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The refuge that lasted a month — the defensive plunged more than two deviations in Jul 2014

Episode

The extreme

In June, the market had rehabilitated public utilities as a sign of a more constructive mood — it bought the defensive the way one buys an insurance policy. Thirty days later, it evicted the tenant. The ratio of Utilities to the broad index was the most violent move in the entire structure that month, and there was no close second. The shelter raised in June lasted one round of trading sessions. In numbers: Utilities/IBOV fell from z +0.48 to −1.85, while domestic appetite — the Perene Risk Index — collapsed from 62.9 to 23.7 and crossed into aversion. What was bought in June was sold in July.

What happened next

The defensive was not abandoned all at once — it was shaken from one side to the other. Six months on, in January 2015, the utilities took an even harder beating: the same ratio sank from −0.68 to −2.17, in a month when even the refuge fell along with everything else — a broad sell-off, not an orderly rotation. And then the pendulum swung back. In July 2015, a year after the eviction, public utilities restocked the shelter at full force: Utilities/IBOV jumped from 0.18 to 1.41, once again at the top of the structure. The tenant that July 2014 expelled came back to fill the house.

What did not happen

Selling the defensive in July was not the market choosing the economic cycle. It was the opposite: within a few months capital crawled back to the shelters. In January 2015, cyclicals were penalized again (Cyclical/Non-Cyclical from +0.52 to −0.92) and real estate funds stood as the only lit room. And July's record plunge was not a turn one could follow: the ratio flipped, unflipped, and flipped once more within a year.

The honest verdict

The largest one-month displacement measures the violence of the positioning, not its direction. The defensive knocked down in July 2014 was back at the top twelve months later. Anyone reading the structure's sharpest move as a verdict on the regime would have been thrown from one side to the other along with it.

Continue reading: Appetite collapses — September 2014 · The single bet on banks · The defensives lose their tenants →

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Characters: Cyclicals × defensives