Stocks declined sharply this week, posting their largest weekly loss in three months amid much higher volatility and trading volumes in certain pockets of the market, raising concerns about speculative excesses. The S&P 500 Index fell almost 2.6% at the same time total trading volume hit a record high of 23 billion shares on Wednesday, a huge jump from the year-to-date average daily volume of about 14 billion.
The headlines were driven, not by corporate announcements of fourth-quarter earnings, but by collective buying from retail traders of shares for companies with heavy institutional short interest. This organized trading, fueled by social media coordination, drove outrageous spikes in prices. This forced hedge funds to cover their short positions, buying shares back at higher prices, incurring substantial losses, and driving prices even higher for names such as GameStop and AMC Entertainment. Stocks recovered a portion of their losses on Thursday after some online brokerages restricted buying in certain stocks.
Large-cap indexes generally held up better than mid-cap and small-cap shares showing signs of rotation and a possible resumption of leadership from the tech titans. With the latest earnings season just kicking off and results beginning to roll out for several Mega-Cap Growth names, we’re seeing investors’ focus shifting back towards the stocks which led the post-covid rally in 2020.
Amid the dramatic swings caused by short squeezes, the Federal Reserve’s January policy meeting went largely unreported, though policymakers reinforced the message that the economic outlook remains uncertain and that it will be some time before the central bank begins to taper its asset purchases. Fourth-quarter GDP data revealed that U.S. growth moderated to 4.0% after record third-quarter growth of 33.4%, as consumers grew more cautious about spending.
Treasury yields decreased slightly for the week. The yield on the 10-year Treasury note briefly reached 1.0% on Wednesday, benefiting from its status as a safe-haven asset amid the sharp drop in stocks, before increasing to finish the week. The general move away from riskier asset classes also weighed on the high yield bond market.
Take a look at the GoNoGo Asset Class Heat Map below. $USCI, and $BTCUSD are in “Go” trends painting aqua and blue bands on the heatmap. $IEF’s “NoGo” trend strength accelerated this week on purple bands.
Perhaps most importantly, $DXY is painting amber “Go Fish” bars as the “NoGo” trend has faltered. A weak US Dollar has been a tailwind to many of the “Go” trends for risk-on equity opportunities around the globe. The heatmap shows that, while risk assets remain the strongest, some neutral price action has appeared in the equities markets this week.