Market Overview

Wednesday's Market Minute: Violent Delights Have Violent Ends

Wednesday's Market Minute: Violent Delights Have Violent Ends

One of the most important days of this bull market was January 26, 2018. It was the frothy peak of the stock market – the one that came after monster ETF flows, retail-trading euphoria, and sported the most expensive valuation of the bull market to-date. Everyone wanted in on a piece of the action, as "synchronized growth" was the narrative of the global economy. FOMO set in, and when it became untenable – pop! VIXplosion. It looks like we are setting up for, or already in, a similar situation.

The relative performance of high-beta stocks next to low-beta ones peaked in January, 2018 and have been underperforming in the two years since, with highs in the spread between high-beta factor fund SPHB and anti-beta BTAL getting lower and lower, even as the stock market rallied. Until now.

As the Great Paranoia of 2019 unwinds, the speed of the S&P 500's move higher is accelerating, and high-beta stocks are leading the charge. When high beta stocks lead the way, it means companies that lately have been swinging the most, are winning the most. Investors are again getting paid to play risky. Retail trading according to TD Ameritrade's IMX survey is also picking up.

arring a big surprise on the geopolitical front, it's not unreasonable to expect investors big and small to want to chase the rally. Where will the fuel come from? Investors spent the past year funneling money out of stock ETFs and into bond funds.

That’s a good place to start if they need to find some cash. But violent delights have violent ends, and the longevity of such a FOMO rally would likely depend on the speed of the corresponding rally in bond yields.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Image by Pexels from Pixabay


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