watch this space. There are many reasons to be excited. Honestly, there’s a lot to be excited about in robotics generally right now. This was one of the more fun weeks in recent memory.

V Bionic's exoskeleton glove shown without its covering.

Image Credits: V Bionic

Let’s start with the ExoHeal robotic rehabilitation gloves. The device, created by Saudi Arabian V Bionic, nabbed this year’s Microsoft Imagine Cup. The early-stage team is part of a proud tradition of healthcare exoskeletons. In this case, it’s an attempt to rehab the hand following muscle and tendon injuries. Team leader Zain Samdani told TechCrunch:

Flexor linkage-driven movement gives us the flexibility to individually actuate different parts of each finger (phalanges) whilst keeping the device portable. We’re currently developing our production-ready prototype that utilizes a modular design to fit the hand sizes of different patients.

Image Credits: Walmart

This is the third week in a row Walmart gets a mention here. First it was funding for GreyOrange, which it partnered with in Canada. Last week we noted a big expansion of the retail giant’s deal with warehouse automation firm, Symbotic. Now it’s another big expansion of an existing deal — this time dealing with the company’s delivery ambitions.

Like Walmart’s work with robotics, drone delivery success has been…spotty, at best. Still, it’s apparently ready to put its money where its mouth is on this one, with a deal that brings DroneUp delivery to 34 sites across six U.S. states. Quoting myself here:

The retailer announced an investment in the 6-year-old startup late last year, following trial deliveries of COVID-19 testing kits. Early trials were conducted in Bentonville, Arkansas. This year, Arizona, Florida, Texas and DroneUp’s native Virginia are being added to the list. Once online, customers will be able to choose from tens of thousands of products, from Tylenol to hot dog buns, between the hours of 8 a.m. and 8 p.m.

Freigegeben für die Berichterstattung über das Unternehemn Wingcopter bis zum 25.01.2026. Mit Bitte um Urhebervermerk v.l.: Jonathan Hesselbarth, Tom Plümmer und Ansgar Kadura von Wingcopter GmbH. Image Credits: © Jonas Wresch / KfW

There are still more question marks around this stuff than anything, and I’ve long contended that drone delivery makes the most sense in remote and otherwise hard to reach areas. That’s why something like this Wingcopter deal is interesting. Over the next five years, the company plans to bring 12,000 of its fixed-wing UAVs to 49 countries across Sub-Saharan Africa. It will cover spots that have traditionally struggled with infrastructural issues that have made it difficult to deliver food and medical supplies through more traditional means.

“With the looming food crisis on the African continent triggered by the war in Ukraine, we see great potential and strong social impact that drone-delivery networks can bring to people in all the countries in Sub-Saharan Africa by getting food to where it is needed most,” CEO Tom Plümmer told TechCrunch. “Especially in remote areas with weak infrastructure and those areas that are additionally affected by droughts and other plagues, Wingcopter’s delivery drones will build an air bridge and provide food from the sky on a winch to exactly where it is needed.”

Legitimately exciting stuff, that.

Image Credits: Dyson

In more cautiously optimistic news, Dyson dropped some interesting news this week, announcing that it has been (and will continue) pumping a lot of money into robotic research. Part of the rollout includes refitting an aircraft hangar at Hullavington Airfield, a former RAF station in Chippenham, Wiltshire, England that the company purchased back in 2016.

Some numbers from the company:

Dyson is halfway through the largest engineering recruitment drive in its history. Two thousand people have joined the tech company this year, of which 50% are engineers, scientists, and coders. Dyson is supercharging its robotics ambitions, recruiting 250 robotics engineers across disciplines including computer vision, machine learning, sensors and mechatronics, and expects to hire 700 more in the robotics field over the next five years. The master plan: to create the UK’s largest, most advanced, robotics center at Hullavington Airfield and to bring the technology into our homes by the end of the decade.

The primary project highlighted is a robot arm with a number of attachments, including a vacuum and a human-like robot hand, which are designed to perform various household tasks. Dyson has some experience building robots, primarily through its vacuums, which rely on things like computer vision to autonomously navigate. Still, I say “cautiously optimistic,” because I’ve seen plenty of non-robotics companies showcase the technology as more of a vanity project. But I’m more than happy to have Dyson change my mind.

Image Credits: Hyundai

Hyundai, of course, has been quite aggressive in its own robotics dreams, including its 2020 acquisition of Boston Dynamics. The carmaker this week announced that part of its massive new $10 billion investment plans will include robotics, with a focus of actually bringing some of its far-out concepts to market.

