Green Lights Are Flashing for Stock Bulls on Another Record Day

(Bloomberg) -- As U.S. stocks powered to another record Monday, bullish signals were firing across a swath of investing styles and risk markets that suggest this rally has legs.

Positioning data show money managers are sinking billions of dollars into equities while paring back on defensive trades. Across the volatility landscape there’s calm at every turn.

Throw in rebounding growth expectations, and this risk-on rotation spurred by bets on a U.S.-China trade deal may have room to run.

“Given the shifting backdrop, we now believe investors would be well served to reposition their portfolios toward value stocks over low vol and growth, and more cyclical groups over defensive names,” Jonathan Golub, chief U.S. equity strategist at Credit Suisse Group AG, wrote in a note. He cited the bottoming out of manufacturing data and the steepening of the Treasury curve.

The bulls gained ground last week as the Fed delivered its third rate cut for 2019, at the same time signaling that it’s done for now. Equity funds earned their first inflows in six weeks as investors pulled cash from government bonds for the first time in nearly two months, according to positioning data cited by Deutsche Bank AG.

Sifting through the equity flows reveals an even more bullish harbinger. Minimum-volatility stocks -- which have drawn billions this year as investors look to play defense -- saw a “rare outflow,” according to strategists led by Binky Chadha.

BlackRock Inc.’s USMV, the largest exchange-traded fund holding the securities, shed $108 million -- its first down week since May, and only the fourth weekly outflow this year. While that’s a fraction of the record $12.7 billion the fund has hoovered up in 2019, it could be the canary in the coal mine for a move away from defensive bond proxies.

Right on cue, hedge funds are also shorting the VIX at a record clip as the underlying gauge sinks to its lowest since July.

That’s because the futures curve for Wall Street’s fear gauge is forming an appealingly steep shape -- reflecting higher uncertainty about the medium-term outlook for volatility relative to the near term. It’s the opposite of an inverted curve that has preceded sell-offs in the past and which is seen by many as a harbinger of doom.

Another volatility-based measure -- S&P 500 skew -- is flashing the all-clear for bulls. The measure of the price for downside protection has slipped since the start of the month, indicating lower hedging demand.

“Put-call skew has collapsed from unusually high levels and continues to be close to year-to-date lows,” Michael Purves of Tallbacken Capital wrote in a note last week. “Seasonal strength for equities against a backdrop of a relatively stable rates backdrop appears to be a recipe for a sprint in equities (and a lower VIX) into year’s end.”

It all comes as high-beta and small-cap stocks have outperformed the S&P 500 since mid-October, on the back of recovering expectations for growth and earnings.

“Assuming the trade detente remains in place, economic volatility should remain depressed, which will keep stock and bond market volatility muted,” Evercore ISI strategists led by Dennis DeBusschere wrote in a note. “All else equal, lower volatility translates into higher market valuations.”

--With assistance from Justina Lee and Luke Kawa.

To contact the reporter on this story: Yakob Peterseil in London at ypeterseil@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Sid Verma

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