Stock market players let it roll again in a brutal year

Stock market players let it roll again in a brutal year

(Bloomberg) — Like stuck card players trying to claw it all back with one hand, stock bulls are increasing their appetite for risk at the end of a brutal year.

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Active inventory managers are adding positions. Options markets are showing a hedging pattern, a sign that professional traders are diving back into stocks. Beyond institutional circles, the demand for meme stocks is eternal, with chatroom favorites like AMC Entertainment showing great days.

Fueling the momentum, as usual, is speculation of a policy shift at the Federal Reserve — hopes that were shattered on Friday when U.S. hiring and wage growth beat forecasts. While shifts in market leadership may point to a stronger future for a rally that has driven the S&P 500 up 14% since October, it remains difficult to distinguish the latest bull run from those that crashed earlier this year. .

“You just have a tough market in terms of people hoping for signs of relief, but realizing that conditions are still relatively tough,” said Lisa Erickson, senior vice president and group head of public markets at US Bank Wealth Management. . “We are more skeptical about the sustainability of this rally, regardless of sector or style like value or growth leading it.”

The problem for bulls is that the latest surge in risk appetite is a near-perfect repeat of early August, when active managers and hedge funds increased exposure and even stocks in some cases doubled. and tripled. This episode ended in disaster for bulls, with the S&P 500 falling more than 15% in eight weeks. Many experts see the potential for the same fate this time.

In the latest round, the equities faithful were quick to latch on to comments from Fed Chairman Jerome Powell on a possible drop in the pace of tightening at next month’s meeting, dragging the S&P 500 to a 3% rally on Wednesday. This session topped losses on each of the other four days and kept stocks in the green for a second straight week.

More than $10 trillion was added to the value of stocks as stocks rebounded from their bear market lows in October. Along the way, familiar signs have surfaced that fund managers who had previously cut their stock holdings to the bone are bracing for the market.

In a survey by the National Association of Active Investment Managers (NAAIM), equity exposure fell in September to its lowest level since the pandemic crash of 2020. It has since surged and is now near a high of four months.

In options, the demand for cover is back – seen as a bullish signal given that no one needed protection despite barely owning stocks. After hitting a nine-year low in November, the S&P 500’s bias – which measures demand for insurance by comparing the relative cost of three-month put options to calls – has climbed in three of the past four weeks, according to data compiled by Bloomberg. .

“This may reflect increased hedging activity,” Christopher Jacobson, strategist at Susquehanna Financial Group, wrote in a note this week. “This could be a constructive sign, suggesting that more investors are adding positions and therefore gradually increasing demand.”

The crowd of battered retailers seemed to be waking up – again – at least when it came to meme stocks. AMC Entertainment climbed 9% during the week, while Bed Bath & Beyond Inc. had an 11-week losing streak, jumping more than 10%.

A similar enthusiasm is not evident among the expert class. Citing everything from an impending earnings contraction to persistent Fed tightening, the strategist for companies ranging from Morgan Stanley to JPMorgan Chase & Co. warned that the S&P 500 is set to test its 2022 lows next year. . In the worst-case scenario, the Morgan Stanley team sees the index hit 3,000, down 26% from Friday’s close.

Investors have been replaying the same basic drama all year. A bounce begins either in oversold conditions or Fed hopes, forcing a short squeeze and prompting dynamic rules-based traders to buy stocks. This leads to a tempting, technique-driven rally that takes legs but eventually crashes. In August, it was President Powell’s Jackson Hole speech that deflated the euphoria. Two months before that, it was a feeling of hot inflation.

That said, one difference stands out from the summer rally: market leadership. At the time, tech stocks led the rebound as investors bought up troubled companies. This time, economically sensitive and seemingly cheap stocks such as commodities and industrial producers are in favor.

“It’s less speculative fringes. Technology is not participating as much,” said Art Hogan, chief market strategist at B. Riley Wealth. “There is more sustainability in this rally because it is wider.

Amid all of the market’s failed rallies, institutional investors — repos, mutual funds and hedge funds — retreated. Their net demand for stocks has shrunk by $2.1 trillion this year, according to an estimate by JPMorgan strategists including Nikolaos Panigirtzoglou.

This could lay the groundwork for future progress. If their positioning were to revert to the long-term average in 2023, according to the JPMorgan team’s model, that would represent a $3.3 trillion increase in stock purchases.

The big question is, are these pros ready to increase their holdings in the face of murky prospects?

Bryce Doty, senior vice president of Sit Investment Associates, said his company was in buy mode as Powell stopped drawing parallels to the inflation era of the 1970s and refrained from saying that the rates had to be high enough to destroy jobs.

“It’s a major inflection point or shift from the myopic, dogmatic, cursed rhetoric of torpedoes, full steam ahead and demanding destruction,” Doty said. “I know the market will look a bit confusing from time to time and things could get choppy, but I left the buy-down camp a year ago. I’m back.”

–With the help of Vildana Hajric.

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