At first glance, one would think these are the perfect market conditions for bears to make some money. However, the Fed has other ideas.
Yesterday was a truly mesmerizing day on Wall Street. U.S. markets witnessed a 900 point swing, opening down more than 2%, turning it around midday, and closing with modest gains. The S&P 500 (NYSEARCA:VOO) fell 2.5% intraday to go on and fully recover its losses. This has only happened 3 times in the last 10 years. Interestingly, those other two times were December 27, 2018, and March 19, 2020, both representing the tail-end of a sharp market downturn.
Some noticeable moves include Shopify (NYSE:SHOP), which jumped 8% after announcing a deal with Walmart (NYSE:WMT), Peloton (NASDAQ:PTON) up 6% and hitting all-time highs, Draftkings (NASDAQ:DKNG) up a whopping 13% for the day, DocuSign (NASDAQ:DOCU) up 8% after it replaced United Airlines (NASDAQ:UAL) on the NASDAQ 100 index, and Teladoc (NYSE:TDOC) which saw a 9% bump.
Why the big turnaround?
All the major indices opened down significantly yesterday after futures pointed to heavy losses, thanks in the most part to fears surrounding a second wave of COVID-19 infections. A number of states recorded an uptick in cases and perhaps most worryingly, Beijing recorded its most amount of daily cases since April as an outbreak was traced back to the biggest wholesale food market in the capital. However, that was until Jerome Powell charged in on his white horse to save the market in distress and live happily ever after. The Federal Reserve’s announcement that they would be buying up to $250 billion of individual corporate bonds in addition to ETFs, essentially providing a backstop to companies most in need of financing, immediately buoyed the markets and turned what was shaping up to be a bloodbath into smooth sailing for investors.
The further extension of the Fed’s safety net was a welcome sight for many and is a testament to the lengths it will go to protect this market. The historic measures taken by Jerome Powell have been the main catalyst in this impromptu rally to many market bears’ dismay. While some may begin to question the ever-growing asset list on the Fed’s balance sheet, its seemingly limitless commitment to protect this market will be enough for many bulls.
You can’t predict the unpredictable
Short-selling is fraught with innumerable risks, perhaps most pertinent of which is the ability to lose your shirt before you even read the rule book. While I would never endorse it for fear of significant shirt-losing by myself and anyone unfortunate enough to listen to me, it is a practice undertaken by many, especially in the face of an overpriced market. So now would seem a perfect time, right?
Wrong.
For short-selling to work, things have to act with some sense of logic, and unfortunately, this market is currently bereft of any. With the infusion of millions of new investors and traders, coupled with a government-sponsored safety net, any sense of rationality has left the building a long time ago. Companies threatening bankruptcy like Hertz (NYSE:HTZ) and Chesapeake Energy (NYSE:CHK) are now go-to’s for a quick pump-and-dump, while growth stocks like Zoom (NASDAQ:ZM), Tesla (NASDAQ:TSLA), and Draftkings are only adding to their gains in spite of their ludicrous valuations.
While so many indicators point to a correction of sorts on the way, to bet against the current market right now seems a losing battle, with yesterday being a perfect example of why you shouldn’t. For the many of you who are expecting such a downturn, the safer bet right now might be to just sit and wait on the sidelines with your dry powder at the ready, because the risks of relying on logic right now seem too great to overcome.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.