The market moves since the US elections have been both big and surprising, and as JPMorgan notes, fund managers have been either too slow or too reluctant to jump into the Trump trade. However, algo-based Risk-Parity funds suffered the most with their biggest loss since Dec 2015 as market 'fear' tumbles to 9 month lows (and stocks are the most overbought in 13 years).
Risk Parity funds were hurt as their equity gains were not enough to offset the sharp selloff in bonds on which Risk Parity funds are typically exposed by four times as much as equities. Correlation between stocks and bonds has normalized thanks to this huge post-Trump divergence (but we note the last time the regime shifted like this was ahead of August 2015's equity plunge)...
U.S. stock markets are signaling calm waters ahead. As Bloomberg reports, the Credit Suisse Fear Barometer has tumbled 25% since the day before the presidential election, while the S&P 500 Index reached an all-time high. The gauge that compares bearish options prices with bullish ones three months from now has dropped to its lowest level since February.
So 'Fear' is absent, and as CNN notes, Greed is on the rise...
Greed indeed - with Small Caps up and almost unprecedented 15 days in a row. The last time they were this overbought (in 2010), the Russell 2000 fell 21% in the following two months...
Bonds are the most oversold since 2007 (after which they exploded higher in price, lower in yield)
And equity market breadth certainly not supportive...
Of course, with The Fed about to hike rates (with certainty) and financial conditions tightening drastically, what could possibly go wrong?