While recent days have seen concerns over the omicron variant slicing equities, odd things were happening before that, like growth stocks, meme favorites, and companies favored by retail investors and hedge funds seeing their share prices drop in spite of the S&P 500 staying pretty stable. It’s a situation that Peter Atwater, president of Financial Insyghts LLC, dubs the “Tarantino Market” for how everyone focuses on the party in the front room while ignoring the star stock being marched out the back door for elimination, a phenomenon detailed in an article in Bloomberg.
Whether the weaknesses in single-name stocks will spread to the entire market or are a sign of more pain on the horizon remains to be seen. Many of those stocks were scooped up by retail investors or hedge funds jumping into the action after missing out on the meme stock craze earlier this year, which makes them vulnerable to a shift in the public perception of their popularity, the article contends. With short interest for an average stock at its lowest level in over 20 years—down from 2.2% at the beginning of 2020 to 1.5% currently—that could lead to a bottleneck at the door if everyone decides to leave the party at once.
The extreme positioning could be chalked up to several things, from the Fed moving faster towards tightening rates, lower-than-expected earnings from tech companies, or hedge funds wanting to close out positions before year’s end. But many experts are finding opportunities in the chaos, says Michael Purves of Tallbacken Capital Advisors LLC. He’s advising investors to utilize crowded stocks to hedge against market volatility, and specifically singled out Cathie Wood’s ARK Innovation ETF—down 19% since November 1st—to bet against.
The best risk/return, Purves says in the article’s conclusion, is “in the corner of the market where valuations comes down more to stories than numbers.” In other words, if you can’t find the value floor in a skyrocketing stock, that stock is going to be more vulnerable to any de-risking in the market.