Market Update: 9/1/2020

J2 Capital Management Research Team

Links of Interest for Advisors:

Recent News

 Fed Chair Powell outlined a shift towards an average inflation target. Under the new framework, the central bank would allow PCE inflation to run moderately beyond 2.0% overtime to make up for years when it ran below 2.0%.

Clients to Advisors - "But the market is doing so well" Is it?

The current dichotomy and bifurcation going on in the market is nothing any of us has seen unless you were around in the 1950s for the Nifty Fifty rally. With the S&P 500 up around 8% year to date, one could easily be led to believe that the market, as a whole is doing quite nicely.  The chart above shows that this is truly not the case.  The mass herding into those FANNMG names and software stocks keeps rocketing higher unabated while the rest of the market languishes behind.  How exactly does this end?  Will the rest of the market catch up to the select few that are powering the S&P 500 higher or will the tech stocks tank to catch down to everything else?

Sentiment Check

  • Equity flows have lightened up significantly as we've approached all-time highs.
  • This could be a mix of profit-taking and people who are still skeptical of the rally.
  • We've seen some market participants recently take their foot off the gas as individual names have gone parabolic. 

  • There is still a good amount of money on the sidelines in money market funds.
  • We've actually fallen from 17% cash to 13% but it's pretty clear that we are far away from all in behavior.

Consumer Check

  • Retail sales have bounced back from the March bottom and have hit a new all-time high when adjusted for inflation.
  • It's pretty clear that if you continuously give people free money they will spend it. It will be interesting to see if this can continue if there isn't any fiscal stimulus going forward.

  • Housing continues to be the hottest sector. We've never seen this sharp of a correction in terms of trough-to-peak.
  • From multi-year lows to new all-time highs in a little under 6 months.

Money Velocity

  • The continued expansion of fiscal policy has expanded the money supply significantly (M2 Money Stock) but the velocity of money continues to decline despite the government effort to encourage spending.
  • The velocity of money can be thought of as the rate of turnover in the money supply--that is, the number of times one dollar is used to purchase final goods and services included in GDP.
  • So far the additional money printing has not resulted in any significant growth in GDP terms and consumers don't seem to be spending this extra income. This is troubling for the Fed's goal of increasing inflation.

Gamma Exposure

  • Gamma exposure is a metric we like to track as the options market has started to play a much bigger role in individual stocks and indexes. You can think of gamma exposure as a metric that can help estimate volatility.
  • The higher the gamma exposure means that there is increased options activity and market makers will have to do more hedging as a result. When gamma is high it usually results in a mean-reverting market. This results in traders buying dips and selling rips.
  • When gamma exposure is low or negative it can result in major swings in the market in either direction. Market makers go from buying the dip to selling into it, and vice versa on the upside.
  • You can see that gamma exposure has reached an all-time high which has been reflected in recent price action and VIX. Realized volatility has collapsed as a result, however, implied volatility has actually started to increase. This may indicate that market makers are raising the price of options in anticipation of increased volatility.

Dark Pools

  • Another statistic that we like to track is dark pools. Dark pools are where large institutions go in order to execute large trades that may cause distributions in a regular trading session.
  • You can see that they have started to back off significantly after a large buying spike in March. This could be a signal the larger players are backing off the bid. You can see that some of these drops in the dark pool have resulted in shorter-term pullbacks, which aligns with our thinking.
By J2 Capital Management Research Team

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