Equities sold off sharply on Wednesday and finished the week slightly in the red. The S&P 500 was down 0.5% for the week. The NASDAQ outpaced small caps by 2.8% on early signs the growth outlook may not be as robust. The Bloomberg Barclays Aggregate Bond Index was up 0.2% as longer dated Treasury yields inched lower. Every sector in the S&P 500 was down by more than 1% on Wednesday as the index suffered its largest daily decline since October.

The Federal Open Market Committee met on Wednesday and left the federal funds rate pinned near zero. There were no changes to the outlook. The press conference saw Chairman Powell hit with several questions on financial stability given the basket of short-squeeze stocks rising 200-400% in just days. As expected, the question was not directly answered. GameStop has risen more than 1600% in 10 trading days. After success with a short squeeze on GameStop, attention shifted to finding the next target. AMC Entertainment is up more than 550% in four days, Express up more than 700% in days and so on. In short, several hedge funds with concentrated short positions could face bankruptcy potential in coming days, especially if this persists.

It is believed that overall market pressure on Wednesday was related to forced selling from hedge funds liquidating their long stocks to cover huge losses on their shorts (bets that a stock will go down). Also, record call options have aided in the market run-up, but these suddenly have been directed off index in an attempt to engineer a short squeeze. The famed Reddit forum WallStreetBets, which is retail focused, is reported to have added 1 million new members overnight. There is often a group herd mentality with these forums which creates large flow dynamics. This is exasperated by hedge funds and others that try to front-run the huge flows, which creates an even bigger push in whatever is being targeted. This could be a source of financial instability in coming months and bears monitoring.

Earnings season is in full gear and thus far there has been significant sales and earnings surprises across the S&P 500. This was expected by the market as analyst expectations seemed overly conservative. The bigger thing to monitor is how stocks react to positive announcements. The last couple of days have seen some negative price reaction to positive results, which could foretell market weakness.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
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Justin Carley, CFA, FLMI, Managing Director II

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