(Bloomberg) – For the first time in a long time, betting on the turmoil in US stocks is paying off. This is a notable break with past patterns that some see as the first chapter in a larger story of suffering for risk markets.
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After more than a year of futility, short sellers have just recorded their fifth straight week of positive returns, their best performance since 2018. In another development that has portrayed trouble in the past, individual stocks have started. to move in unison, a sign of sharing the anxiety that has driven the correlations achieved to their highest in a year. At the index level, the movements of the S&P 500 exceeded 1% for six consecutive sessions until Thursday, the longest period of volatility in six months.
On their own, none of the developments are conclusive, and actions have certainly worsened on their way to doubling since the outbreak of Covid-19. But together, they hint at a shift in psychology tied to the evolving policy of the Federal Reserve, whose billions of dollars in stimulus spending are finally on the verge of dwindling. In addition, soaring commodity inflation and persistent supply chain disruptions threaten corporate earnings.
Rising correlations are “a sign of market fragility – you could see a market pullback if there is a change in perspective,” Steve Kolano, chief investment officer at BNY Mellon Investor Solutions, said by phone. “There are a lot of mixed streams in the market right now. “
Stocks took one of the most roundabout routes of the year to advance this week, as oil and natural gas producers surged amid an energy crisis in Europe and China. Throughout, however, violent movements rocked traders.
While corporate earnings had yet to start, stocks were held hostage to the ebb and flow of macro headlines. The new trend to move at the same pace contributed to some big reversals, including Wednesday, when the S&P 500 erased a 1.3% drop during the day. It was the biggest turnaround since February, spurred by Republicans saying they were prepared to offer Democrats a way to end the debt ceiling deadlock.
“We went through a time when there was no volatility in the market, there weren’t these big days of ups and downs,” said Barry James, portfolio manager at James Investment Research. Now, “people have to be a little scared of the market before they can really hit that bottom and take off again.”
The bears, almost on the verge of extinction amid the relentless rally in equities and the short-term contraction fomented by retail in January, are making a comeback. In September, when the S&P 500 experienced its worst monthly decline since March 2020, hedge funds boosted short selling at the fastest pace in more than two years, according to data compiled by senior broker Morgan Stanley.
For once, these bets did not immediately implode. A basket of Goldman Sachs Group Inc.’s shorter stocks has fallen nearly 4% in the past five days to its lowest level since May, generating gains for short sellers who borrow and sell stocks in hope to buy them back at lower prices.
For bulls like JPMorgan Chase & Co. strategist Marko Kolanovic, all concerns about soaring energy prices and interest rates are misplaced. According to him, the economy is on track for a sustained recovery now that the Covid trend has improved. Kolanovic has a model showing that stocks should do well even if oil climbs to $ 130 a barrel and 10-year Treasury yields hit 2.5%. Crude futures have recently hovered around $ 80 and 10-year yields stood at 1.6%.
Rick Rieder, director of global fixed income investments at BlackRock Inc., agrees stocks may continue to climb, although he warns that the current macroeconomic uncertainty is forcing investors to temper their optimism.
“Some of what we have seen unfold today and have seen over the past few weeks somewhat obscures where the near-term upside is,” Rieder said on Bloomberg TV with Jonathan Ferro while discussing of Friday’s payroll failure. . “When I read the corporate earnings reports and see, ‘My God, we can’t get enough product, we’re having trouble finding manpower,’ it mutes what was poised to be an explosive profit growth, an explosion revenue growth of turnover.
Indeed, the bulls retreat as the drum of warnings grows louder. The proportion of newsletter editors classified in the Investors Intelligence survey as being in the bull camp fell to 40.4% this week, the lowest since March 2020, according to data compiled by Yardeni Research. Meanwhile, those calling for a market correction jumped to 37.1%, the highest during the same period.
For JJ Kinahan, chief market strategist at TD Ameritrade, this whole downtrend sets the stage for a rebound and a big risk for investors is getting out too early.
“Every person who has called the summit in the past 18 months has been carried on a stretcher, if you will,” he said by phone. “I think now is the time to be careful – I don’t know if this is the time to say ‘yes, this is the time to sell.'”
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