We have mixed action this morning as market participants contemplate rising interest rates, a sharp drop and bounce in many stocks, and a renewed short squeeze in a number of 'junk' names.
Optimism about the speed at which the economy will reopen is driving higher interest rates and inflation fears. While that is an obvious positive for the broad economy, it is triggering a vigorous rotation in the market. Many of the names that benefited greatly from the 'stay at home' economy are now under pressure. Many of these stocks offered the technology that made working from home much easier.
There are some questions about the valuations of the groups like cruise ships, airlines, and hospitality that are being chased higher right now, but they have the momentum and the hot money is chasing them. This rotation is causing pressure on the Nasdaq 100 ETF (QQQ) and the FATMAAN names, but another dynamic that is at work is the renewal of speculative trading in bitcoin, certain small-caps, and social media-driven short squeezes.
This combination of rotation and highly speculative small-cap trading is nothing new, but it is shifting a bit, and that is causing some consternation among traders trying to keep pace with the action.
Yesterday afternoon GameStop (GME) , Koss (KOSS) , and AMC (AMC) suddenly erupted and moved sharply higher without any real warning. There is talk about a 'gamma squeeze' again, but this is primarily just traders piling into a crazy situation as certain stocks start to move. This is more 'Ponzi Scheme' than 'rocket science.'
Traders are feeling a little nervous after the panic selling that hit on Tuesday morning. While the indices recovered quite well, there were many individual stocks that suffered damage, and there is an inclination to reduce some risk just in case it happens again.
My focus here remains on stock picking. I don't believe the short-squeeze action in the junk names is going to gain the same sort of traction that it did before, but it tends to be a distraction that can hurt some of the momentum trading in high beta big caps.
Some choppy and sloppy action would probably be the best-case scenario right now. That can be good for astute stock pickers but make sure you manage positions carefully. I see more and more slippage in the SPAC space lately, and I think it's important to tighten up there if you have too much exposure.