02/24/2021 — Eye On The Exit

I remember one of the best Phish shows I ever saw like it was yesterday. Well, not exactly…it was a Phish show, so I probably have parts of other shows confused with it and other sections misremembered, or forgotten entirely. But what sticks in my memory (besides a great “First Tube” to close the first set), are the alternating feelings of euphoria and claustrophobia. The third show of a three night run felt oversold. The crowd seemed more crowded than the night before, and at the UIC Pavilion, this meant that the house was rocking. It also meant that when I went to the bathroom — of which there being only two, buried in the hooks of the arena’s horseshoe shape — a sick sense of not being able to move overcame me.

So, as great as the show was, a small part of me desired to leave, or at least leave early, because if something were to go wrong, the concert would quickly become a stampede.

I sort of feel the same way about the market of the past few days.

For a good portion of February, I haven’t traded a whole lot (accordingly, nor have I written much about trading). Even the recent moves failed to force me into much action, although they have forced me to pay attention. There are a lot of players in the market at present. Probably a good deal more than there should be, and while that creates a good deal of giddy sentiment, it tends to amplify other risks. So when rates are low and buyers are buying (and some on JV platforms like Robinhood are only allowed to buy), the good times seem like they’ll go on forever, spurred on by this mob euphoria. It’s like being at an oversold Phish show.

The dark side of “the show” is that things start to get a little uncomfortable when this overcrowding becomes overbearing. Most of the time, all is resolved calmly and in a predictable fashion. Some people leave early, some skip the encore, and some brave the masses and very, very slowly file out of the auditorium at the tail end of the night. In market terms, some take their profits and leave cash on the table, others wait for the first signs of a pullback, and a bunch will ride it to the top and suffer minimal to moderate losses as they exit on the down draft.

All of that is well and good. But what happens when an overcrowded venue — concert or market — needs to clear out quickly, or even evacuate? What if someone yells fire in the arena? Sure, we are all taught and told to “proceed to the nearest exit in an orderly fashion,” but I think we all know that scenario weighs about the same as its polar opposite — utter chaos.

The same is true with the current market. Fed Chairman Jerome Powell said today that “rampant inflation is not a problem to fear” (whether that is true or not remains to be seen and is a topic for another time). That jives nicely with his other assertion that “interest rates will remain near zero for the foreseeable future.” Very convenient. So what’s the problem? Zero interest rates and seemingly unlimited buyers should add up to a show that goes on forever.

Maybe. But when bond yields start to quickly jump up, they can provide a similar scare to counter market exuberance as would an interest rate hike. A gradual increase in yields over time probably comes hand in hand with a return to normalcy and can even accompany a strengthening economy and rising market, but sudden jumps like we’ve seen this week can have the opposite effect.

In lieu of a base interest rate, the bond market can substitute as the variable in stock and option pricing. If the yield (interest rate) goes up, growth prospects for companies can appear less rosy, not to mention that investment in certain securities starts to look less appealing to investors. With a 1.9 trillion stimulus package on the horizon, there is reason to believe that yields may trend higher, causing more distress, and potentially pushing large investors to yell “fire.” If it leads to a market correction, the sheer mass of investors currently involved in this unprecedented bull market might over-panic when their overextension teams with their inexperience. The result might be very painful.

So, like at The Pavilion, I’m still in the crowd, first row off-stage right. But I’m not in any hurry to get into the orchestra pit and push closer to the stage. I’ve got one eye on the exit light.

August 17, 2011 ended perfectly with a controlled exit and no surprises, but that was with an experienced group of Phish fans and in much saner times…

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A running soliloquy covering the life and times of a financial trader. Opinions, insights, commentary, and stories from past and present…served with a healthy dose of irreverence.

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Willie Witten

Willie Witten

Writer, thinker, trader, musician, builder and beer aficionado. Find me at williewitten.com

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