The markets have become a minefield

When I was in college, a depressing time ago, students had different ways of marking the end of exam season.

Most of us did the sensible thing and drank tequila in the garden, but one group got into a game of dousing each other with water guns or water balloons. The goal seemed to be to soak other players and emerge as the only one left.

This meant that players were never safe. They could be going about their business, shopping for food, or heading to the computer room to send out novelty “emails” and could be mugged at any moment.

Something similar is happening now in the markets. With alarming frequency and with little or no warning, individual stocks are getting soaked.

In the markets, the game, for lack of a better word, began in earnest in April with Netflix plunging nearly 40 percent a day after it said it had misjudged the trajectory of subscriber numbers. The most recent victim was Snap, owner of social media platform Snapchat, which fell by a similar amount this week after blaming everything from inflation to the war in Ukraine for a tougher earnings environment. The week before, retailer Target got soaked.

In the Nasdaq 100 index alone, which does not include Snap or Target, seven stocks have plunged 20% or more in a single day so far this year, almost as many as in the entire pandemic-wracked 2020. including PayPal and Meta (Facebook for you and me).

To put it mildly, this is pretty weird. Outside of full-blown crises, like in 2020, 2008, or 2002 after the dot-com bubble burst, it’s highly unusual to see such a pronounced series of big downside jolts. This tells investors that they are in an extremely unforgiving mood.

Of course, the general market environment is gloomy. The benchmark S&P 500 index is down 15 percent so far this year and is about to cross the arbitrary threshold of 20 percent below its latest peak that would mark a recognized bear market. The Nasdaq Composite is down a quarter in 2022 and double-digit losses across European and Asian stocks are common as investors adjust to red-hot inflation and the rapid withdrawal of central bank support (against the trend: UK! The FTSE 100 is up this year, thanks to its preponderance of commodity-heavy companies that fund managers have raved about while more exciting modern stocks take a beating).

It makes gut sense that riskier stocks with high valuations based on the prospect of strong future earnings, much of it in technology, are receiving the most pressure in this bearish market regime.

Not everyone has jumped, of course. VandaTrack, which monitors retail trade flows, notes that small investors continue to buy. But Salman Baig, multi-asset investment manager at Unigestion in Geneva, points out that other regular tech enthusiasts are now drifting away.

“The question is, why are markets moving? What makes them fall? Baig says. “It’s not just about more vendors. They may drop simply because there are not as many buyers anymore.” That gives sellers more leverage. Meanwhile, liquidity, the ease with which trades are made without moving prices, is unstable, exacerbating moves.

At this time, this is a series of unique cases. But that shouldn’t necessarily be reassuring. “These are all idiosyncratic crashes, but these things always look like this. 2008 is the other example. They always look like some individual names and . . . then it snowballs,” Baig said. “The market right now is not exactly fragile, but it is sensitive. The market is not very liquid. You have rising rates. There is a war in Europe. This is not a good environment. It’s easy for these little idiosyncratic tensions to escalate.”

One way they capitalize is that funds sometimes take a hit on a speculative asset and have to scramble to offload safer assets from other parts of the portfolio to meet redemption calls. April LaRusse, chief investment specialist at Insight Investment, said this was one of many things that went wrong in the Covid-19 shock two years ago. “It was anything you could sell. It was impossible to trade well in that environment,” she added.

The optimistic version of all this is that it opens up new potential business opportunities. As always, the retail business community is on the case. Breakout Point, which monitors negative or short bets, notes that the WallStreetBets community on Reddit, infamous for its frequent attacks on meme stocks, is on high alert for the chances of using put options (bets on falling prices). prices) to make money off big drops in stocks.

“Among retail investors, almost every upcoming earnings highlight is seen today as a big selling opportunity and the appetite is, in fact, for 25 percent declines,” said Ivan Ćosović on Breakout.

But the problem with these abrupt soaks for a certain narrow band of actions is that innocent bystanders who never signed up for the game often get soaked in the process as well.

katie.martin@ft.com

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