Price fears are blamed for stock weakness, but there are other factors as well

Traders work on the floor of the New York Stock Exchange.

NYSE

Are you confused about what is going on in the markets? Traders are sure.

“We all thought comfortably that Covid was ready or manageable, and it might still be a wild card,” said Peter Tchir of Academy Securities. “Nobody wants another year of lockdown.”

This week, it looked as if inflation / return concerns would replace Covid as the primary market risk, and consequently there was progress in equities as investors tried to determine the impact of higher rates.

It’s hard enough to figure out, but now we’re reminded of an unpleasant truth: Covid is not gone.

“The story of Paris was not what the market wanted to hear,” said Steve Sosnick of Interactive Brokers. He referred to the French capital re-locked amid concerns over new virus strains.

“The market did not feel like receiving more bad news,” he told me. ‘The bond market was not very happy with [Fed Chair Jerome] Powell’s remarks, and it did not help that you [quadruple witching] expiration [Friday], which probably caused more volatility. ‘

That unpleasant truth – that Covid has not disappeared – is a threat to one pillar of the market’s rise in new highs: the so-called reflection trade, where companies associated with the reopening of the US economy – transportation, travel / leisure, industrial industry – all led the market march.

Some reopening of stocks, especially energy supplies, came to a halt this week over concerns about additional closures:

Reopening of shares this week

  • Exxon Mobil fell 8%
  • American Express drops 4%
  • Notice decreases by 2%
  • Disney dropped 3%

Although this week’s broad reopening sectors remain, by midweek it is by far the highest:

Reopening this week:

  • Airlines (JETS) Rise 1.5%
  • Home Builders (XHB) Rises 1.6%
  • Motors (CARZ) increases by 1.5%

Value stocks are momentum now – or is it?

The downturn was particularly frightening because value stocks (energy, industry, banks, some consumer names) that had not performed better for a long time (technology) suddenly stole the spotlight. Value stocks have gained momentum: the new high list is regularly filled with banking and industrial stocks.

Can another outbreak threaten the profits of the reopening sector? “Americans need to be reminded that we are not the world,” Sosnick said. “It’s not just Europe but also Brazil that’s breaking things. Americans are all thinking about their upcoming vacation, but that may not happen for the rest of the world.”

The market is confused about rate hikes

However, the biggest problem for markets is the right attitude towards higher tariffs.

“We can not determine whether higher rates are good for the markets,” said Jim Paulsen, Leuthold. “I still feel that the big growth figures we are going to see will be at the end of the day. Growth is going to be so strong that some inflation is not going to matter that much.”

While the decline in major capital technology stocks was relatively modest this week, the hugely popular “thematic” technology sector (clean energy, gaming, cloud computing, cyber security and Cathie Wood’s Ark Investments) inflicted more serious damage. all week.

Thematic ETFs this week:

  • Clean Energy (ICLN) drops by 11%
  • Invesco Solar (TAN) drops 11%
  • Video Gaming (GAMR) drops 7%
  • Cloud Computing (WCLD) drops 4%
  • ARK Innovation (ARKK) decreases by 5%
  • 3D printing (PRNT) lower by 3%

“Everything seems to be accelerating”

How can you make sense of it? Is this crazy trade completely understandable given the confusing fundamentals, or is it something else playing out here?

One problem that the trading community repeatedly raises is a hyper-acceleration in trading – trends that lasted months before taking place are now playing out within days or even hours.

This is no illusion, says Seth Merrin, founder and CEO of Liquidnet, a global institutional trading network.

“GameStop is a positive proof. Back in the dot-com craze, your porter will give you tips. Now everyone is sitting at home watching Reddit. Give money in bitcoin, dogecoin. It wakes up the market. It is “Professional traders did not really look at it. You can create a firestorm in retail stocks that changes the trade in ways that professional traders never thought possible,” he said.

At its core, Merrin said, is the fact that more people are accessing data that was previously only in the hands of professionals. “The fast trading is not the big difference, it’s the access to data,” he said. “People can access data, process it and respond to it. This kind of data used to be only available to high-frequency traders. Now you have a lot more people who can use it.”

Where will it end then? Will we all be a high frequency trader in the near future? Will I have an artificial intelligence that trades my stocks that will communicate with your AI, and my AI will be just as good as the best high frequency traders?

“Yes,” said Merrin. “Everyone in the world will not be a citadel, but because everyone can process more data, chances are they will trade more in and out of positions.”

Paulsen also noted that the Covid crisis has also changed the way people look at the world.

“Looking back at what happened in the pandemic, we had the biggest drop in GDP, the biggest job loss in history. And the Fed and Congress reacted violently almost immediately. If the Fed and Congress reaction suddenly accelerated time, why would traders not? ‘

Correction: Steve Sosnick is with Interactive Brokers. An earlier version incorrectly identified the firm’s name.

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