Record High S&P 500 Ignites Unhealthy Retail Investor Interest

Positioning in U.S. stocks is flashing a short-term warning sign as the market hits record highs and shrugs off rising Covid cases, lockdowns and weaker economic data. Horizon Investments is noticing rising retail investor demand for call options. That demand is similar to what was observed in August just ahead of the September pullback in stocks. As for professional traders, the CBOT’s data shows they’re essentially flat, erasing the multi-year high in bulls reached in October. While retail investor positioning is generally a poor barometer for timing short-term twists and turns in the market, it has our attention and we are monitoring it.

The task of interpreting the positioning data is made harder by politics and the Federal Reserve. Any drop for equities is likely to be aggressively bought as Congress moves quickly to strike a stimulus deal before New Year’s Eve. Meantime, the monetary stimulus already injected by the Fed and the end of the election’s uncertainty are reviving animal spirits.


Factor volatility in U.S. markets has calmed down after the strong move to value. The fact that the tech-heavy NASDAQ beat the S&P 500 last week indicates the value/growth battle will not be a clear-cut affair. That said, small-cap stocks beat the S&P 500 as well, and we think that trend is likely to continue.

We continue to favor emerging markets and Asia over Europe due to better growth stories, more favorable equity sector composition and the drop in the dollar. Brexit negotiations are another reason to avoid Europe.

Bond Market Breakout or Fake Out? Two levels to watch if this is a real breakout higher in Treasury yields or the third fake-out of the pandemic: the psychologically important 1.0% level in the 10-year note and the post-Pfizer vaccine high of 1.77% for the 30-year bond. Those key levels are perilously close by.

Credit markets completely believe the Fed will hold rates down for a long time to come. Spreads are tight and getting tighter. Any widening should be viewed as an opportunity to increase exposure.


What to Watch This Week

Covid and vaccines – The U.S. Covid numbers are plainly awful and set to get worse; vaccines cannot be administered fast enough. Economic restrictions are coming back as hospitals are overwhelmed, while rollout plans for the first vaccine doses are coming together. Watch FDA discussions on Thursday.

Stimulus talks – A deal in the $900 billion range is what markets expect. Aid to state and local governments and small businesses could go a long way to bridging the gap as businesses are forced to shut down again.

ECB meeting – European Central Bank (ECB) President Christine Lagarde has her work cut out for her. Europe’s economic recovery looks tenuous, and inflation is not expected to hit the ECB’s target anytime soon. Trader expectations for additional easing are exceptionally high. If that isn’t met, the Euro may rally, adding another blow to the continent’s recovery.


This commentary is written by Horizon Investments’ asset management team. Please reach out to Chief Investment Officer Scott Ladner for interviews at 704.919.3602 EXT-3602 or sladner@horizoninvestments.com.


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