"The Capitulation Begins": Everyone Is Bearish But No One Is Short

In the past two months we have written extensively on how most market participants got caught offside by the dramatic reversion in risk assets, and which after several attempts at bottom-fishing - attempts which have failed because as Morgan Stanley first noted two months ago the Buy The Dip trade no longer works.

Increasingly more traders have thrown in the towel, resulting in YTD returns which are truly "historic" with not one single asset generating positive returns for the first time since the Nixon presidency.

Well, that's not exactly right: one asset is outperforming - the one which usually does best just as the economy slides into a recession or worse: cash. As Bank of America notes,the YTD score for the top global assets is the following:

  • equities -4.2%,
  • bonds -2.3%,
  • commodities -6.2%,
  • cash 1.7%,
  • US$ 4.9%.

Drilling down reveals an even uglier picture: the 2018 bear market has spared nobody with US Treasuries down -4.9%, the fifth largest loss since 1970, US IG bonds -3.3%, their fourth largest loss since 1970, meanwhile 1881 of 2767 global stocks are in a bear market, down more than 20%, 86 of 94 equity indices underwater, and the cherry on top - the FAANG bull market "leader" is down -26% from highs, which according to BofA's Michael Hartnett is "a big nasty bear market."

The result, per Bank of America, is that "capitulation to lower credit & equity allocations begins but from high allocations to risk assets."

That's the good news: the bad news is that even as investors are bailing out of risk assets, they are also dumping safe havens like treasuries, and in the last week we saw broad based risk-off flows, including a $5.2 billion outflow from equities, and an $8.1B billion outflow from bonds this week. Looking at the latest EPFR fund flow data, Hartnett observes 3 flows trends:

  • value to growth...inflows to tech (largest in 11 weeks) & healthcare, big outflows from financials;
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