Investors Stampede Out of the Market?

By Marius-Cristian Frunza
Weekly Briefs

The Federal Reserve signals a move towards tapering asset purchases. It is not a secret that Fed’s measures throughout the pandemic boosted the financial markets to unprecedented levels. The gains generated by the inflation in asset prices are theoretical because no one is taking into account the exit costs. What if a certain segment of investors may wish to mark their profits? Could investors be tempted to rush out?

The U.S. central bank maintained its policy to keep the benchmark federal funds rate in a range between 0% and 0.25%. Moreover, the Fed will continue the quantitative easing in the foreseeable future, by holding the bonds purchase strategy. Nevertheless, investors feel the wind of change, which may reduce the Fed’s support.

The market pumping that started in March 2020, brought irrationality in investors’ decision-making process. Retail investors were not attracted to the market by the bright economic perspectives. They were pushed into buying by the fear of missing out, thereby inflating asset prices to unsustainable levels. The very same senseless frenzy that drove traders into the market, could push them out of it. When investors apprehend the tide is turning, they would rush to cash out their investments.

What will the market look like the day after?

It is overly complex to speculate about a foreseeable massive market sell-off. Nevertheless, the Gamestop episode could be relevant for such market disruptions. Liquidity risk should be the key concern for an individual investor in the case of a sudden market exit. Under such circumstances, retail and institutional investors would compete against each other for better prices. The competition will be asymmetric and Wall Street will have the upper hand, thereby leaving the retail traders exposed to unforeseen risks.

How can an unsophisticated investor hedge such risk? A straightforward approach would be to de-risk the portfolio, re-centre the investment around a core of stable instruments and avoid highly speculative assets.

All hype/speculation is doing is drawing in retail before the mother of all crashes. When crypto falls from trillions, or meme stocks fall from tens of billions, #MainStreet losses will approach the size of countries. Michael Burry, Scion Asset Management, CEO

Market overview

The 10 years Treasury yields fell on Thursday as low as 1.25 % amid a spike in market volatility. The dip was temporary and the bond yields rebounded swiftly, as the stock market bolstered in the last trading session. Nevertheless, this decline in bond yields could be signalling that investors have several underlying concerns. On the one hand, the spread of the Delta variant may bring a new lockdown, thereby hindering economic recovery.

On the other hand, it could show that the inflation burst is only transitory. NASDAQ, the leading tech stock index hit record highs despite the fresh concerns about coronavirus. Bitcoin had a relatively silent week, the price of the leading cryptocurrency oscillating around 33,000 USD.

Focus:

Palantir

Palantir Technologies, the American software company specialized in big data analytics seems to have lost its edge. Palantir's shares were on a positive trend in June but lost over 10% over the past week.

The Colorado-based company has been on a  bearish cycle since February when its stock was worth twice its current value. The innovative firm is in a process of streamlining its commercial sales and revamping its marketing. Nevertheless, the rampant competition in the space of big-data intelligence providers may significantly erode its market share.

Focus:

AirBNB

For those frequent AirBNB customers, the San Francisco-based tech giant may look like a well-deserved success. Behind the enormous network of logging properties that resemble more to a global hotel chain, there are a number of shady stories. The investors are aware of these concerns and the evolution of the share price since its public listing speaks for itself.

Airbnb has a secretive team called “the Black Box” including 100 agents responsible for keeping away from the eyes of the public, stories of murders, deaths and sex attacks taking place at its rentals. The Black Box generated a Black Hole of more than 50 million USD in payouts for various lawsuits settlements. Investors need transparency in order to put the right price on AirBnB’s shares.

Focus:

Virgin Galactic Holdings

Virgin Galactic,  the British-American spaceflight company founded by the legendary entrepreneur Richard Branson, has been on a bullish path since May. Over the last week, the share price gained significant traction after Branson’s announcement that he will take his first flight aboard a Virgin Galactic spacecraft on July 11. If the flight is successful Branson will win the billionaire space race against Jeff Bezos and breach the final frontier of space tourism. We note that Virgin Galactic started its journey in October 2019, following its merger with publicly traded SPAC Social Capital Hedosophia, a blank check company that raised over 650 million USD in 2017.

Market outlook

The Dow Jones Index soared over the past week above 34,800. The current momentum could bring the leading stock index above the 35,000 mark. Thus, the likelihood of a significant correction in the short term seems low. Nevertheless, the perspective of non-transitory inflation and a new wave of coronavirus infections could put investors in a risky spot.

Bitcoin’s price is stabilised in the short run, but we are not yet at the end of the bearish cycle. For the moment, there are no signs of an exit from this zone of turbulence.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.