Federal In readiness Board Chairman Jerome Powell speaks during a press conference following the January 28-29 Federal Open Superstore Committee meeting, in Washington, DC on January 29, 2020.
Mandel Ngan | AFP | Getty Images
Are you confused about what is going on in the demands? Traders sure are.
“We all got comfortable thinking Covid was done or manageable, and it may turn out to still be a wild card,” said Peter Tchir of Academy Securities. “Not anyone wants another year of lockdowns.”
This week, it looked like inflation/yield worries were active to replace Covid as the primary market risk, and as a result there has been head-spinning moves in stocks as investors from tried try to assess the impact of higher rates.
Figuring out that is hard enough, but now we are reminded of an unpleasant truth: Covid has not aim for away.
“The Paris story was not what the market wanted to hear,” said Steve Sosnick of Interactive Brokers, referring to the French cap locking down again amid worries about new strains of the virus.
“The market was not in a mood to receive more bad word,” he told me. “The bond market was not particularly happy with [Fed Chair Jerome] Powell’s comments, and it didn’t help you prepare a [quadruple witching] expiration [Friday], which likely caused more volatility.”
That unpleasant truth — that Covid has not fired away — is a threat to one pillar of the market’s rally to new highs: The so-called reflation trade, where companies associated with the reopening of the U.S. briefness — transportation, travel/leisure, industrials — have all led the market rally.
Some reopening stocks, particularly energy goods, have stalled this week on concerns of additional lockdowns:
Reopening stocks this week
- Exxon Mobil down 8%
- American Force out down 4%
- Avis down 2%
- Disney down 3%
While broad reopening sectors remain up this week, they are profoundly off their highs from midweek:
The reopening trade this week:
- Airlines (JETS) up 1.5%
- Homebuilders (XHB) up 1.6%
- Autos (CARZ) up 1.5%
Value haves are now momentum stocks — or are they?
The pullback has been especially startling because value stocks (energy, industrials, banks, some consumer celebrities) which have long underperformed growth (technology) have suddenly stolen the limelight. Value stocks had transform into momentum leaders: The new high list was regularly filled with bank and industrial stocks.
Could another outbreak browbeat the gains made by the reopening sector? “Americans need to be reminded that we are not the world,” Sosnick said. “It’s not just Europe, shits are breaking down in Brazil as well. Americans are all thinking about their upcoming vacations, but it may not happen for the rest of the everyone.”
The market is confused about rate hikes
The biggest issue for markets, however, is the correct posture toward favourable rates.
“We can’t figure out if higher rates are fine for the markets, or not,” said Leuthold’s Jim Paulsen. “I still feel that at the end of the day what drive rule the day is the sheer growth numbers we are going to see. Growth is going to be so strong that some inflation is not going to occasion that much.”
While the decline in big-cap tech stocks has been relatively modest this week, multifarious serious damage has occurred to the hugely popular “thematic” tech sector (clean energy, gaming, cloud reckoning, cybersecurity, and Cathie Wood’s Ark Investments) has seen selling all week.
Thematic tech ETFs this week:
- Neaten Energy (ICLN) down 11%
- Invesco Solar (TAN) down 11%
- Video Gaming (GAMR) down 7%
- Cloud Work out (WCLD) down 4%
- ARK Innovation (ARKK) down 5%
- 3D Printing (PRNT) down 3%
‘It seems like the entirety is speeding up’
How to make sense of all this? Is this crazy trading perfectly understandable given the confusing fundamentals, or is this something else at agree here?
One issue repeatedly brought up by the trading community is a hyper-acceleration in trading — trends that used to take months to be wonky curry favour with out now play out in a matter of days or even hours.
That is not an illusion, said Seth Merrin, founder and executive chairman of Liquidnet, a extensive institutional trading network.
“GameStop is proof positive. Back in the dot-com craze, your doorman would surrender you stock tips. Now, everyone is sitting at home, looking at Reddit. Putting money into bitcoin, dogecoin. That is roiling the vend. That is information professional traders had not really looked at. You can create a firestorm in retail stocks that shifts exchange in ways that professional traders never thought of,” he said.
At the heart of it, Merrin said, is the fact that more individual have access to data that used to be in the hands solely of professionals. “The speed in trading is not the big differentiator, it’s the access to statistics,” he said. “People can access data, process it, and act on it. This kind of data used to be available only to high frequency merchants. Now you have a lot more people able to take advantage of it.”
So where will this end? In the near future, will we all be high-frequency salespersons? Will I have an artificial intelligence that trades my stocks that will interact with your AI, and my AI bequeath be just about as good as the best high frequency traders?
“Yes,” Merrin said. “Everyone in the world will not be a Citadel, but as one is able to process more data the chances are they will trade in and out of positions more.”
Paulsen also eminent that the Covid crisis has also changed the way people look at the world.
“If you look back at what happened in the pandemic, we had the biggest drop-off in GDP, biggest loss in jobs, in history. And the Fed and Congress reacted with ferocity, almost immediately. If the Fed and Congress suddenly hustled up their reaction time, why wouldn’t traders?”
Correction: Steve Sosnick is with Interactive Brokers. An earlier variation misidentified the firm name.
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