President Biden’s decision to reappoint Jerome Powell as chairman of the Federal Reserve Board will cause a small panic in the fixed income and stock markets on Monday. Yields on 10-year bonds soared, Nasdaq fell by more than 2% in two days, and Vix’s volatility index rose above 20.
Such a move is small in the scheme of things and shows a market that is overly acclaimed but not yet ready to roll over. Many commentators are now talking about Santa Claus rallies.
In my personal view, using seasonality (the tendency of the market to record rising and falling patterns at specific times of the year) is lazy from investment and sticks to the efficient market hypothesis. Should be disappointing, but the QE-led global market has long been inefficient. Rivian is the latest example to support this view.
In that context, simply investing in a Santa Claus rally is lazy, as it is supported by seasonal factors.
Even more interesting is looking inside the market. Broadly speaking, risk appetite is not an excessive level, and many tactical indicators (from width to volatility positioning) have been reset to lower levels, suggesting room for upwards.
Headline indices such as the S & P 500 and Nasdaq remain close to record highs, but much is happening at the equity level. In particular, growth stocks from Palantir to Oatly to Upstart have fallen, partly due to disappointment in earnings and partly due to the reduction in premiums investors are willing to pay for high growth. increase.
In addition, small caps have gone terrible in two weeks, the Russell index has fallen by about 7% in the last two weeks, and many retail investors’ favorites have been caught up in this.
The stock market has been stress-tested to some extent as the dollar began to monitor buying and bond yields began to digest a lot of bad news about inflation. In my opinion, as we move from Thanksgiving holidays and beyond, we see rotations from large tech stocks and indexes back to growth and small cap names, especially those with high levels of short selling.
It won’t be long before commentators demand 5,000 on S & P, and it’s time to think about sales.