“…According to data from Bank of America Global Research released this week, individuals remain a permanent source of buying in this market. And last week retail was the only offer left…Last week’s accumulated equity flows were $ 5.2 billion in net outflows. This was the largest week-long stock churn since November and the fifth largest in history. In the past, such exodus from the market has been a shaky time for investors… ”
– –Yahoo Finance, April 21, 2021
This article implies that retail investors will be the main drivers of the market in 2021, even if hedge funds and institutions were net sellers. No doubt we saw some stocks take to dizzying heights in the first quarter when Reddit and individual investor collusion made the headlines.
In addition, we have seen evidence in stock option activity that the ratio of the buy volume (to open) the put volume (down betting or hedging on long positions) to buy volume (up betting or hedging on a short position) is reaching multi-year lows.
My approach to increasing the retail flow in stocks has been that if most of these market participants continue to make money, they will likely remain a supportive factor in the stock market.
At the same time, such players, some of whom are brand new to the game, tend to be weaker hands, which makes me wonder, “Will these weaker hands ultimately leave the casino with their newfound fortunes in hand? or stay too long? “Staying too long and making the big bet at the wrong time is a risk institutions and hedge funds are likely to see as such groups have been net sellers for the past few weeks. The good news is that these participants represent future purchasing power after they do have stepped to the sidelines.
The sentence that comes to mind from The Art of Contrary Thinking by Humphrey Neill is:The public is right during the trends and wrong on both ends. ”
Unfortunately, as catchy as this phrase is, there is nothing related to that timed coordination wrong to the public. So the applicability I see is that if the diagrams suggest you should consider hedging in cases where the sentimental risk is increased, or make sure you have a plan for such action. If the charts continue to look strong, as they do now, it is best to keep the uptrend and have a plan in place to hedge if technical risks increase due to a higher outage of support.
This logic brings me to the next topic …
“… Potential levels of support for entering this week’s trading include 4,131 today, which is the level corresponding to 10% above the 2020 closing price and the top of the channel. On Friday, the top of that channel is at the half century SPX 4,150 mark. If you’ve been on this index or an equivalent index for a long time, don’t disturb positions unless the SPX falls back into its channel by the end of the week. And if you want to give more headroom to decline before trading, move below 4,050 might be worth considering. “
– –Monday morning view, April 19, 2021
Keep in touch with longer-term historical chart patterns that I discussed in depth last week. If such longer-term historical patterns repeat themselves, you will recognize early on an early interruption of important levels of support, which I have discussed in recent weeks.
The S&P 500 Index (SPX – 4,180.17) hunched last week – Thursday’s decline was due to headlines related to President Biden’s plan to nearly double the tax rate on capital gains (which I’ll discuss below) – but it was far from broken.
As per the chart below, support for the SPX was at 4,131, which is around 10% above last year’s closing price and a level discussed last week. There has been one near below the channel since mid-November connecting higher highs, but the SPX quickly moved back above that level. In addition, the level at which the movement occurred over this channel – specifically 4,105 – was never tested during pullback. This is another level that you can attach importance to as well.
In addition, the potential support is at 4,050 – or roughly six times the low from 2009 – and the roughly 4,000 millennium point. For what it’s worth, the 50-day moving average of the SPX, popular with many technicians and retail investors who use technical analysis, is rapidly approaching that 4,000 round level. Notice that this moving average included two of the last three pullbacks in the In index.
Anecdotally, on Wednesday last week, I had accidentally turned up the volume when Bloomberg TV was playing in the background. I noticed word correction being thrown around in the afternoon program.
In fact, a Susquehanna analyst found a volume of 45,000 SPDR S & P 500 ETF Trust (SPY – 416.74) Strike in May 402 / strike in strike 382, which was used the day before as a hedge. The opposite reaction is that if everyone is attuned to a correction, a correction is unlikely.
However, we have seen rare instances where the large open positions on strikes well below the SPY can sometimes act as magnets as the correction eventually becomes a self-fulfilling prophecy as sellers of the puts are forced to close S&P futures sell when the put strikes are hit, typically after an unexpected catalyst has triggered the initial decline.
Looking at the standard May expiration series, the SPY would currently have to fall below the 405 strike for the option mechanics discussed above to accelerate a decline. The 405 strike coincides with SPX 4,050, which I discussed above as a potential level of support.
“Markets are falling after the second report that President Biden will increase capital gains for wealthy Americans from 20% to 39.6%.”
-Briefing.com, April 22, 2021
“The investment income tax rate is a variable in a model followed by Keith Parker, head of US equity strategy at UBS. In the past, when the tax rate changes, the multiple of the S&P 500 is also the same. The new suggestion could mean a 7% hit for the PE multiple. This is because a higher interest rate could cloud sentiment towards stocks as investors are less willing to pay for profits. Momentum stocks felt the brunt of the impact, just as they did in 1986 when the tax rate on long-term capital gains rose from 20% to 28%. “Another point to consider is whether stocks with large embedded capital gains price this in even more?” Said Parker. “And we’ve seen some evidence of this in the past. ‘”
– –Bloomberg, April 22, 2021
“The White House plans to double the investment income tax rate to 39.6% for those earning $ 1 million or more, according to those familiar with the proposal. That would not affect many. Only about 0.32% of American taxpayers reported more than $ 1 million in adjusted gross income and capital gains or losses on their returns, according to the Internal Revenue Service’s 2018 tax return. ”
– –Bloomberg, April 22, 2021
A few thoughts come to mind:
- If retail is actually the driving force right now, and it is actually 0.32% of American taxpayers who are vulnerable to the tax hike, one might conclude that those pushing the market higher are not for such a capital gain increase are prone to. While stocks fell in the headlines, the fact was that it likely didn’t affect the investment process of more than 99% of market participants who are currently driving stocks higher.
- The proposal on capital gains tax, which is expected to be officially implemented this week, has not yet been regulated by law. Nobody can definitely say that this will happen and in what form.
- IF the proposal in its current form goes into effect and IF 1986 provides an invaluable roadmap on what to expect in terms of momentum names selling off, which stocks are most vulnerable?
Momentum can be defined in a number of ways, but one way could be to consider names that the wealthy had early access to via initial public offerings (IPOs) in recent years and that have resulted in exorbitant returns. Such a list includes, but is not limited to, those shown in the following table. This table could be used as a future reference when and in what form the capital gains tax proposal is implemented.
Todd Salamone is Schaeffer’s Senior VP of Research