Where did the sellers go? What happened to them?
Far too often we don't reflect on where the sellers went to. Remember this is a market of stocks and you need buyers to pay up and suppliers to vanish for a market to roar as it did Monday.
I have some theories about why we can go up with such ease and they all revolve around the disappearance of sellers, which is more important at this moment than the strength of the buyers.
First, and most important, there's an absence of initial public offerings. I don't think the average investor or the newer trader, understands the pressure the IPOs can apply to the stock market. The whole process of bringing a stock public involves finding people who want to buy stock on the deal but also buy stock at the opening. Every real offering involves a substantial capital commitment. Most big accounts can't get a lot of stock on what's going to be a hot deal unless they put in for a huge amount of stock with a soft commitment to buying more when it opens. Given that they get a huge slug at the very low opening price it's only fair that they buy a lot at an extended price because the average will still be so much better than the run-of-the mill buyer.
We have had 484 IPOs this year, which is 680% more than last year when we had only 62. That's a gigantic amount of supply. You must imagine that big firms have had to let go of a massive amount of stock to get these new deals. They weren't getting new money in so they had no choice but to sell. And sell. And sell.
But now we are about to go into the summer when the deals slow down and selling pressure is off. That's a huge part of what you are seeing. The deals will now be spaced out so the willy-nilly selling to buy hot deals is now mostly over. Sure we had Oatly (OTLY) last week, which went to a nice premium and we had Squarespace (SQSP) , still one more painful direct listing as so many of these have been a bust. Oatly inspired both IPO buying and buying in the aftermarket but it wasn't that big a deal. Squarespace doesn't put much pressure at all on the market because there is no broker cajoling.
Second, the seeming demise of SPACs has been a huge godsend for this market. The whole concept created a false sense of security on the part of buyers who felt that they couldn't lose no matter what. When these stocks started going down after their huge run-ups individual investors realized that the joke was on them. The big investors who got in early, including large funds, no longer had the public eagerly lapping up stock. That's what proved to be the SPAC undoing, not the SEC and not the lack of quality, which meant nothing to any of the sponsors. These deals can still be the unwelcome gifts that keep giving in the after-market, like the huge lock-up expiration in QuantumScape (QS) , the EV battery company, but these deals can be shorted against and the shorts end up buying the stock that the insiders sell so no new capital get crunched. SPACs, in the end, have been a pox on the market with very few that would have gotten through the traditional IPO process. They have had a very negative impact on the market by creating sellers all over the place. They will not be missed and if they come back again, they will be shunted.
Third, it looks like investors had so much money that they didn't need to cash out of their savings despite the pandemic. We know this because of what Brian Moynihan, the CEO of Bank of America, told us recently.
If you had told me that individuals would have much more money in the bank at the end of a pandemic than at the beginning I would say that's impossible. But the government stimulus changed things and made it so that people didn't need to sell their holdings. A ready source of funds was never used. These numbers would indicate that dollars were used for both consumption and saving. That's pretty perfect.
Fourth, the sudden downdraft in bitcoin seems to be over and I could see how that could take selling out of the market. It's possible that bitcoin holders had to liquidate their S&P holdings or shorted the S&P to get more money to put up. Whatever, that takes supply down.
Fifth, earnings season is, gloriously, at last over except for a few stragglers. Once earnings season ends buybacks begin in earnest. I know that many lament that companies are buying stock back high versus where it was but need I remind you that many companies feared bankruptcy a year ago. Now, flush with cash, they want to share it with shareholders. Their removal of stock truly didn't start until the pandemic subsided. The more it diminishes they more they buy.
Sixth, what happened to those changes to the capital gains laws? Kind of a whole lot of nothing. It seems like another stillborn change that had been putting a lot of pressure on the market. Why bother to sell if there is no change in the tax rates?
Seventh? What are you going to put it in? You surely recognize that on a day like Monday there is just a flood of money coming in over the transom. It's index money, most likely S&P 500 index money that might have otherwise gone into cash had it not yielded so little. Sure that's a Jay Powell issue but when you listen to the news you are led to believe that Jay Powell is the reason for all of this. Hardly. People buy CDs and almost all of them do not reward you like this one day is able to do.
It no doubt helps that we don't have hedge fund managers telling you that it's time to run for hills or the CDC head talking about "impending doom." It's also reassuring that FAANG plus Microsoft (MSFT) is back because those stocks actually got cheap versus a giant new cohort of newly minted stocks to choose from.
I know that the next question is "how long can it last?" I hate that question. That's a trading question. It's about time horizons and being in when the market gets like this, which is very rare. If I say it could end any minute I would be worse than most of these people who spout jeremiads. So I will say it could be until something systemic happens because it sure isn't set up badly for the foreseeable future.
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