Another week, another big round for logistics/fulfillment robotics, as Polish firm Nomagic raised $22 million to expand its offerings. The company’s primary offering is a pick and place arm that can move and sort small goods. Khosla Ventures and Almaz Capital led the round, which also featured European Investment Bank, Hoxton Ventures, Capnamic Ventures, DN Capital and Manta Ray.

Amazon Astro with periscope camera

The periscope camera pops out and extends telescopically, enabling Astro to look over obstacles and on counter tops. A very elegant design choice. Image Credits: Haje Kamps for TechCrunch

We finally got around to reviewing Amazon’s limited-edition home robot, Astro, and Haje’s feelings were…mixed:

It’s been fun to have Astro wandering about my apartment for a few days, and most of the time I seemed to use it as a roving boom box that also has Alexa capabilities. That’s cute, and all, but $1,000 would buy Alexa devices for every thinkable surface in my room and leave me with enough cash left over to cover the house in cameras. I simply continue to struggle with why Astro makes sense. But then, that’s true for any product that is trying to carve out a brand new product category.

A tiny robot crab scuttles across the frame. Image Credits: Northwestern University

And finally, a tiny robot crab from Northwestern University. The little guy can be controlled remotely using lasers and is small enough to sit on the side of a penny. “Our technology enables a variety of controlled motion modalities and can walk with an average speed of half its body length per second,” says lead researcher, Yonggang Huang. “This is very challenging to achieve at such small scales for terrestrial robots.”

Image Credits: Bryce Durbin/TechCrunch

Scuttle, don’t walk to subscribe to Actuator.

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Asymptomatic SARS-CoV-2 infections responsible for spreading of COVID-19 less than symptomatic infections

Based on studies published through July 2021, most SARS-CoV-2 infections were not persistently asymptomatic, and asymptomatic infections were less infectious…

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Based on studies published through July 2021, most SARS-CoV-2 infections were not persistently asymptomatic, and asymptomatic infections were less infectious than symptomatic infections. These are the conclusions of an update of a systematic review and meta-analysis publishing May 26th in the open access journal PLOS Medicine by Diana Buitrago-Garcia of the University of Bern, Switzerland, and colleagues.

Credit: Monstera, Pexels (CC0, https://creativecommons.org/publicdomain/zero/1.0/)

Based on studies published through July 2021, most SARS-CoV-2 infections were not persistently asymptomatic, and asymptomatic infections were less infectious than symptomatic infections. These are the conclusions of an update of a systematic review and meta-analysis publishing May 26th in the open access journal PLOS Medicine by Diana Buitrago-Garcia of the University of Bern, Switzerland, and colleagues.

Debate about the level and risks of asymptomatic SARS-CoV-2 infections continues, with much ongoing research. Studies that assess people at just one time point can overestimate the proportion of true asymptomatic infections because those who go on to later develop symptoms are incorrectly classified as asymptomatic rather than presymptomatic. However, other studies can underestimate asymptomatic infections with research designs that are more likely to include symptomatic participants.

The new paper was an update of a living (as in, regularly updated) systematic review first published in April 2020, which includes additional, more recent studies through July 2021. 130 studies were included, with data on 28,426 people with SARS-CoV-2 across 42 countries, including 11,923 people defined as having asymptomatic infection. Because of extreme variability between included studies, the meta-analysis did not calculate a single estimate for asymptomatic infection rate, but it did estimate the inter-quartile range to be that 14–50% of infections were asymptomatic. Additionally, the researchers found that the secondary attack rate—a measure of the risk of transmission of SARS-CoV-2 — was about two-thirds lower from people without symptoms than from those with symptoms (risk ratio 0.32, 95%CI 0.16–0.64).

“If both the proportion and transmissibility of asymptomatic infection are relatively low, people with asymptomatic SARS-CoV-2 infection should account for a smaller proportion of overall transmission than presymptomatic individuals,” the authors say, while also pointing out that “when SARS-CoV-2 community transmission levels are high, physical distancing measures and mask-wearing need to be sustained to prevent transmission from close contact with people with asymptomatic and presymptomatic infection.”

Coauthor Nicola Low adds, “The true proportion of asymptomatic SARS-CoV-2 infection is still not known, and it would be misleading to rely on a single number because the 130 studies that we reviewed were so different. People with truly asymptomatic infection are, however, less infectious than those with symptomatic infection.”

