It hasn't been much of a Santa Claus rally this year. The S&P 500 was only down 0.2% last week, but the Nasdaq was worse (down almost 2%) and daily volatility continued to torment those who hoped to enjoy a quiet week.
Ten-year yields rose, which was reasonable as sub-3.5% seemed aggressive, even for someone as pessimistic on the economy and the inflation story as me. We had the Bank of Japan surprise everyone by allowing Japanese bonds to move to higher yields. That move pressured yields directly but also got market participants talking about the possibility that Japanese accounts, that have been buying dollar-denominated bonds and hedging the foreign currency risk may sell as the rate hedges need to be rolled over. That has been an ongoing theme, with higher foreign exchange volatility, and will weigh on bond markets, but won't be the main driver of the next big move in yields (I still like the two- to seven-year maturities best here across bond markets).
Speaking of "rolling hedges," there were numerous stories about JPMorgan Hedged Equity Fund Class I (JHEQX) , a large mutual fund, needing to roll over a large options trade into year-end (part of its strategy). The "vol killer," according to Bloomberg on Dec. 20, would have a tendency to peg the S&P 500 to the 3,835 level (it closed at 3,844). That number could act as a magnet until that roll is done.
Last week seemed to have a lot of inconsistencies on what good or bad news meant for markets. It seemed to hinge on the inflation versus recession impact, but that is a bit vague. Nothing was helped by very thin/illiquid trading.
Tesla (TSLA) , always topical, has become even more so. TEsla has lost more than $600 billion in market cap since mid-September and lost more than $225 billion since the start of December. Part of me, the tin foil hat part of me, can't help but wonder if the "Glass Onion" movie isn't somehow impacting Tesla's stock. Seems crazy (I did admit it was the tin foil hat side of me writing this), but in any case, what is more concerning is that I'm seeing several charts foretelling doom for some other Big Tech companies (as though we haven't already had enough doom there).
While prices are much cheaper, valuations heading into a potential recession with an non-accommodative Fed may still be stretched.
While neither the AAII Sentiment Survey nor the CNN Fear and Greed Index are at their extreme levels, both indicate a pretty heavy tilt toward bearishness and hedging, which has been enough to spark rallies.
I've been closely watching the ARK Innovation ETF (ARKK) shares outstanding decline, while ProShares UltraPro QQQ (TQQQ) shares outstanding increase to their highest of the year. Often these two move in tandem, so it is interesting to see them move in opposite directions, reasonably consistently. (Could be tax-related selling in ARKK, though at Friday's prices the only investors with gains are those who bought in the first half of 2017.)
I committed pretty heavily to being long equities over the last week; I currently own SPDR S&P 500 ETF (SPY) , TQQQ (not Invesco QQQ Trust (QQQ) to avoid some wash-sale issues in my active account) and even tiny amounts of ARKK. which I'm eyeing more of.
I'm neutral on bonds here, though looking to add.
Consensus has gotten bearish enough while inflation is declining. If you take the last two months and annualize those numbers, we are in good shape, though I continue to think we've already pushed too hard and will regret it. My sense of "consensus" is a weak start to the year, followed by a rebound.
I think there will be an extremely weak start to the year (new lows in stocks), but I also think we have room to get in a Santa rally. Or maybe, with so much focus on Ukraine, a Saint Nicholas rally into Jan. 7. (One can hope and be positive this time of year, even if I think the Grinch is coming back.)
