Stock market gamblers are letting it ride again on a rough year

(Bloomberg) — Like stranded card players trying to win everything back with one hand, stock speculators are ramping up their appetite for risk at the end of a rough year.

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Active stock managers add to positions. Options markets are showing a trend towards hedging, which is a sign of a pullback for professional stock traders. Away from institutional circles, the demand for meme stock is forever buzzing, with chatroom favorites like AMC Entertainment posting big days.

Fueled by momentum, as usual, is speculation about a policy shift at the Federal Reserve – hopes that coalesced on Friday when US employment and wages rose to previous expectations. While changes in market leadership may herald a more stable future for the rally that has lifted the S&P 500 by 14% since October, it remains difficult to distinguish the latest bull run from the one that broke out earlier this year.

“I’ve just been through a difficult market in terms of people hoping for signs of some delay, but realizing that conditions are still relatively difficult,” said Lisa Erickson, senior vice president and head of the Public Markets group at US Bank Wealth Management. “We are more skeptical that this rally is permanent regardless of what sector or pattern it is driving such as value or growth.”

The problem for the bulls is that the latest rebound in risk appetite is a near-perfect replay of early August, when active managers and hedge funds ordered exposure and M shares in some cases doubled and tripled. That episode ended in disaster for the bulls, as the S&P 500 fell more than 15% over the course of eight weeks. Many critics see the possibility of a similar fate this time around.

In the latest round, staking believers were quick to catch on to Fed Chair Jerome Powell’s comments about a potential bearish turn in the pace of tightening at next month’s meeting, sending the S&P 500 up 3% on Wednesday. That session overshadowed losses on each of the other four days and kept stocks in the green for the second week in a row.

More than $10 trillion was added to stock values ​​as stocks rebounded from their October bear market lows. Along the way, there are familiar signs showing that money managers who had previously reduced their stock holdings considerably are beginning to prepare for the market.

In a survey by the National Association of Active Investment Managers (NAAIM), exposure to stocks fell in September to the lowest level since the pandemic crash of 2020. It has jumped since then and is now hovering near a four-month high.

In options, hedging demand is back – seen as a bullish sign given that no one needs protection when they barely own any stock. After falling to a nine-year low in November, the S&P 500 — which measures insurance demand by comparing the relative cost of three-month discounts versus calls — has risen in three of the past four weeks, according to data compiled by Bloomberg. .

“This may reflect increased hedging activity,” Christopher Jacobson, a strategist at Susquehanna Financial Group, wrote in a note this week. “It could be a constructive sign, suggesting that more investors are adding to positions and as a result demand is gradually increasing.”

The battered hashish crowd seems to be waking up — once again — at least when it comes to meme stocks. AMC Entertainment rose 9% for the week, while Bed Bath & Beyond Inc. An 11-week losing streak, jumping more than 10%.

Similar enthusiasm is not evident among the pundits. Citing everything from a looming earnings contraction to the Fed’s continued tightening, the corporate strategist from Morgan Stanley to JPMorgan Chase & Co warned that the S&P 500 is likely to test its 2022 lows next year. In a worst-case scenario, the team at Morgan Stanley sees the index reach 3,000, or 26% down from Friday’s close.

Investors have been replaying the same fundamental drama all year. The bounce starts either amid oversold conditions or due to Fed hopes, forcing a short squeeze and driving rule-based momentum traders into buying stocks. It makes for a technically seductive hike, but eventually comes crashing down. In August, it was President Paul Jackson Hole’s speech that diminished the euphoria. A couple of months before that, it was a hot inflation print.

However, one difference from Summer March stands out: market leadership. At the time, technology stocks led the recovery as investors snapped up battered companies. This time, economically sensitive and cheap-looking stocks such as raw materials and industrial producers are preferred.

“It’s less of a speculative fringe. The technology isn’t much involved,” said Art Hogan, chief market strategist at B. Riley Wealth. “There’s more durability to this rally because it’s broader.”

Amid all the failed market bounces, institutional investors — pensions, mutual funds and hedge funds — have pulled out. Their net demand for the stock has shrunk by $2.1 trillion this year, according to an estimate by JPMorgan strategists including Nikolaos Panigirtzoglou.

This may lay the foundation for future progress. Should their position return to the long-term average in 2023, JPMorgan’s team modeling shows, that would amount to a $3.3 trillion increase in stock purchases.

The big question is, are these professionals willing to increase their holdings in the face of the enigmatic gaze?

Bryce Doty, senior vice president at Sit Investment Associates, says his company is in the buy mode as Powell stopped drawing parallels to the 1970s inflation era and refrained from arguing that rates had to rise enough to destroy jobs.

“It’s a major inflection point or change from myopic, doctrinaire, damned on torpedoes, going all-out and demanding rhetoric of destruction,” Doughty said. “I know the market will look a little confused from time to time and things can be choppy, but I left the buying camp a year ago. I’m back.”

— with assistance from Vildana Hajric.

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