Friday, December 28, 2018

A Theory for the Giant Stock Rebound

This was one of the reasons we went ahead with the "Santa's coming after Christmas' thing (and again). Not determinative* but one of the reasons. More after the jump.**
From Bloomberg:

One Theory for the Giant Stock Rebound Is a $60 Billion Pension Frenzy
Trying to figure out what caused the biggest single-day stock turnaround since 2010? At least one analyst attributes it to buying by pension funds that dove into equities after December’s carnage.
The S&P 500 Index posted the biggest upward reversal in eight years during Thursday’s session, rallying back from a 2.8 percent deficit. The about-face could reflect end-of-quarter adjustments by pension funds that have $60 billion of shares to buy this month, among the most ever, according to Wells Fargo’s Pravit Chintawongvanich.

Institutional investors with large holdings in stocks and bonds use the end-of-quarter period to balance out holdings, adding to losers and cutting on winners. This time, they went big on U.S. large and small caps, adding $35 billion and $21 billion to indexes that are set to post the worst month since 2009. Money got pulled from fixed income that’s outperformed stocks, he said.
“While the $60 billion rebalance is historically large, its effect is probably exacerbated by the low market liquidity conditions,” Chintawongvanich said in a note to clients. “A given dollar to buy or sell is moving the market more than it normally would.”

Nothing guarantees the rally will be repeated, Chintawongvanich said, as such phenomena are quickly exploited by other traders. Now that the end-of-day rebalancing is well known, traders may buy ahead of pension funds only to sell high during the end-of-day rally. Those waiting for the right moment to dump a lot of stock may could do so in the last hour of the session....MORE
*Holy crap, I thought I knew what determinative means, something that settles the issue, but according to Wikipedia it is:
A determinative, also known as a taxogram or semagram, is an ideogram used to mark semantic categories of words in logographic scripts which helps to disambiguate interpretation. They have no direct counterpart in spoken language, though they may derive historically from glyphs for real words, and functionally they resemble classifiers in East Asian and sign languages....
**ZeroHedge had "Brace For "Seismic" Volatility: Pensions To Buy Record $60BN In Stocks In Coming Days" on December 21. We didn't link because $60 billion ain't what it used to be but it was definitely a positive..