The stock markets in the United States are once again floating to new highs, but beneath the surface, a tremendous tide is dragging thousands of companies’ share prices to their historic lows in almost a year. Moreover, the growing difference in individual stock performance suggests a ferocious rotation fueled by soaring options activity and a hostile Fed shift that might upset several investors’ positions.
Traders say the changes are exceptional because they deal with a Fed policy shift and the rapidly spreading Omicron coronavirus variant – two seismic shifts that frequently cause markets to move in perfect sync. “After three years, the Fed could be about to remove the bucket,” said Jason Goldberg, a senior portfolio manager at fluctuation investment bank Capstone.
One thousand three hundred eighty stocks listed on US trading platforms touched their lowest levels in a year early last month. More than 210 equities in the S&P 500 were at least 10% off their twelve-month peaks when the index achieved the first-ever record closing high in three weeks and extended its year-to-date gain to 25%.
The data are even more startling on the tech-heavy Nasdaq Composite, with more than 1,300 equities fallen 50% or over from their all-time highs in the past year. Approximately 80% of the more than 3,000 equities on the exchange are down at least 10%. The poor correlation helps to explain why certain managers are underperforming in a year when the S&P 500 is up double digits. According to Goldman Sachs calculations, just five stocks — Apple, Microsoft, Nvidia, Tesla, and Google parent Alphabet — have accounted for over half of the S&P 500’s gains since April.
S&P 500 equities have flowed in a tighter pattern whenever the market has fallen sharply over the last month, and the Cboe’s Vix unpredictability indicator has surged. There have been anomalies, such as two weeks ago when the benchmark fell while its most significant component Apple gained steadily.
“Right now, benchmark moves are utterly receptive to whatever is going on underneath the surface,” said Brian Bost, Barclays’ co-head of equities derivatives in the Americas at Barclays. Over the last two weeks, the sharp fluctuations have become even more pronounced. According to Goldman analyst Rocky Fishman, one-factor moving stocks in such divergent directions is the extraordinary levels of trading options. It’s a truth exacerbated by “non-fundamental stock trading,” which he defined as regular investors flooding the market during the past 22 months.
The Options Clearing Corporation reported a high November for contract transactions in recent months. According to Bloomberg data, there have been two days since December when more than 50 million options have changed hands in the United States, attained only ten times in history. This week, Morgan Stanley’s Michael Wilson, an equity analyst, cautioned investors that the major indices will “essentially [move] nowhere over the next 12 months.” He stated that stock selection was more important than prior in that scenario.
According to traders and analysts, with the substantial change in the market’s favorite stocks, regression findings may improve in the coming days as the Fed tries to bolster its conservative credentials. According to economists, if monetary policy changes generate a jolt of volatility in markets, or if the Omicron version begins to alter the global growth trajectory substantially, it will result in the type of trading behavior seen when whole industries or indexes move in lockstep. “We don’t know what’s going to occur next,” Bost said, noting that prices are growing dramatically.