Many equity traders dislike today’s holiday. The main reason is jealousy. Why should we have to work when our fixed income brethren get the day off? That hardly seems fair. Yet in so many ways, the holiday is different in 2020. Many individual investors find themselves with more time on their hands today, time that can be spent in their newfound pastime of stock and options trading.
The crop of newly minted investors tend to be bullish. Who can blame them? If you began investing in the spring and summer, thanks to monetary and fiscal stimulus you might assume the following are true:
- Markets always go up
- Every dip is a buying opportunity
- Tech stocks go up the most
- Call options go up even faster
Those of us who have endured several market cycles, including the gut-wrenching declines of long ago – such as March of this year – understand that markets are not always that simple and one-sided. But quite frankly, prices are set at the margin, and the marginal new investors are those who have taken this summer’s lessons to heart.
Thus it is not surprising to see markets head upwards today. Investors are shrugging off the diminished likelihood of a fiscal stimulus agreement this week (even if the White House and House of Representatives agree to a deal, the Senate also has to sign off on it) and instead focusing on individual stocks and their stories. And lo and behold, the stocks with the highest influence upon the key market-capitalization weighted indices are the ones with the type of stories that can grab the imagination.
I’m talking specifically of Apple (AAPL) and Amazon (AMZN), both of which are up over 4.5% today as I write this. Amazon’s Prime Day is actually a two-day affair, beginning tonight at midnight. It is a testament to the market power of the retailing giant that what is essentially a warehouse clearance sale can be treated as a national holiday. Can you imagine the same occurring for a huge sale at Wal-Mart (WMT)? As a manufactured event, only Alibaba’s (BABA) Single’s Day is in that league. Big things are clearly expected out of Prime Day.
Tomorrow also brings us an event hosted by AAPL, during which they are widely expected to introduce an iPhone 12 with 5G capability. Given the iPhone’s phenomenal run as one of the world’s most profitable products and AAPL’s enormous size, it is well worth the market’s continued attention on every new product announcement that company makes. Investors seem to be expecting that the new products could be game changers.
Could it be that markets are setting themselves up for disappointment? Sure. But we won’t know that until tomorrow or the next day. Investors also seem to have decided not to let facts get in the way of a good story – and investors are saying today that tomorrow’s stories will be good ones.
As a final thought, consider the put/call ratio. Below is a graph of the US Put/Call ratio, compiled by Bloomberg. Low levels of this index show that there is far more volume traded in calls relative to puts. The ramification is that the index only reaches low levels when traders become more enraptured with potential profits than they are concerned about hedging potential losses. In other words, greed outpaces fear. The ratio has dipped to levels seen 4 times in the past 4 months. Two of the three prior occurrences were followed by sharp dips in the broad indices like the S&P500 (SPX). Please keep that in mind if you consider the mindset described above to be a truism.
Source: Bloomberg
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