Do you feel the squeeze? Don’t hate the player, hate the game!

Local market was taken down to negative territory by constant selling pressure after popping up at the open on the expected dead cat bounce. US market had a dead cat bounce overnight that faded through the day with mixed economic data. We were to follow that but local and global investors were getting ahead of the seasonal weak period in Feb/Mar to lock in their performance for the month end. The month end window dressing trades were no match to the selling pressure. Energy and Banks were the worst hit while Health Care and Telecom Services were the best. Gold sector has started to shine on safety and value trade. We had elevated volatility in bond and currency markets overnight and now the US futures pointing to more pain coming. Markets were ignoring the obvious lockdown/restrictions/delays driven downgrade coming out of Europe and US. After the confirmation from ECB and US Fed, there is no stimulus boost to cover this downgrade. New US administration is more concerned about Main Street and that recovery might cost a Wall Street bashing. Reflation genie is out of the bottle and Central Banks have lost control. We have also started the currency wars where USD debasement is delivering inflation to US but boosting everyone else and exporting deflation to the world. Due to the global reserve currency status, money printing by other central banks are unlikely to make a difference but ECB, BOJ and RBA have made that mistake in the past…don’t bet against them to repeat the failed policy again. Chinese central bank PBOC has been tightening into this cycle to reduce the bubble risk. You know things are weird when China is making the smart move while the rest of the world runs around like headless chooks. Have we started the sell off cycle as earnings reality, virus damage, reflation and lack of excess stimulus starts to bite the structurally challenged economies? Has a feel of that…but time will tell.

Let us look at a few signals regarding risk off trade…

(1) USD breaking above 50 day Moving Average for the first time in 3 months on risk off trade.

(2) Aussie volatility index hits 2 month high as risk rises.

(3) Shanghai Composite has pulled back below 50 day Moving Average as the best recovery market slides on lower global growth.

There is a lot of attention being given to the short/gamma squeeze played out in the US market in a few stocks. The reality of the situation is that there is nothing new to see here. Regulations were weak to allow big funds to use this methodology to boost performance. Usually a few big funds can dry out the selling pressure and boost a heavily shorted stock to force short covering and get a performance boost. The fact that options are being used to get the same result by retail investors does not change the methodology. It also does not make it illegal. As the saying goes… “Don’t hate the player, Hate the game!”. If you set the rules to allow big players to get a certain outcome legally, then it is not illegal for smaller players to achieve the same result. If you think it’s manipulation, then limits the amount of shorts that can be held or how much maximum holding you can have in a stock. The squeeze works on both sides of the coin….long and short. Regulators should make changes but they will not change it due to “Lance Armstrong Effect”. Too many people make too much lazy money playing the game. They will try and hide the game more by making it harder for retail but the game will be played. Crowded trade is the same on the long side as well as the short side. If you are in a crowded trade, you run the risk of getting squeezed. It’s the nature of the beast that you are playing with. There are a lot of players attacking it (i.e. they tend to be pro big funds) and defending it (i.e. they tend to be special situational investors like SPAC). Each are defending their turf against more regulations removing their standard models. Investment is about managing risk and return. Don’t complain about someone beating you at your own game. Just come back with a better model or you won’t last anyway.

Comments on US market last close > US market had a bounce after the bash. Partial recovery from yesterday's losses. S&P beating NASDAQ and RUSSELL is not a positive sign. USD pulled back after starting strong. AUDUSD got below 76 and now near 77. US bond yield fell to 1% and now 1.05%. Fund managers are trying to hold it together for month end. Gold and Financial sectors were the best in a green day. European markets were weak mainly and commodities were weak too. Market outlook for Feb is not looking good for now!

Remain nimble, contrarian and cautiously pragmatic with elevated global macro risks!!! Buckle up...it’s going to get bumpy!!!