Has a Real Risk-Off Move Started?

on Sep 23, 2020
Updated: Dec 19, 2022

The bullish run in the stock market shows some cracking signs. Considering the events in front of us (i.e., U.S. elections and the Fed’s FOMC meeting that follows right after elections), it is only normal for market participants to book profits.

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Or, to simply go on the short side ahead of the elections. However, retail accounts will have a hard time shorting the stock market, as brokers already started announcing an increase in the margin requirements. In other words, either you come up with new funds from home to make up for the difference in margin, or you must close part of your positions (or the broker will close them for you) as elections approach.

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QQQ Sees Biggest Outflows Since The Tech Bubble

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QQQ is the largest and most popular ETF (Exchange Traded Fund). Also called “triple Q’s,” it is structured as an investment fund. It tracks nonfinancial stocks listed on Nasdaq, and it recently registered the largest outflows since the dot.com era.

If we look back in history to check a date with similar outflows, only at the end of the 90s, something similar happened. Also, in the weeks that followed such outflows, Nasdaq 100 almost always dropped.

Real Risk Aversion in Riskier U.S. Credit

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This week so far is marked by investors pulling more than a billion dollars out of a high-yield ETF – HYG. It reflects the high-yield corporate debt in the United States and belongs to BlackRock. This outflow represents the biggest such move since February this year, signaling risk aversion in the U.S. credit markets.

LQD Investment Grade Outflows Build Up

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Yet another ETF, LQD tracks the U.S. corporate investment-grade bonds. It represents one of the most popular ETFs in the fixed-income market for a simple reason – it is cheap to hold. In fact, this is one of the main qualities of owning ETFs, rather than the real thing – retail investors have access to markets otherwise too expensive to access.

LQD typically moves in a similar fashion with U.S. Treasuries. Only that recently investors pulled of over $700 million out of it, in yet another sign that many prefer to sit on the sidelines ahead of the elections ahead.

Expect volatility to be on the rise, the more we get closer to the elections. As it was the case in 2020 already, daily ranges will easily exceed historical ones.

Plan your trades accordingly.