Examining the current extraordinary market backdrop, the “pain trade” has been higher. Despite extreme bullish sentiment, many have remained less than fully invested. FOMO (fear of missing out) has been excruciating. The poor bears have been decimated. Short positions remain easy – big fat bear in a barrel – “squeeze” targets, with little concern these days for those pesky bears shorting overextended stocks. Devoid of selling pressure, the sky’s the limit.
But, mainly, there is today a pool of speculative finance without precedent. Positive vaccine news stoked a manic rotation, catching most in a highly Crowded marketplace tech heavy and underexposed to financials, small caps, myriad lagging sectors, EM and the broader market more generally. Quant strategies run amuck. Throw in all the manic derivatives trading – beloved call options in particular – and one can easily explain the origins of market “melt-up” trading dynamics. And such a speculative, dislocated and devious marketplace welcomes negative news flow. This only entices some new short positions along with put buyers – to then be summarily torched by a carefree market gleefully climbing the proverbial “wall of worry.”
In reality, there’s plenty to worry about. As welcome as positive vaccine news is right now, the conclusion of the pandemic will not, unfortunately, usher in a return to normalcy. The massive amount of debt noted above will overhang the system for years, as will deep scars throughout the real economy.