The Russell 2000 index is over 20% above its 50 day moving average.
I checked the past 20 years, and this hasn't happened. The selloff in March was extraordinary, but the v-rally we've seen has mirrored just how wild the market has become.
We can chalk it up to lots of fundamental reasons... the better-than-expected jobs numbers, the pandemic data coming back better than expected, and hilariously low rates that are still pricing in a deflationary apocalypse.
You can also blame the Fed, but that's a decade-old story now and a boring one.
Let's step away from the obvious narratives and dive down into a very simple explanation.
Who Is Liquid?
Back in March of this year (which feels like 2 years ago now) the markets fell apart. Nobody knew how to price in a pandemic risk and all sorts of trades were blown out.
- Long stocks (obviously)
- Risk parity
- Short vol
- Long Treasuries
- Short Treasuries
It was ugly. Bear markets happen all the time, but the speed at which it occurred was unprecedented. Trading halts hit
So we had this Great Deleveraging event and the market finally bottomed late March.
Now think about two questions:
- Who wants to buy?
- Who still has inventory available?
This is where market liquidity comes into play. Over the past few months, it's not that people have been aggressively buying stocks, it's that there simply hasn't been much inventory for people to buy.
And price must go higher to find sellers.
We have a ton of liquidity demand, but a small hose for it to push through.
This market has been pretty thin. The offers really haven't been available in size, and all you need is a slight push from marginal buyers to move markets. Combine that with the fact that institutions are trying to aggressively releverage and that's how you end up with the Nasdaq 100 breaking to all time highs two months after a market crash.
When Will The Turn Happen?
It can feel sexy when you nail the market turns, but it is hard to do.
As an example, I nailed the exact market bottom on March 23rd, but that didn't mean I was loaded up to the long side with leverage.
I called the top on the markets in January of 2018 but I didn't absolutely kill it when the market crashed.
And while I was a day early on my TSLA top call, the trade I put on didn't really cash in until a full month later.
The lesson here is that the execution of the idea is just as important as the trade itself.
The question here should not be about when the exact top of the market will happen.
It's about what you will do as a trader-- how will you structure your risk for the best kinds of profits over the next week or month?
That's what I've been focused on. I'm putting my blinders on and doing my best to trade what is in front of me, because with the current liquidity conditions we just don't know how far the market can stretch before finding proper sellers.
Hope this helps!