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Michael Gayed: The Most Crowded Trade to Fade
Emerging markets have been the popular way to hedge equities. That may be about to change.
Michael A. Gayed    

There's been some interesting behavior the last two days within equities. High-momentum trades, most notably biotech, have, for lack of a better term, collapsed. High beta small-caps? Significantly underperforming. Momentum is breaking, and value may be beginning to replace it. US stocks are not in the value camp. Nor are Japan or Europe. The cheapest area of the equity landscape far and away is emerging markets, which has been like a rock amidst market volatility. The most crowded trade of all is long US high beta, and short the BRICs. Emerging markets became the source of hedging, while the US became the bastion for investments.
 
I have been arguing in the last few weeks that a setup is very much there for a melt-up to come, given fund outflows nearing what appears to be a crescendo, crisis valuations, and an incredibly ingrained negative narrative that rising rates are bad. History, of course, proves this assertion to be false, since US rates rose all throughout 2003-2007 as emerging economies ripped higher. Never mind that, though. Emerging market debt has been incredibly strong despite huge outflows. Bad news in China? Rally. Brazil credit downgrade? Rally. Things are changing.
 
Sure, I've been on this theme for a while. Why is it different this time? The chart below says it all. Take a look at the price ratio of the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) relative to the Russell 2000 ETF (NYSEARCA:IWM). As a reminder, a rising price ratio means the numerator/EEM is outperforming (up more/down less) the denominator/IWM. 



The fact that this is happening despite concerns over Russia and in the face of slowing economic data coming from China is important. With the first quarter coming to an end, spread traders who have been shorting emerging markets may have to cover aggressively if a melt-up is about to occur when everyone least expects it.  A second-quarter move seems very likely now.  My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts look ready to take another bite in the trade very, very soon with a bit more confirmation.
 
Whatever happened to buy low, sell high?

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Michael Gayed: The Most Crowded Trade to Fade
Emerging markets have been the popular way to hedge equities. That may be about to change.
Michael A. Gayed    

There's been some interesting behavior the last two days within equities. High-momentum trades, most notably biotech, have, for lack of a better term, collapsed. High beta small-caps? Significantly underperforming. Momentum is breaking, and value may be beginning to replace it. US stocks are not in the value camp. Nor are Japan or Europe. The cheapest area of the equity landscape far and away is emerging markets, which has been like a rock amidst market volatility. The most crowded trade of all is long US high beta, and short the BRICs. Emerging markets became the source of hedging, while the US became the bastion for investments.
 
I have been arguing in the last few weeks that a setup is very much there for a melt-up to come, given fund outflows nearing what appears to be a crescendo, crisis valuations, and an incredibly ingrained negative narrative that rising rates are bad. History, of course, proves this assertion to be false, since US rates rose all throughout 2003-2007 as emerging economies ripped higher. Never mind that, though. Emerging market debt has been incredibly strong despite huge outflows. Bad news in China? Rally. Brazil credit downgrade? Rally. Things are changing.
 
Sure, I've been on this theme for a while. Why is it different this time? The chart below says it all. Take a look at the price ratio of the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) relative to the Russell 2000 ETF (NYSEARCA:IWM). As a reminder, a rising price ratio means the numerator/EEM is outperforming (up more/down less) the denominator/IWM. 



The fact that this is happening despite concerns over Russia and in the face of slowing economic data coming from China is important. With the first quarter coming to an end, spread traders who have been shorting emerging markets may have to cover aggressively if a melt-up is about to occur when everyone least expects it.  A second-quarter move seems very likely now.  My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts look ready to take another bite in the trade very, very soon with a bit more confirmation.
 
Whatever happened to buy low, sell high?

Twitter: @pensionpartners
< Previous
  • 1
Next >
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Michael Gayed: The Most Crowded Trade to Fade
Emerging markets have been the popular way to hedge equities. That may be about to change.
Michael A. Gayed    

There's been some interesting behavior the last two days within equities. High-momentum trades, most notably biotech, have, for lack of a better term, collapsed. High beta small-caps? Significantly underperforming. Momentum is breaking, and value may be beginning to replace it. US stocks are not in the value camp. Nor are Japan or Europe. The cheapest area of the equity landscape far and away is emerging markets, which has been like a rock amidst market volatility. The most crowded trade of all is long US high beta, and short the BRICs. Emerging markets became the source of hedging, while the US became the bastion for investments.
 
I have been arguing in the last few weeks that a setup is very much there for a melt-up to come, given fund outflows nearing what appears to be a crescendo, crisis valuations, and an incredibly ingrained negative narrative that rising rates are bad. History, of course, proves this assertion to be false, since US rates rose all throughout 2003-2007 as emerging economies ripped higher. Never mind that, though. Emerging market debt has been incredibly strong despite huge outflows. Bad news in China? Rally. Brazil credit downgrade? Rally. Things are changing.
 
Sure, I've been on this theme for a while. Why is it different this time? The chart below says it all. Take a look at the price ratio of the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) relative to the Russell 2000 ETF (NYSEARCA:IWM). As a reminder, a rising price ratio means the numerator/EEM is outperforming (up more/down less) the denominator/IWM. 



The fact that this is happening despite concerns over Russia and in the face of slowing economic data coming from China is important. With the first quarter coming to an end, spread traders who have been shorting emerging markets may have to cover aggressively if a melt-up is about to occur when everyone least expects it.  A second-quarter move seems very likely now.  My firm's ATAC (Accelerated Time and Capital) models used for managing our mutual fund and separate accounts look ready to take another bite in the trade very, very soon with a bit more confirmation.
 
Whatever happened to buy low, sell high?

Twitter: @pensionpartners
< Previous
  • 1
Next >
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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