This is one of the most unusual periods the markets have ever seen. It’s hard to pinpoint what’s happening, but consider the following:
The Russell 2000 rose 12% in five days. According to John Authers, this move in the past 30 years has been surpassed only by the sudden spikes following major crises: the Long-Term Capital Management Fund, the dot-coms, the global financial crisis, the 2011 U.S. debt downgrade, and the pandemic. For a pure turnover, this is unprecedented.
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Bespoke notes that the Russell 2000 closed yesterday 4.4 standard deviations above its 50-day moving average. No other U.S. index has ever closed at such an extreme level.
When you consider that the Nasdaq has been flat over the same period and the S&P 500 has only risen moderately, it becomes even more bizarre. The S&P 500’s five-day gain is the largest ever.
Some ideas:
1) There is a narrative going around about the rate cut. The CPI decline may have confirmed to the holdouts that a rate cut is coming. However, this cannot be explained at the macro level because yesterday’s strong retail sales report did not prevent prices from rising by 3.5%.
2) Politics is another explanation, and the hope is that a Republican victory will lead to lower corporate taxes and fewer regulations. I understand the sentiment, but the House is still open to contest, and it’s hard to justify this kind of move on politics alone.
3) Call buying has been heavy. There is a lot of tail wagging the dog in many stocks right now and call buyers are shifting from tech to less liquid stocks.
4) Chipmakers are struggling. Nvidia went out of business after a wild rally. Investors may look to reallocate or diversify their investments after the end of the second quarter. Trump also talked about Taiwan paying for defense yesterday and Biden threatened more sanctions because chips are still finding their way to China.
5) Money flows. There may be pure swing trading, but there may also be a combination of pressure and money explosion in highly leveraged trades.
6) Expansion. The range of the rally was remarkably narrow, limited to a handful of big tech and chip names. Regardless of how aggressive they were, the moves represented an endorsement of a healthy move and a soft landing scenario with a Fed put option.
I’m sure there are other explanations, but that’s the way it is. Whatever the case, the move has the market on edge today, with S&P 500 futures down 1% and Nasdaq futures down 1.5%. It’s not just tech, with the Russell 2000 down 1% for each market after yesterday’s 3.5% gain.