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Old 29-01-2021, 13:26
TickmillNews TickmillNews is offline
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Join Date: Aug 2018
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Default Re: Tickmill UK Fundamental Analysis

Why stock markets can fall further, but not for long

The US dollar extends bullish correction entirely on the back of increased volatility in the stock markets. The risk-off on Friday were fueled by an apparent liquidity shortage in China money markets, where the overnight repo rate rose to a 5-year high, presumably also signaling increased credit risk.

The halt of trading in shares that were rampantly bought up by retail investors in recent days calmed markets on Thursday, but today it became known that brokers resumed access to buying, so the hot theme of market cornering and short squeeze of hedge funds has every chance of jolting stock markets again. To justify this, take a look at the following chart:

It shows the value of two portfolios - stocks which have the highest number of short interest (aka “most shorted stocks”) and stocks - favorites of hedge funds. The indices are completely different in terms of composition of portfolios - the first consists of “losers” according to some market consensus (since they were heavily shorted), while the second – good firms with strong potential. It can be seen that in the last few days, especially on January 26-28, the indices mirror each other - when the value of “most shorted” index rises, the VIP index falls. That is, when retail investors rushed to buy shares of hopeless firms, for some reason market favorites fell. How can it be possible? One of the most logical explanations is that hedge funds were forced to sell their favorites from the index below in order to cover their short positions in stocks from the index above.

From the reasoning above, it follows that if hedge funds failed to reposition and close shorts yesterday when trading were halted, resumption of the opportunity to buy losers could allow the army of retail investors to again push the pros to the wall and this could lead to deeper fall in ‘favorite’ stocks, which, as we have already seen, easily feeds into the broader market, which is quite fragile due to weak news background and proximity to historical highs.

However, it is worth remembering that the macro picture has not changed much. Investors continue expect economic rebound in the first half of 2021. The risk described in the article is unique, so long-term correction, in my opinion, can be safely ruled-out. I consider the 3650 level in the S&P 500 (Christmas lows) as a potential entry point upwards. Unless, of course, the market turns around earlier.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

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