Is Good News Good Again? Not Yet.

Then a strange thing happened. Well, maybe not so strange in light of the recent performance of stocks during recent sessions. Major indices sank after registering their highs of the day (as of now). As I write this, the S&P 500 (SPX) is down about 0.75% and the Nasdaq 100 (NDX) is down over 1.5%. The VIX index is resuming its flirtation with 30, indicating investors’ increasing desire for protection. We now have to ask ourselves what has equity investors so spooked – especially when they can’t blame an unchanged bond market.

I believe that we are seeing the continuation of two trends that have the potential to cause a fair bit of short-term pain. One is the continuing pressure on high momentum stocks, particularly those that are widely held by the Ark Investments funds. I wrote about this a week ago and urged caution because I saw traders actively targeting these holdings. I worry that this is growing into a larger negative feedback loop, with holders trying to lock in profits (or minimize losses, if they are newer entrants) as the funds drop. Many of the stocks in question have high weights in SPX, and even higher weights in NDX and those indices will be under pressure if this feedback loop grows.

Also, I remain concerned that the need to raise money to pay taxes on April 15th may be weighing upon investors as well. It should certainly be considered carefully by investors who invested many of the trading profits that they earned in 2020 into investments that are performing poorly in 2021. Early last week, I wrote that VIX futures appeared to be pricing in worries about either tax payments and/or a “buy the rumor, sell the news” reaction to the fiscal stimulus package over the coming months. Liquidity needs ahead of tax day could reverse the inflows to which the equity markets have become accustomed.

That said, various technical indicators are pointing to major US indices as heavily oversold. That could result in a sharp snapback rally – much like we saw on Monday this week (doesn’t that rally seem far away right now?). Unfortunately, oversold indicators are not great at timing. Stocks and indices can remain oversold or overbought for extended periods of time. At present, I would take the message of the VIX index and remain poised for volatility over the short-term.

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