#####

In your coverage, please use this URL to provide access to the freely available paper in PLOS Medicine:

http://journals.plos.org/plosmedicine/article?id=10.1371/journal.pmed.1003987  

Citation: Buitrago-Garcia D, Ipekci AM, Heron L, Imeri H, Araujo-Chaveron L, Arevalo-Rodriguez I, et al. (2022) Occurrence and transmission potential of asymptomatic and presymptomatic SARS-CoV-2 infections: Update of a living systematic review and meta-analysis. PLoS Med 19(5): e1003987. https://doi.org/10.1371/journal.pmed.1003987

Author Countries: Switzerland, France, Spain, Argentina, United Kingdom, Sweden, United States, Colombia

Funding: This study was funded by the Swiss National Science Foundation http://www.snf.ch/en (NL: 320030_176233); the European Union Horizon 2020 research and innovation programme https://ec.europa.eu/programmes/horizon2020/en (NL: 101003688); the Swiss government excellence scholarship https://www.sbfi.admin.ch/sbfi/en/home/education/scholarships-and-grants/swiss-government-excellence-scholarships.html (DBG: 2019.0774) and the Swiss School of Public Health Global P3HS stipend https://ssphplus.ch/en/ (DBG). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.


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Harsher COVID-19 restrictions associated with faster “pandemic fatigue”

Between November 2020 and May 2021, adherence to COVID-19 pandemic restrictions decreased in Italy, with the fastest decreases taking place during times…

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Between November 2020 and May 2021, adherence to COVID-19 pandemic restrictions decreased in Italy, with the fastest decreases taking place during times of the most stringent restrictions, according to a new study publishing May 26th in the open-access journal PLOS Digital Health by Laetitia Gauvin of ISI Foundation, Italy, and colleagues.

Credit: Ben Garratt, Unsplash (CC0, https://creativecommons.org/publicdomain/zero/1.0/)

Between November 2020 and May 2021, adherence to COVID-19 pandemic restrictions decreased in Italy, with the fastest decreases taking place during times of the most stringent restrictions, according to a new study publishing May 26th in the open-access journal PLOS Digital Health by Laetitia Gauvin of ISI Foundation, Italy, and colleagues.

Pandemic fatigue, the decreased motivation to adhere to social distancing measures and adopt health-protective behaviors, represents a significant concern for policymakers and health officials. In the time period spanning November 2020 to May 2021 in Italy, tiered restrictions were adopted to mitigate the spread of COVID-19, with regions declared red, orange, yellow or white depending on their health data. Restrictions ranged from a nighttime curfew in the yellow tier to general stay-at-home mandates in the red tier.

In the new study, the researchers used large-scale mobility data from Facebook and Google captured in all 20 Italian provinces in 2020 and 2021 to analyze the timing of pandemic fatigue. Facebook reports the change in a user’s number of movements over time, while Google data estimates the change in time spent at home.

People’s relative change in movements increased an average of 0.08% per day and their time spent outside the home increased by an average 0.04% per day, leading to a more than 15% increase in relative mobility over the entire seven-month study period. During times of red tier restrictions, individual mobility increased an additional 0.16% per day and time spent outside the home increased an additional 0.04% when compared to the average. This means that during every 2-week period spent in the red tier, there would be an additional average 3% increase in relative mobility.

The authors conclude that changes to pandemic restrictions are faster during periods characterized by the strictest levels of restrictions. However, they acknowledge that the data used are subject to bias since they include only Facebook and Google users who opted-in to location sharing. In addition, untangling the combined effects of vaccination and new pandemic variants on adherence to pandemic restrictions was not within the scope of the study and requires more work.  It is also important to note that the study did not investigate on the effectiveness of each tiered restriction against the spread of SARS-CoV-2.

Gauvin adds, “By analyzing mobile phone-derived mobility data in Italy, we investigated how adherence to COVID-19 restrictions changed over time, under different levels of increasing stringency. Our results show that adherence can be difficult to sustain over time and more so when the most stringent measures are enforced. Given that milder tiers have been proven to be effective in mitigating the spread of COVID-19, our study suggests policymakers should carefully consider the interplay between the efficacy of restrictions and their sustainability over time.”

############

In your coverage, please use this URL to provide access to the freely available article in PLOS Digital Health: https://journals.plos.org/digitalhealth/article?id=10.1371/journal.pdig.0000035

Citation: Delussu F, Tizzoni M, Gauvin L (2022) Evidence of pandemic fatigue associated with stricter tiered COVID-19 restrictions. PLOS Digit Health 1(5): e0000035. https://doi.org/10.1371/journal.pdig.0000035

Author Countries: Italy

Funding: The study was partially supported by the Lagrange Project of the ISI Foundation funded by the CRT Foundation. The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.


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