It seems Shakespeare was way ahead of his time when he created the character of the soothsayer that caught Caesar's attention by warning him about the "Ides of March". Granted that was during Roman times when no stock market was existent so to speak, but it is by no coincidence that seasonally March always tends to be one of the most volatile and "surprising" of months when consensual positions are whiplashed, crushing performance before the start of the next quarter. Is this just a famous line that keeps getting quoted time and again, or is there something more to this ominous saying?
Moving the spot light from an Elizabethan center stage towards financial markets, there are very good reasons why March tends to be a volatile period, more of an inflection point in markets. As 2020 ended, almost every sell side shop pushed out notes of how inflation was going to be the theme for 2021, given the endless quantitative easing by global central banks, with no way out but to deflate away the grandiose debt. The so-called "reflation" trade was the buzz word across all trading floors and all Value sectors (Energy/Financials/Industrials) were chased aggressively on hopes of the re-opening trade as stocks had lagged so much. But every single consumer commodity from milk, sugar, soya to industrial related ones like copper, oil, had all rallied significantly as well spurring inflation concerns. When inflation rises, bonds tend to fall as they need to reflect the "true yield" in the economy to account for inflation and growth. The Fed may be right on saying that rising yields are reflective of economic growth. We never denied that. What we are saying is that the rate of change of yields is more damaging than the actual level of the yield.
We have seen U.S. bonds collapse 15% in the past three months as 10 year yields have moved from 0.5% to 1.6%. As asset allocators stand by and see their long-fixed income positions suffer, they have to make a choice in March, when they tend to do their year ahead asset allocation with a slightly different take on Hamlet's issue, "to buy or not to buy?" If these pension funds and institutions realize that being long fixed income is purely just capital gain or loss, and that there is no yield per se, they have a choice to make. Do they add more as yields are much more tempting or really start de-risking as inflation is here to stay? The latter could then cause some disorderly markets.
Most quarterly expiration months, like March, September, and December tend to be very important from a positioning point of view as a lot of portfolio put protection is bought on quarterly terms. These will be expiring next Friday. Portfolio managers now have to make a decision to either let them go out worthless or roll, buy more? All this means is that there is significant open interest around key strikes, at the moment, around 3900 which can see some violent swings both on the way up and down as dealers need to be flat. This is not fundamental, it is purely technical. If one goes back to Nasdaq moves this past week, one can see how a down 20% move the day before in names like Tesla (TSLA) to a 20% move the next day is nothing to do with fundamentals and EV/EBITDA. To put it mildly, derivatives positioning and triple witching should never be underestimated. The market will be freer to move in its true direction after next week.
The market is one big macro trade. Either the bond market stays supported with the endless buying soaking up all the supply, i.e., the Fed essentially doing yield curve control in the back, implying Technology and long duration assets rally hard from their oversold levels. Or, bonds continue falling and yields sky rocket, causing a much bigger wobble in Technology with more liquidation from investors who are just used to buying the dip in this sector. Every tick in the bond yields is being mirrored in the growth vs. value trade. The fate of the broader equity market lies in the hands of the bond market. Take your pick and position wisely. There is a reason why March has earned its own phrase.
