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  1. Home
  2. / Investing

What Does a 3-Sigma Move Mean for Markets?

Ask yourself if anything has really changed.
By MALEEHA BENGALI
Nov 09, 2020 | 01:15 PM EST
Stocks quotes in this article: PFE

If the Election 2020 uncertainty and Trump refusing to accept defeat, filing lawsuits and recounts across key battleground states was not enough, then came the Pfizer (PFE) news on a vaccine that proved to be effective in 90% of cases. The market was up 1.5% coming in today on a Biden victory, then it went up another 2%, but the stock bias was totally different! Long/Short funds P&L collapsed and Quant Funds blew up as their models flashed red warning signs to close the books down as trends had reversed aggressively. Why? This is what a 3-Sigma move massive portfolio unwind does, and humans have no choice but to take their risk and VAR down, cutting their losses. All the covid winning basket stocks fell 20%+ and all the laggard "value" recovery names like Energy and Airlines moved up 25%! In summary, there was blood on the streets and Bonds got crushed too, the "hedges" as 10 year yields sky rocketed towards 0.95%.

All throughout this year, every fund manager has been long the covid basket, which is long Technology, for the right reason as that is genuinely where the earnings have been and will be going forward. But against that, long/short Hedge Funds have been underweight Energy, Banks and other cyclically geared recovery names that saw demand hurt their balance sheets and cash positions. They have also been long Gold, Silver and Precious Metals as a fiscal stimulus bill was expected any day now. Post Biden being elected, the chances of a fiscal bill coming were even higher. So when the vaccine news came, the market flipped and unwound the "defensive" basket and bought back the "underweight" basket. With a vaccine, all seems to be well as life goes back to normal and then we do not need a fiscal bill anymore? What most do not realize, or have time to question it today in all the madness, is that even if a vaccine is 100% guaranteed, it will not be in production let alone distribution right away. It may take six months or so before it gets distributed to then assume people might feel safe to travel or dine again. But what about jobs and the labor market?

The U.S. economy is stalling here, and even with a vaccine, Congress needs to pass a fiscal bill to help alleviate the job market and consumer spending power. We do not yet know if the majority of the Senate is Democrat or Republican as we head into Georgia run-offs on January 5th. If both votes go Democratic, it will stand at 50-50, and then Kamala Harris would need to decide on the tie-breaking vote. What this means is we still have a lame duck president who refuses to accept the election results and may keep courts busy to get the verdict his way. The Senate is Republican now but the number of the bill is still not on common ground. If no fiscal bill comes, the U.S. economy is at risk of rolling over. The Fed has already said it has done what it can for now with monetary policy. Of course, if the markets do pullback, they can buy more but fiscal spending is the best way to get genuine recovery, rather than just support asset prices.

The Fed is not going to take its foot off the pedal until there is clear signs of a genuine recovery. To assume that the bill will not be passed as U.S. bonds suggested is a bit pre-emptive. Also seeing large cap Technology stocks down today is on back of pure sector rotation. Sector rotation can be vicious, it is too hard to call especially when there are flying daggers on both sides. Instead these company's earnings will not change with or without a vaccine.

Energy on the other hand is up 10% today, it is and will be the clear winner going forward. But one needs to ask if demand will really pick up that fast? Seeing Oil majors up 15%, that take ages to grow even in a positive oil price environment, is purely indicative of painful unwinds. The oil market is slowly cleansing itself but it will take time before prices can rise sustainably. To see the move happen all in one day seems a tad bit pre-emptive.

Usually when models blow up, the moves are so exaggerated, it is perhaps better to go the other way and monetize on the blow out spreads, as these things tend to be quite extreme and not fundamental. Ask yourselves, has anything really changed?

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At the time of publication, Maleeha Bengali had no position in the securities mentioned.

TAGS: Economy | Investing | Markets | Politics | Stocks | Trading | Treasury Bonds | Pharmaceuticals | Coronavirus

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