Stock market gamblers let it work again in a brutal year

(Bloomberg) — Like trapped card players trying to take it all back in one hand, the bulls are ramping up risk appetite at the end of the brutal year.

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Active stock managers are adding positions. Options markets show hedging bias, a sign that professional traders are returning to stocks. Outside of the institutional world, the demand for meme stock is endless, with chat room favorites like AMC Entertainment posting the big days.

Driving impetus, as usual, was speculation about a policy change at the Federal Reserve – hopes rose on Friday as US hiring and wage growth beat forecasts. While changes in market leadership could herald a more solid future for the rally that has lifted the S&P 500 14% since October, it is still difficult to distinguish the latest rally from price drop earlier this year.

“You just hit a tough market where people were hoping for a slight drop, but realized,” said Lisa Erickson, senior vice president and head of mass markets at US Bank Wealth Management. that the conditions are still relatively difficult. “We are more skeptical about whether this rally is sustainable regardless of what sector or style like value or growth is driving it.”

The problem for the bulls is that the most recent resurgence in risk appetite is a near-perfect repetition of the situation in early August, when active managers and hedge funds dial risky stocks and memes in some cases double and triple. That period ended in disaster for the bulls, with the S&P 500 plummeting more than 15% in eight weeks. Many experts see the possibility of a similar fate this time around.

In the most recent round, equities loyalists were quick to snap to Fed Chairman Jerome Powell’s comments on the likely pace of policy tightening at next month’s meeting, sending the S&P 500 up 3. % on Wednesday. That session overpowered the losing sessions for the remaining four days and kept the stock in the green for the second straight week.

More than $10 trillion was added to equity value as stocks bounced from their bear market lows in October. Along the way, familiar signs emerged that showed managers Capital managers who previously cut their equity holdings are heating up the market.

In a poll by the National Association of Active Investment Managers (NAAIM), the level of equity risk fell in September to its lowest level since the fall of the pandemic in 2020. Since then, it has spiked and is now hovering near a four-month high.

In options, hedging demand is back — seen as a bullish signal when no one needs protection when they barely own any stocks. After falling to a nine-year low in November, the S&P 500 skew – which measures insurance demand by comparing the relative cost of a 3-month call versus a call – has rallied 3 out of 4 weeks. over, data compiled by Bloomberg shows.

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

The battered retail crowd seems to be waking up — again — at least when it comes to meme stocks. AMC Entertainment is up 9% for the week, while Bed Bath & Beyond Inc. Overcame a losing streak of 11 weeks, gaining more than 10%.

The same enthusiasm was not evident among the scholarly class. Citing everything from falling earnings to continued tightening by the Fed, strategists at companies from Morgan Stanley to JPMorgan Chase & Co. warns the S&P 500 is likely to test the 2022 low next year. In a worst-case scenario, the team at Morgan Stanley sees the index hitting 3,000, or a 26% drop from Friday’s close.

Investors have been replaying the same basic play for the whole year. The rally started in oversold conditions or on Fed hopes, forcing a short-term squeeze and prompting rule-based momentum traders to buy stocks. That leads to a fascinating, technical-based rally that can succeed but ultimately collapse. In August, it was Chairman Powell’s Jackson Hole speech that dampened the euphoria. Two months before that, it was a hot inflation print.

That said, one difference stands out from the summer rally: leading the market. At the time, tech stocks led the rally as investors snapped up companies that fell. This time around, economically sensitive and cheap stocks such as raw materials and industrial manufacturers are in favor.

“It is less speculative. “Technology is not as much involved,” said Art Hogan, director of market strategy at B. Riley Wealth. “There’s more durability to this rally because it’s broader.”

Amid all of the market’s failed recoveries, institutional investors – pension funds, mutual funds and hedge funds – pulled out. Their net equity needs have fallen by $2.1 trillion this year, according to estimates from JPMorgan strategists including Nikolaos Panigirtzoglou.

That could lay the groundwork for future progress. If their positioning returns to the long-term average in 2023, the JPMorgan team’s modeling shows, that would add $3.3 trillion in stock purchases.

The big question is, are these professionals willing to increase their holdings in the face of a bleak outlook?

Bryce Doty, senior vice president of Sit Investment Associates, said his firm was in buy mode as Powell stopped drawing parallels with the inflationary era of the 1970s and refrained from saying interest rates needed to rise enough. high to destroy jobs.

“It’s a major inflection point or shift from the short-sighted, dogmatic, damned rhetoric that moves forward and demands destruction,” Doty said. “I know that sometimes the market gets a little flustered and things can get tough, but I left the dip buying campaign a year ago. I have returned.”

–With support from Vildana Hajric.

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