Yet another, let’s call it, amazing day in the equity markets. Late last evening the Dow future contract was pointing to a 1,000 drop at this morning’s open. By the time the bell rang things had improved, albeit slightly, to where the index began the day somewhere north of 600 points in the red. Then, by a stroke of Fed genius (well, Fed intervention), late morning pdt, stocks reversed course and stayed that way to the tune of +157 Dow points come closing time. As I type, futures are pointing the index to another 450 points higher from there.
In terms of today’s internals, from a volume standpoint they were weak, from a breadth standpoint they were so-so. Nothing, let’s say, to write home about. Judging by tonight’s futures action, however, tomorrow’s internals could be notably better. That said, per last evening’s experience, this market can turn on a dime, or on a headline for sure…
Clients and regular readers know that we remain uninspired by the present rally; which, by the way, has nothing to do with bias or hunch, and everything to do with underlying fundamentals, and, for the moment anyway, a volatility regime that demands caution right here. Context on the latter to come…
Last night I found myself thinking deeply about the prevailing narrative that says that, of all elements, the retail day-trader is having a measurable impact on the latest stock market dynamic. I, coincidentally, saw a comment this morning by a Bloomberg analyst suggesting that today’s day-trader is in fact proving to be a legitimate force of sustainable support for equities. Well, suffice to say that I struggle with that notion.
As you’ve noticed my “deep thinking” often finds its way to my computer’s keyboard.
Here’s what I found myself typing for the blog last night:
6/14/2020
Popular opinion presently has it that today’s retail trader, to no small degree, explains what has become either an atypical — in terms of % move — bear market rally, or an altogether new bull market. Of course record monetary and fiscal stimulus hasn’t hurt either (to put it mildly)…
As for the “influential (to the market)” retail trader, who, to further explain the present narrative, is supposedly your out-of-work millennial with an extra $600/week (on top of unemployment benefits) with which to trade, and your pent-up professional sports bettor without an event to wager on, well… let’s just say that if indeed this combination to any consequential degree explains the huge rally off of the March bottom, it’s ultimately a serious problem for any unsuspecting bull.
You see, rookie retail traders fail, bottom line! I’ve witnessed it first hand over the years, and I’ve seen stats suggesting that something like 50% are kaput in the first 90 days (don’t quote me), with 90% gone after a year or two. Found one last night that said that 80% are zeroed out in their first 12 months (quote me)…
So, with or without the $600/week extra going away after July, as planned, this is a narrative that, again, if it’s true, by itself virtually assures some serious downside pain in the coming weeks/months…
So, then, the question, is it true? Well, not by itself. Meaning, unemployed millennials and sports bettors, in my view, can’t generate a 40% rally all by themselves. Ah, but converging at the bottom of the initial bear market selloff, accompanied by record monetary and fiscal stimulus, short-covering futures traders and, critically, the crowd of investment pros who were caught unaware at the top (who, fearing for their livelihoods, and, thus, fearing missing out, were essentially forced to join the crowd), well… absolutely, you have the recipe for a serious rally in stocks.
Ah, but said recipe notwithstanding, if indeed this amazing move in stocks amid the worst economic setup in nearly a century, can, to any serious degree, be explained by a retail trading wave like nothing we’ve seen since the tech bubble, well, I’ll say it one more time, it’s highly likely that, alas — like the tech bubble — it ends very badly for those who find themselves caught up in it…