S&P 500, Russell 2000, Dollar, EURUSD, GBPUSD Talking Points:
- The 80 percent retreat in GameStop shares this past week seems to draw to a close the era of speculative mania
- Despite the quick rise and falter of the fade risk assets, traditional measures like the S&P 500 managed to notch record highs to close this past week
- A promising Dollar rally was cut down Friday when January jobs data reminded markets of economic troubles; but pairs like EURUSD, USDCAD and GBPUSD are still loaded
Risk Appetite Has Lost Its Urgency and Returned to Dubious Stability
The incredible rise of the retail trader effort to fight a perceived predatory hedge fund effort to short certain US stocks rich in value seems to have come to an end this past week. A swell led by the likes of GameStop and AMC has largely deflated while volume and volatility have normalized. There is still potential for these targeted assets to recharge from ‘a more favorable level’, but that would require the market to rouse a sense of conviction that goes against the most basic of interests for market participants: speculative returns. Mustering the kind of weight to move even a moderate level volume single stock is no small feat, and there is reason to believe that the charge of the past two weeks was born of false pretenses. In a report from JPMorgan, it was shown that GME wasn’t even one of the top 10 stocks retail traders were active in – meaning ‘other’ forces were leveraging the degree of volatility we were seeing.
Chart of GameStop with Volume and 1-Week Rate of Change (Change)
Chart Created on Tradingview Platform
Ultimately, a moderation in tickers like GME, AMC, BB and similar is a favorable shift for those that are true believers in the bullish course of the markets. While a general ‘risk on’ mentality can lift all boats, such an intense charge in very particular areas of the financial system is often a sign of excess…an urgency that is like a flash in the pan. Such appetites usually burn bright but they consume conviction very quickly. As the outperformance of these single names (including silver and Dogecoin) settles, we are left with a picture of more traditional speculative measures that are slowly extending their gains. The S&P 500 ended this past week at a record high. Much of the move through the period was ‘recovery’, but the strength of the small-cap Russell 2000 relative to the broader (and more heavily traded) S&P 500 suggests there remains a focus among market participants. That contrasts another ratio like the Nasdaq 100 to the Dow Jones Industrial Average which tracked out the favor of tech shares. Is this a permanent rotation in speculative appetites or a sign of froth?
Read about how the rise retail can be a signal for a market mania.
Chart of Russell 2000 Overlaid with Russell-to-Nasdaq 100 Ratio (Daily)
Chart Created on Tradingview Platform
While I will admit that markets seem to be shifting back to norms that fall more squarely on factors of complacency, that should not be misconstrued as stability for a next phase higher. Speculative assets have been running proud of underlying fundamentals for some years, and there are limits as to how far the charge can run. To give a sense of how prominent the appeal of capital markets is to the average person – and inexperience is numbing the sense of value – I think it is worth revisiting the search in Google for ‘day trading’. On a global basis, we have seen interest in this speculative endeavor hit a peak that far outstrips anything we’ve seen stretching back to when the search engine began keeping data (in 2004).
Google Global Search Ranking for ‘Day Trading’ (Weekly)
Chart from Google Trends
A Reminder of Fundamental and Speculative Disconnect
To give a further reminder of the contrast between fundamentals and price action, I believe this past Friday’s data was a particularly acute reminder. There was very little to cheer over in the US January employment update. While the headline nonfarm payrolls figure was in-line with expectations at 49,000 jobs added (the consensus was 50,000 expected), the 0.4 percentage point drop in the jobless rate to 6.3 percent fooled no one. It was a drop in the participation rate which prompted the ratio change. There are still 18 million Americans collective unemployment benefits – a remnant of the steep recession just last year.
US Change in Nonfarm Payrolls Overlaid with Unemployment Rate (Monthly)
Chart Created on Federal Reserve Economic Database
A dubious backdrop for the US labor market is a picture for the world’s largest economy. Yet, the trouble this would insinuate for traditional investment themes wouldn’t knock the speculative favorites of the past decade off their trajectory…yet. On the other hand, the US Dollar certainly felt the burn. Having just this past week earned critical technical progress with the DXY Index clearing 91, it seemed that the technical crowd could be roused to action. On Friday, however, with the US employment data as a backdrop, that climb would falter. The EURUSD – a mirror for the US Dollar Index given its principal weighting – responded with a check higher after tentatively breaking the midpoint of the past six months’ range but before the 100-day moving average gave way. Now, we are simply ping-ponging between technical barriers.
| Change in | Longs | Shorts | OI |
| Daily | -5% | 4% | -2% |
| Weekly | -4% | -9% | -6% |
Chart of EURUSD with 100-Day Moving Average (Daily)
Chart Created on Tradingview Platform
Top Fundamental Targets and Arbiters for Market Impact
Looking out over the coming week, the Dollar will be one of the key assets on my radar. It doesn’t default to complacency so readily like US indices. With that said, if the idea is to keep focus on risk trends, USDJPY can be a useful measure. Both the Greenback and Yen are often labeled as havens, but they are not outright measures in this category. The Dollar is preferred as refuge when liquidity is at risk while the Yen is treated as such when stretched speculative interests must unwind – as Japanese investors used to looking abroad for returns will repatriate capital. What extreme are we dealing with in either ‘risk on’ or ‘risk off’? This pair is a better barometer than most. As it stands, Friday closed the first bearish daily candle in 8 trading days, ending the longest bullish stretch since October 2016.
| Change in | Longs | Shorts | OI |
| Daily | -16% | 1% | -3% |
| Weekly | -8% | 7% | 4% |
Chart of USDJPY with 200-Day Moving Average and Consecutive Candle Count (Daily)
Chart Created on Tradingview Platform
Another pairs that was quite interesting to end this past week was USDCAD. The ‘minor’ Dollar pair checked lower below a major trendline resistance. What is more remarkable than the technical retreat was the fundamental backdrop. While the US labor stats were disappointing under the surface, the Canadian figures were outright bad. The net payrolls figure out of the Northern neighbor blew past the expected -48,000 jobs lost expected last month with a staggering -213,000 positions lost. That pushed the jobless rate up to 9.4 percent. The Loonie slid in other pairings, but not USDCAD. I will be watching to see what this pair does in the first half of next week and what the Canadian currency does more broadly.
Chart of USDCAD with 100-Day Moving Average (Daily)
Chart Created on Tradingview Platform
One of the serious shortcomings – at least from an event traders’ perspective – next week is the serious lack of high profile data points and critical events. We have a few milestones like the University of Michigan US consumer confidence survey, top central bank speeches and other ancillary prints; but these are hardly what I would expect to redefine bearing – much less sustain a trend. Aside from the abstract developments on US stimulus or change in the global Covid status, I will be watching the UK’s docket for the December/4Q GDP statistics. GBPUSD, EURGBP and GBPJPY are all interesting on a technical basis; and the proper application of fundamentals can make for drama. Of course, that is on tap for the very end of the week; so set expectations accordingly.
Chart of GBPUSD with 50-Day Moving Average and 20-Day ATR (Daily)
Chart Created on Tradingview Platform
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