Midway through last month, as emerging markets crumbled amid the collapse of the Turkish lira, it became abundantly clear that the dollar needed to take a breather if U.S. equities were going to escape unscathed from the latest bout of EM weakness.

Since March, the effects of U.S. fiscal policy have largely shielded U.S. stocks from turmoil abroad. The tax cuts and late-cycle stimulus catalyzed a buyback bonanza, bolstered corporate bottom lines and supported the U.S. economy even as trade tensions weighed on the global growth outlook.

Meanwhile, the dollar’s ascent on the back of hawkish Fed policy and divergent growth outcomes weighed on vulnerable developing economies, driving EM FX volatility higher and pushing EM stocks into a bear market. By August, the divergence between U.S. equities and the rest of the world was unprecedented on multiple metrics.

Just when it looked like the global malaise might finally be set to boomerang back to Wall Street, Donald Trump took aim at the Fed, Beijing reinstated the counter-cyclical adjustment factor in the yuan fix and Jerome Powell delivered what was generally seen as a dovish speech in Jackson Hole (interpretations vary on that). The dollar took a breather, EM staged a fleeting recovery and with spillover risk thus mitigated, U.S. equities pushed to new highs.

At the same time, the buyside was forced to grab for exposure after underperforming thanks in part to the late July selloff in consensus longs (think: Facebook) and a short squeeze. That scramble to increase exposure conspired with a rally in Growth and Momentum to help close a yawning gap between hedge fund performance and the broader market, although it’s since widened back out as tech regulatory jitters came calling (again).

(Bloomberg)

Well, given what certainly looked like a “melt-up” in late August, some folks are asking JPMorgan how positioning compares with the epic “blowoff top” that unfolded in January just before the VIX spike.

“With US equities making new highs, one question we are often asked by our clients is how investor positions compare to last January”, the bank’s Nikolaos Panigirtzoglou writes, in a note dated September 14, before asking the following: “Are institutional investors as long US equities currently as they were last January?”

This discussion goes back to JPMorgan’s contention that part of what happened in early February was down to forced de-risking by systematic strats as the market careened lower on Friday, February 2 (following the above-consensus AHE print that accompanied the January jobs report), and then again on Monday, February 5, when the bottom fell out entirely after liquidity disappeared at roughly 3:15 PM ET.

By many accounts, CTAs and risk parity funds de-risked to the tune of $200-250 billion during that rather unfortunate episode.

As things stand currently, JPMorgan’s momentum indicator for S&P futs is at 1.1 standard deviations, below extremes seen in January. Panigirtzoglou notes that the main difference between then and now is that trend followers are likely short ex-U.S. equities, where momentum signals are bearish.

(JPMorgan)

Implicit there is the notion that trend followers are serving to exacerbate the performance disparity between U.S. stocks and their global counterparts. If that reverses, it wouldn’t be great for U.S. benchmarks. “Not only are US equities currently vulnerable to potential momentum reversal, but they are also more vulnerable relative to their non-US counterparts as CTAs are already short the latter”, Panigirtzoglou cautions.

He goes on to note that other systematic investors are now running exposures that are at or near levels seen in January. To wit, from the note:

By looking at other quantitative funds outside CTAs, we also find that investor positions look elevated currently. In fact, via our beta analysis, we find that Risk Parity funds have raised their equity exposure in the most recent weeks to even higher levels than last January (Figure 2). The Relative Value Multi-Strategy, another important category of quantitative hedge funds, has also seen a steep increase in its equity beta over the past month or so, approaching the highs of last January (Figure 3).

 

Finally, Panigirtzoglou observes that Long/Short funds (a ~$900 billion category) seem to be running high exposure as well. “The rolling equity beta of these equity funds to the S&P500 index has risen steeply over the past two months to a level that is even higher than last January’s high”, he writes, describing the following visual.

(JPMorgan)

Is all of this exposure hedged? Well, probably not, according to Panigirtzoglou, who flags relatively low short interest, average levels on put to call open interest ratios (S&P) and call to put open interest ratios (VIX) and a stretched spec short in VIX futs.

In short (get it?), U.S. equities look vulnerable to the extent quant funds are running high exposures and various measures of hedging activity don’t suggest anyone is overly concerned with protecting positions.

Of course I’m sure someone could roll out an equally compelling set of data that would paint the opposite picture because that’s how these things go, but what I would say here is that when it comes to what you want to watch out for, we now live in a world where monitoring the exposure of quantitative, systematic, vol.-sensitive strats is critical when it comes to assessing risk. You should read the above in that context.