Don’t call it a “selloff” yet.
After two straight weekly declines and losses in eight of the last 10 sessions, the S&P remains just ~3% from the highs, a testament to all manner of dynamics, from the esoteric to the obvious.
One thing that’s become clear enough is that people know when the dips are coming. Or, wait. Scratch that. Market participants know when the door is about to open to a wider distribution of outcomes, and that may be encouraging some folks to front-run potential index “movement.”
“Monthly options expirations are now socialized,” Nomura’s Charlie McElligott said Friday afternoon. They’re the “‘known’ windows for pullbacks and vol expansions,” he added.
The “socialization” of the options cycle dynamic eventually prodded the financial media into running a series of articles documenting the predictable monthly mini-swoons, thereby making the story more ubiquitous still. “The stock market has effectively become a derivative of its own derivative,” Bloomberg’s Lu Wang wrote this week. “A tail wagging its dog.”
This is the furthest thing from “news” to professionals. And it’s been a fixture of weekly commentary in these pages dating back years. But in 2021, it’s highly amenable to mainstream coverage.
In addition to serving as a kind of visual CliffsNotes for the socialized OpEx pattern, the chart above also suggests that US equities continue to garner support from the 50-DMA. Consider the figure (below).
It’s been 219 sessions since the S&P closed below the trendline for two straight trading days, the longest such stretch in a quarter century.
Admittedly, I struggle with the kind of self-referential “analysis” that sometimes (ok, always) accompanies these kinds of factoids. In an article dated Friday afternoon, Bloomberg’s Wang and Vildana Hajric quoted Seema Shah, from Principal Global. “Should investors keep the habit of buying the dip at the 50-day average, more gains may be in store,” Wang and Hajric wrote, summarizing Shah’s thoughts on the matter.
Why, yes. If people buy stocks, it’s possible stocks will rise. And, as it turns out, they (people, but also machines) have been buyers in and around that trendline this year.
Of course, you have to be careful about mocking the trivial. Because in a world of abundant liquidity and unprecedented policy support, there’s an argument to be made that the more superficial your approach to markets, the better you’re likely to do.
I’ve been waiting for an opportune time to quote a September 12 note from JonesTrading’s Mike O’Rourke. Journalists don’t seem to understand this, but sometimes, it’s best to save good soundbites, knowing that eventually, the perfect opportunity to utilize them might present itself.
With that in mind, I’ll leave you with the passage (below), from O’Rourke. As is the case with several other folks I quote, I don’t always agree with what I perceive to be an opinion on matters of policy evident in the cadence, but O’Rourke’s dailies are always incisive. And that’s welcome in a world where incisive analysis is in short supply.
The market’s list of headwinds grows with each passing day. The risks are easily ignored as FOMO has combined with YOLO thinking to create pervasive complacency. Consider the laundry list of actual and emerging challenges in the current environment. There is the incredibly intractable global pandemic. We have likely witnessed the peaks of absurdly historic levels of monetary and fiscal stimulus. Personal and Corporate income taxes are set to rise. The nation will be breaching the debt ceiling in the next few weeks and there are no prospects of an agreement to raise it. Inflation is at its worst level in decades and rising as fast as it did in the 1970s when Congress introduced the Fed’s price stability mandate. Raw materials shortages and supply chain disruptions are expected to last well into next year. We are in the midst of an escalating Cold War with China, easily the most important trade partner that does not share a border. The deflationary globalization trend that has symbiotically benefited corporate profits at the expense of labor and GDP has halted. Amidst a labor shortage, the only way workers will benefit is if wages increase, further fueling inflation. In the meantime, real wages are contracting. This is an era where the 1999-2000 equity bubble’s “pro forma” earnings have been replaced by “adjusted EPS.” Therefore, any aspect of the business or challenges the company faces that are atypical (even if lasting years) is non-recurring and does not impair those adjusted earnings. In short, collectively, investors currently don’t care about earnings. Historically, market participants might call an ascent in the face of headwinds climbing a “Wall of Worry.” This is not the case here. For it to be such a climber, the market would need to have at least mildly reacted to the negatives to acknowledge they exist. This has been a worry free wall.