Morning Note: Careful With That Spear! -- And -- "The Rise" of Robin Hood

As January comes to a close it's clear that the winds have changed around equity markets. Last year was utterly void of any serious volatility, with the largest S&P 500 drawdown being ~5%.

As I type the S&P is already down 9.8% year-to-date, while the Nasdaq Composite (whose hugely weak breadth we've been flagging for months) is down 15.2% ytd.

While we're not calling for a major bear market right here (that would be a short-term prediction), we continue to view today's equity market setup (US's in particular) as being one of historically heightened risk; the kind of risk that demands diversification, and, in our opinion, active options hedging to mitigate the impact of something major to the downside.

That said, our economic assessment continues to reflect low recession risk. And it's been our experience, and observation of history, that big bear markets mostly occur amid economic downturns. Of course we are very cognizant of the fact that 2020's recession (shortest on record) and 3-week flash crash in stocks in all likelihood would have morphed into a protracted, painful period were it not for the trillions of dollars of stimulus brought to bear. 

I.e., there's an air of artificiality (or, perhaps better said, an utter dependence on politicians and central bankers) in today's macro setup.

Now, with rising inflation having become the dominant topic of the times, and the view that the Fed is to be its slayer, well... let's just say that the battle would occur within the walls of a somewhat thin stock market bubble. 

Should the Fed miss its mark, say, with an errant spear, well... you get the picture.

Asian equities leaned slightly green overnight, with 9 of the 16 markets we track closing higher.

Europe's taking a hit this morning, with 15 of the 19 bourses we follow in the red as I type.

US major averages are mixed: Dow down 214 points (0.63%), SP500 down 0.09%, SP500 Equal Weight down 0.74% (i.e., continued bad breadth), Nasdaq 100 up 0.57%, Nasdaq Comp up 0.49%, Russell 2000 down 0.79%.

The VIX sits at 30.67, up 0.59%.

Oil futures are up 1.50%, gold's down 0.51%, silver's down 1.48%, copper futures are down 2.27% and the ag complex is up 0.88%.

The 10-year treasury is up (yield down) and the dollar is down 0.13%.

Led by Verizon, ag futures, AMD (chip maker), Indian equities and carbon credits -- but dragged by MP (rare earth miner), ALB (lithium miner), solar stocks, silver and industrial stocks -- our core portofolio is off 0.29% to start the session.

Read the following from Didier Sornette's Why Stock Markets Crash carefully:

"One story often advanced for the boom of 1928 and 1929 is that it was driven by the entry into the market of largely uninformed investors, who followed the fortunes of and invested in “favorite” stocks.

The result of this behavior would be a tendency for the favorite stocks’ prices to move together more than would be predicted by their shared fundamental economic values. The co-movement indeed increased significantly during the boom and was a signal characteristic of the tumultuous market of the early 1930s.

These results are thus consistent with the possibility that a fad or crowd psychology played a role in the rise of the market, its crash, and subsequent volatility."

Has me thinking about the phenomenon epitomized by the recent rise of the Robin Hood trading app that captured the attention of stimulus check-wielding folks who found playing (in the likes of meme stocks and cryptocurrencies) in the market fun, easy, and, alas, addicting. 

Well, I said "the rise" of Robin Hood. Here's a look at the action in its stock since going public last summer:

Have a great day!

Marty

P.S. Macro Update's on deck, then I'll be going quiet (out of the office) until mid next week.