Markets have become a minefield

Markets have become a minefield


When I was at university, which is a long time ago, students had different ways to mark the end of the exam period.

Most of us did a sensible thing and drank tequila in the garden, but a group got involved in a game that involved soaking each other with water guns or balloons full of water. The goal seemed to be to soak up the other players and emerge as the only one left.

This meant that the players were never safe. They could do business, buy food, or head to a computer lab to send new “e-mails” and be attacked at any time.

Something similar is now running around the markets. With an alarming frequency and little or no warning, individual stocks are soaked.

Markets, for a better word, began seriously in April with Netflix, which fell nearly 40 percent a day after saying it had misjudged the trajectory of the number of subscribers. The latest victim of watering was Snap, the owner of the social media platform Snapchat, which fell by a similar amount this week after blaming everything from inflation to the war in Ukraine for a tougher earning environment. Target was soaked last week.

In the Nasdaq 100 alone, which does not capture Snap or Target, seven stocks have fallen 20 percent or more in a single day this year, almost as much as the entire 2020 pandemic. including PayPal and Meta (Facebook to you and me).

To put it mildly, it’s quite strange. Outside a fully-fledged crisis, such as in 2020, 2008 or 2002 after the dotcom bubble burst, it is very unusual to see such a significant series of huge fluctuations below. This tells you that investors are in an extremely relentless mood.

The wide market environment is, of course, gloomy. The S&P 500 benchmark is 15 percent lower so far and is on the verge of exceeding an arbitrary limit of 20 percent below its last maximum, which would mean a recognized bear market. The Nasdaq Composite fell a quarter in 2022 and double-digit stock market losses across Europe and Asia are common as investors adjust to hot inflation and rapid withdrawal of central bank support (reject trend: UK! companies to which fund managers have warmed up, while exciting modern stocks are beating).

It instinctively makes sense that riskier, high-valued stocks pinned to the prospect of strong future profits, especially in technology, are the hottest in this unfavorable market regime.

Of course, not everyone jumped out. VandaTrack, which monitors retail trade flows, notes that small investors continue to buy. However, Salman Baig, multi-asset investment manager at Unigestion in Zurich, points out that other regular tech enthusiasts are now avoiding.

“Is this why the markets are moving? What leads them to fall? “Says Baig.” It’s not just more sellers. They can only fall because there aren’t that many buyers. “That gives sellers more influence. prices have shifted – weak, which makes these movements even worse.

This is a series of one-offs right now. But it doesn’t have to be reassuring. “It’s all idiosyncratic shocks, but these things always seem that way.” The year 2008 is another example. They always look like several individual names and. . . then snowballs, “Baig said. “The market is not very fragile right now, but it is sensitive. The market is not very liquid. You have rising rates. There is a war going on in Europe. This is not a good environment. These little idiosyncratic stresses come together easily. ”

One way they can merge is that the funds sometimes get hit on one speculative asset and have to try to release more, safer assets from other parts of the portfolio to meet the redemption calls. April LaRusse, chief investment officer at Insight Investment, said it was one of many things that went wrong with the Covid-19 shock two years ago. “It was all you could sell.” It was not possible to trade well in such an environment, “she added.

The optimistic view of all this is that it opens up new potential business opportunities. The retail community is there as always. Breakout Point, which monitors negative or short bets, notes that the WallStreetBets community on Reddit, known for its frequent attacks on meme shares, is on high alert due to the chances of using put options – falling price bets – to make money. huge stock declines.

“Today, almost every upcoming significant profit result is considered a great sales opportunity among retail investors, and the appetite is really falling by 25 percent,” said Ivan Ćosović from Breakout.

But the problem with these sudden soaking for a certain narrow group of stocks is that innocent onlookers who have never signed up for the game are also often soaked in the process.

katie.martin@ft.com



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