The Speculative Present Vs. The Investing “Pfuture”

Markets discount future events, don’t they? If so, that should mean that widely expected events have little impact when they actually occur. When markets closed on Friday, did anyone reasonably NOT expect that the Pfizer (PFE) vaccine would not be approved and start shipping by this morning? If so, why did we begin the day with a nearly 1% rally?

We can assert that there were other positives today. One could credibly claim that there are new possibilities for progress in both the fiscal stimulus and Brexit impasses. Those of course would count as fresh reasons for optimism, but those were not the stated reasons behind the move. There was a definite turn lower – from the highs, not overall – as the news of London’s more stringent lockdown measures hit the wires. 

The London lockdown news reflects the market’s view of the present versus the future. The present is both gloomy and hopeful, with dire news about Covid outbreaks being balanced – or outweighed by – the hope that things will snap back to normal after the vaccine is widely distributed. Markets are pricing in an economy that was as strong as the one before albeit with more accommodative monetary and fiscal policies. That would indeed be a powerful combination. Of course, it is a particularly rosy set of assumptions that things will snap back to normal so quickly after such immense disruption, and to do so without causing inflation sufficient to cause the Federal Reserve to reverse some of their accommodation, but that set of assumptions has worked for investors so far.

Why today’s rally, then? I believe that some of it has to do with the new infatuation for options by individual investors. Today is the Monday before a quarterly expiration, which has always been focus for larger investors who strategically roll options positions during this week. The current wave of options activity, with individual investors focused primarily upon weekly call options, is converging with that activity. These investors are initiating fresh positions in their favorite tech names. Those tend to be bullish call bets, which have the short-term effect of pushing those names higher.If there is enough call buying, the call sellers find they need to delta hedge by buying shares, creating a positive feedback loop. (We discussed this phenomenon last week here and here)

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Disclosure: The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the ...

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