A Screaming Dislocation – “We Must Raise Cash” On Any Rally From Here

Excerpted from Larry McDonald’s Bear Traps Report,

A Colossal Rotation Has Begun… Into Value

As we can see below, Value has been out-performing Growth for more than 16 months on an equal-weight basis. It is the highest compliment when the Street picks up on an investment thesis months after we started to walk down this trail.

This week – Goldman Sachs and Bank of America focused on the carnage inside long duration (Nasdaq) equities. Goldman´s Tony Pasquariello noted:

 “a screaming dislocation has emerged between long-duration equities (which have been falling apart – ARK Names, Software, long duration cash flows) and long duration itself (the yield on the 30 year long bond is near YTD lows). Elements of capitulation are starting to accumulate and there are clear footprints of major risk reduction.”

We have seen two 80% + surges in the VIX since September 1, immense volume on intraday selloffs punctuated with a string of MOC sell imbalances.

Pasquariello notes Goldman´s PB (prime broker) data reveals the largest net selling over any 10-day period since April of 2020. Likewise – insider selling looks to be 2 standard deviations greater than any quarter looking back over the last 6 years. In November, insiders unloaded a collective $15.59 billion – an all-time record).

Furthermore – Private Equity insiders – the best sellers on earth – are unloading stock in size. Over the last two quarters, PE deals and exits have been completed deals at their highest levels relative to trends in at least the last 20 years.

Although the current torrid pace is unsustainable, the bulls claim near-record-high dry powder and corporate cash balances and a red-hot IPO market—as well as an ample and cheap supply of debt financing—highlight a supportive backdrop for completing PE deals and exits (even with a Fed singing the 3-rate hike tune for 2022). Interesting with all the upside still left of the table – insiders are selling PE equity with both hands with the famous names leading the way.

This is so reminiscent of the summer of 2007; at Lehman – the talk of the trading desk was private equity players exiting not only their longs but their personal equity holdings. This is a screaming sell signal. In the vol space, implied-realized spreads approached all-time wides with put-call skew was very stressed and UX2 (front month VIX futures) recently traded at a premium to UX8. Bulls say, there have been nine times in market history when S&P was down in November, but still up > 10% YTD on the follow, and December was positive all nine times, for an average gain of 4.3%. They also note – US nominal GDP growth in Q4 will likely be north of 13% – backward looking indeed. After three years where the S&P has averaged a 25% net return, one should lower their expectations of the REAL returns that asset markets can generate on a going forward basis. Just four stocks in S&P 500 account for around 1/3 of total returns this year (MSFT, AAPL, NVDA and GOOGL).

In fact, over the past six months, their attribution is approaching around 70%. This further reveals the fact that a lot of the market – as a whole – peaked in Q1 and never looked back (CLOU Software,TAN Solar, XBI Biotech, ARK, etc).

We have seen VERY consistent deterioration, month after month further contagion – one more victim after the next with the FAANGMT starting to take some pain (TSLA and FB 20% drawdowns). Use year-end market rips as priceless opportunities to SELL top heavy indexes (QQQs, SPY) and accumulate value plays. With the HIGHEST Conviction, this is the trade for the first half of 2022. Long INTC, T, KWEB, MSOS, XLE, RIO XME, EWU, XBI, IMPUY, GDX vs. Short or Underweight Large Cap – obnoxiously crowded – growth. If the market moves higher, this will just give Fed Chair Powell further confidence to threaten MORE aggressive accommodation withdrawal.

We MUST raise CASH on any market rally moving forward – the risk – reward for the Major Indexes is as poor as we have ever seen it.