This is one of the most-unusual periods in markets I can remember. It’s hard to pin down what’s going on but consider this:
The Russell 2000 is up 12% in five days. According to John Authers, in the last 30 years that move has only been exceeded by snap-back rallies following major crises: LTCM, Dot Coms, GFC, 2011 US debt downgrade and the pandemic. For a pure rotation, it’s unprecedented.
Bespoke notes that the Russell 2000 yesterday closed 4.4 standard deviations above its 50-day moving average. No other US index has ever closed at that much of an extreme.
When you layer in that the Nasdaq is flat over the same period and the S&P 500 only moderately higher, it’s even more strange. The 5-day gain relative to the S&P 500 is the largest ever.
Some thoughts:
1) There is a rate-cut narrative at work. The softer CPI may have confirmed to the holdouts that rate cuts are coming. Still, it can’t be explained by macro as yesterday’s strong retail sales report didn’t prevent a 3.5% rally.
2) Politics is another explanation and the hope that Republican sweep will lead to corporate tax cuts and less regulation. I get the sentiment but the House is still very much up for grabs and it’s tough to justify this kind of move on politics alone.
3) Call buying. It’s been heavy. There is so much of the tail wagging the dog in many stocks right now and call buyers rotating out of tech to less-liquid stocks.
4) Chip makers are struggling. Nvidia has stalled out after an insane rally. Investors could be looking to redeploy or diversify following the end of Q2. Trump also talked about Taiwan paying for defense yesterday and Biden threatened more sanctions because chips continue to find their way to China.
5) Fund flows. There may be a pure rotation trade but there could also be a combination of a squeeze and funds blowing up on highly levered trades.
6) Broadening. The breadth of the rally has been remarkably narrow, limited to a few megacap tech and chip names. Aside from how aggressive they are, the moves are an endorsement of a healthy move and a soft landing scenario with a Fed put.
I’m sure there are other explanations but that’s the state of things. Whatever it is, the move has market worried to day with S&P 500 futures down 1% and Nasdaq futures down 1.5%. It’s not just tech either as the Russell 2000 is down 1% per-market follwing yesterday’s 3.5% gain.
This article was written by Adam Button at www.forexlive.com.
