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Home / Business / As the market declines and investor fears intensify, assess the possibility of a comeback at the end of the year

As the market declines and investor fears intensify, assess the possibility of a comeback at the end of the year

On October 2, 2020, a trader talks on the phone outside the New York Stock Exchange in Manhattan, New York City.

Carlo Allegri | Reuters

Are you scared enough?

Yes, now is when the stock market is falling, and the question turns to whether it has surfaced to replace complacency.

Year-end rallies in the winter often occur, but when investors begin to doubt that the boom in the fourth quarter will happen, they are often born in a terrible autumn.

The Standard & Poor̵

7;s 500 index fell 5.6% last week, which hit many of the best performing stocks in 2020 and brought the index back to 9% from its peak nearly two months ago.

However, the three-week sell-off disrupted Wall Street’s ease of confidence in economic growth in the fourth quarter, forcing people in the fashion industry to quickly withdraw funds and increase hedging before the election. This is the beginning.

It should be said that the typical method of measuring investor attitudes has not yet reached the terrible limit, or at least did not appear until midweek. In fact, several readings best reflect the easing effect of the rise in optimism a few weeks ago. These will include weekly investor intelligence surveys of investment advisors, which as of last week still showed nearly 60% long, and the National Association of Active Investment Managers’ weekly equity exposure index, as shown below.

However, option traders showed greater nervousness and bought a large number of put options, which played a negative role. Company insiders have basically stopped selling their shares. Moreover, investors have moved away from popular speculation activities such as special purpose acquisition companies. The CNN Fear and Greed Index dropped to 30 at a ratio of 1-100, entering the fear field. Since going public a month ago, the ETF (Defiance Next Generation SPAC (SPAK)) tracking SPAC has fallen by 14%.

Unusual bond trends

Perhaps more obvious than complete anxiety, it is a confusion about the abnormal behavior of the entire asset market.

The most striking is the sale of Treasury bonds while the stock market is weak. Bonds are far from enjoying safe bidding, and they have retreated. The 10-year US Treasury bond yield closed at 0.87%, a record high in nearly five months.

As pointed out here last week, the explanations for the increase in yields vary, from expectations of post-election fiscal spending to catching up with other risky assets to investors generally reluctant to bet on any assets before the election.

After the S&P 500 Index fell 3.5% on Wednesday, the Custom Investment Group pointed out that since 1962, in only 24 days, the S&P fell at least 3% and the 10-year US Treasury yield rose. Does the usual panic rush into the Treasury bond market before stocks hit the bottom? Or is this “sell everything” in itself enough to cause panic? “

For now, segmentation has become the possibility of the reverse movement of stocks and bonds expected in many investment models, which may cause some traders to lose their balance. The RPAR Risk Parity ETF (RPAR) is already in operation. The fund tracks popular hedge fund strategies that combine stocks and bonds with leveraged buyouts to seek stable returns.

However, the credit market has remained relatively stable in resisting stock market volatility. If the market is under pressure due to Covid’s suspension of economic recovery, it can be said that this is not the case.

Strategas Group’s Chris Verrone pointed out that the relative strength of copper and gold, as well as the relative strength of non-essential consumer stocks and commodities, indicate that the market has not yet shaken off economic improvement.

Of course, this rethinking may of course have not yet come. The market news last month caused a lot of dissonance. The two-month layoffs of large technology stocks seem to be partly related to the feeling that they drove demand during the quarter when Covid was down. Netflix and Facebook say the same. At the same time, Microsoft, SAP and Amazon hinted that spending on technology services will slow.

However, the proliferation of Covid cases and the re-imposition of restrictions in certain states in Europe and the United States has hindered the most obvious beneficiaries of the return to normal, such as travel, chain retail and restaurant inventory.

Although the election is in everyone’s mind, it is difficult to say smart words about the direct impact it may have on the market, except for the hesitation and sensitivity of the title in the previous few days.

S&P 500 key levels

And, appropriately, the market ended last week with the greatest degree of ambiguity. The S&P 500 fell below the 3400 level barely maintained the previous week and fell to the correction zone in September. All traders regarded 3230 as the decisive level. This is the September closing low, the peak since the initial rebound in June from the March low, and the break-even line so far this year.

Therefore, in terms of scripts, the index fell to 3230 on Friday, then rebounded in the last one and a half hours, and finally closed at 3269. This is a loose chart with all the benefits that are not questionable. Some traders are now focusing on the 200-day moving average at 3100, which may be a true test of the bullish attitude.

Who said that pandemics, politics and positioning conflicts will not plunge us into more ultimate fears and fears? In the market, trampolines can be disguised as trapdoors and vice versa, so it’s no wonder people don’t dare to jump.

However, these actions do not always give rise to “what if…?” Extreme situations, of course, are not always straight lines.

The tape became oversold due to several measures. By Friday, about half of the S&P 500’s constituent stocks were at least 20% below all-time highs. The stock’s earnings are far below expectations, but its trading price is very poor, but the forward profit forecast remains unchanged.

Standard & Poor’s annual earnings estimates are not cheap, but they are down by nearly 20% from 23 points two months ago. No matter how many Covid vaccines are now approved, it is closer than a few months ago, and the possibility is not small.

These factors make it an ideal location for a rebound and show that as stocks fall, the risk-reward tradeoff for long-term investors has improved-almost a natural law. Even short-term actions in the market are at least as difficult as elections and pandemics.

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