Merry Christmas and Happy Holidays!
Will we see a Santa Claus Rally this year, typically occurring between Dec 24 through Dec 31? I bet we will. Apart from the seasonal bullishness for the last week of the year, there is another strong catalyst for it: Desperate final push by hedge fund managers!
Here is what I have learnt: "Most of these people have had a truly terrible year this year. Few if any of them accurately timed the COVID-19 meltdown from February into March. And even fewer of them bought at the lows in late March or April for that matter. According to Aurum's Hedge Fund Data Engine, the average year-to-date performance for hedge funds at the end of November was 5.6%. The S&P 500 is up nearly THREE TIMES that at roughly 14%. All of the folks managing these funds will be desperate to push stocks higher so they can finish the year with the best possible returns. And with trading volume being relatively light this week due to the Christmas holiday, there is the potential for an explosive move into year-end."
I think this is a pretty convincing argument for a strong SCR! We will see if it indeed materializes.😏
Having said that, even if we see new all time highs from the SCR in the next week or two, don't be fooled to believe that this will be a long lasting rally from here. I strongly believe it will be another rather big bull trap waiting for fools to be trapped in. In addition to many other indicators suggesting a gigantic euphoric top in the formation, below is a rather interesting writeup how the market has exercised its magic alchemy to turn gamblers to traders. This is of course typically seen at a top of the market, not at a bottom😵
Flush with Government "stimulus," individuals shifted their bets from sports to stocks.
The Rise Of The Robinhood Trader
Such was a point we made in: Is it 1999 or 2007? Retail Investors Flood The Market:
"Free trading app Robinhood has added more than three million retail accounts in 2020, and now has over 13 million. The median age of its retail customer is 31. The Covid-19 lockdowns and the plunge in markets in March persuaded millions of new investors to open accounts. Some of the action appears to be from people who would otherwise be gambling or betting on sports—both of which were shut down." – Barron's
As we noted in that article, Robinhood, which provided "free trades" to retail investors, wasn't doing it for free. To wit:
"The irony is that Robinhood really isn't 'stealing from the rich.' In reality, they are 'getting rich by stealing from the poor.' As is always the case, there is no 'free lunch,' as Robinhood bundles orders and then 'sells' the flows to major hedge funds for profit.
Those hedge funds then 'front run' the 'Robinhooders' taking advantage of their trading. (If this wasn't massively profitable for hedge funds they wouldn't pay millions for the data.)"
Not surprisingly, Robinhood recently settled with the SEC for $65 Million for precisely that reason.
It is not just sentiment, but also the speculative positioning of investors. Currently, options traders are exceedingly confident the market will not crash.
That confidence shows up in many indicators showing investor positioning into equity "risk" at a rather alarming rate. The 4-panel chart below shows investors have piled into equity funds, have a high level of confidence about the future, and complete evaporation of "short-interest" in the market. (Charts courtesy of The DailyShot)
Such has led to the highest concentration into stocks by investors on record.
With some of the most extreme deviations from long-term means, investors are likely once again setting themselves up for disappointment.
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