Retail Investors Continue to Hammer Hedge Funds; Market Remains Unfazed by Stagflation Indicators

Market Reaction to PPI and Powell's Comments

The Producer Price Index (PPI) initially caused a stir in the markets, with yields and the dollar rising while stocks fell. However, this reaction quickly subsided due to lower revisions. Despite this, the trend of stagflation persists this week. Federal Reserve Chairman Jerome Powell briefly unsettled stocks with his comment around 10:30 ET, suggesting that a rate hike could be a possibility, but he doesn't believe it will happen. He hinted that the Fed is likely to maintain its current course. This comment, coupled with the CPI-related components within the PPI indicating a softer CPI, led to an increase in rate-cut expectations. The market is now pricing in almost two cuts for 2024 and just over three cuts for 2025.

Trading Volumes and 'Meme Stocks'

John Flood from Goldman Sachs noted that trading volumes are finally tracking higher, up 31% compared to the 20-day moving average, with ETFs accounting for 25% of the overall tape. It was another significant day for 'meme stocks', with AMC and SunPower joining GameStop. This resulted in 'indicative' hedge funds suffering a significant blow for the second consecutive day, falling by an astonishing 15% at the day's lows. This also affected several crowded longs as the squeeze in shorts forced de-grossing overall.

Market Performance

Small Caps emerged as the winners of the day, while the Dow lagged behind. However, all major indices ended the day on a positive note, with the Nasdaq closing at a record high. Treasury yields initially jerked higher following the PPI print but quickly reversed, ending the day lower by 3-4bps. The dollar, after a brief spike following the PPI, drifted back to the week's lows.

Commodities and Cryptocurrency

The dollar's loss turned out to be gold's gain. Bitcoin, on the other hand, wiped out the gains it made yesterday, which had erased the losses it suffered on Friday. Crude oil prices continued their roller-coaster ride, falling again today, with WTI finding support at $78.

Discrepancies in the Market

Interestingly, the Nasdaq is at record highs despite US macro data being at its weakest in two years. Financial conditions are as relaxed as they've been in years, and Fed Funds are at 23-year highs.

Final Thoughts

The market continues to show resilience despite numerous indicators suggesting potential economic challenges. The question remains: who will be the last one holding the bag? What are your thoughts on this? Share this with your friends and let us know what you think. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.