The Market Bacchanal Rages On — While I Remain Celibate (Part 4)
This is Part 3 of a multi-part discussion of the markets (Read Part 1 here, Part 2 here and Part 3 here) …
A K-Shaped Economy Has Produced Distortions in Consumer Sentiment and Stock Prices
We are mindful of the gap between Wall Street and Main Street:
As an illustration of the Main Street/Wall Street comparison, here is the stock price chart of Home Depot ($HD):
With inflation high and the economy weakening, should equities decline, the weakness in the K-shaped economy could begin to impact the middle and upper-middle classes —adversely impacting aggregate economic growth.
The Casino Is in Overdrive… And We Refuse to Gamble
As mentioned, the stock market is now acting less like a church (which respects valuations) and more like a casino.
Last Thursday the market did something it has literally never done before. The S&P traded $2.6 trillion in call options — that is the highest single day call volume in market history:
When traders buy massive amounts of calls the market makers selling those calls are forced to hedge by buying the underlying stocks. That buying pushes prices higher. Higher prices force more hedging. More hedging pushes prices higher again. This is called a gamma squeeze. It works well on the way up. It’s brutal on the way down.
The entire market is in an unprecedented gamma squeeze. Open interest at all-time high, outstanding delta above $4.2 trillion — an all-time high:
In the context of this speculation, I plan to continue to have some net short exposure. However, given the respect I have for the historical conditions of late speculative cycle markets (they go further than anyone expects!) and the forceful impact of passive strategies and products (driven by algorithms), I will, consistent with my risk appetite, keep my net short exposure low.
Nonetheless, there will come a time that I will expand my short book.
Stay tuned for Part 5…
