Hugo Angelo Lucien Manenti
Edited
Dear all, After a rocky few days since my last update, it seems that markets are finally catching a break. I’ll try to walk you through my interpretation of what happened, and then discuss a few relevant developments. 𝟭. 𝗪𝗵𝘆 𝘀𝗼 𝗺𝘂𝗰𝗵 𝘃𝗼𝗹𝗮𝘁𝗶𝗹𝗶𝘁𝘆? 𝗔 𝘁𝗲𝗰𝗵𝗻𝗶𝗰𝗮𝗹 𝗲𝘅𝗽𝗹𝗮𝗻𝗮𝘁𝗶𝗼𝗻. We initially saw a combination of worrying news about Omicron and a hawkish tone from the Fed igniting a sharp selloff in the markets. I did say that it seemed overdone at the time, however it accelerated further into last Friday’s close. My bad. What we saw was one more leg in a continued and substantial liquidity withdrawal trend. Hedge funds have been reducing their exposure for many months now. They have been selling their books, and in particular small cap and tech names. A number of hedge funds were deep into those names (the $ARKK type), lost big money this year, and were forced to liquidate positions in order to meet margin calls and investors' withdrawal requests. The Fed’s increasingly hawkish tone added fuel to the fire – higher rates and lower liquidity are bad for growth stocks. This created a snowball effect and was further accelerated by algorithmic trading (“Omicron + USA” = sell) and option trading (Gamma Trap) – fear pushes funds to buy puts, which forces put sellers (banks) to hedge by shorting futures, which sends markets further down, increases fear, etc. Essentially, the opposite of the gamma squeezes that we saw with $GME (GameStop Corp.) and others this year. As more funds faced margin calls, they liquidated their riskiest positions, which is why small caps and crypto had a particularly horrendous Friday – Saturday. It's all quite technical, but this is my best understanding of what happened since mid-November. 𝟮. 𝗪𝗵𝗮𝘁’𝘀 𝗮𝗵𝗲𝗮𝗱? 𝗔 𝗳𝘂𝗻𝗱𝗮𝗺𝗲𝗻𝘁𝗮𝗹 𝘃𝗶𝗲𝘄. Markets are rebounding nicely since Friday’s close and the pre-market looks strong today. It does “look like” we hit a bottom on Friday. Are we heading towards new ATHs or is it merely a corrective bounce before another leg down? I lean towards the former, but nothing is certain. What gives me a bit of confidence is that the bounce is supported by a few positive developments: ✅ Omicron seems to cause fairly mild disease, and shouldn’t have too much of an impact. I already discussed this in my last post: etoro.tw/3E7Pdf3 ✅ China is restarting its engine, as expected, ahead of the Beijing Olympics and the CCP Congress next year. It seems to have dealt with its energy crisis and is back to stimulus and infrastructure spending. Imports rose substantially in October and this is good news for everyone. ✅ Germany printed an excellent industrial production number in October and could benefit from any rebound in Chinese growth 𝟯. 𝗟𝗼𝗼𝗸𝗶𝗻𝗴 𝗔𝗵𝗲𝗮𝗱 Short term moves will likely be determined by (1) what the Fed does, (2) inflation and (3) hedge funds behaviour. Longer term… looks quite good in my view. Nothing is really different from two – three weeks ago. Finally, I made a change to the portfolio. $MELI (MercadoLibre) is a great company which has been building a strong moat in LatAm. They have built a winning full service offering to e-commerce merchants, with an e-commerce platform, logistics, payment solutions and financial services. The stock took a beating this year due to the situation in Brazil and poor sentiment for the sector and now looks quite attractive to me. I had to sacrifice a position and $PTON (Peloton Interactive) took the axe. I still think that it is worth much more than where it is trading, but I always prefer to cut my losers rather than my winners. Peloton’s management has been a disappointment, and the technicals still look weak – it made another low yesterday… That's all for today, I hope you have a great week! Hugo $SPX500
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