FOMO Battles “Anti-FOMO”

As I see it, there are two short term themes driving trading right now.  They are: (1) a change toward institutional risk aversion, and (2) “buy and chase” working alongside, if not ahead of “buy the dip”.   It’s sort of a battle between FOMO and “anti-FOMO”.

The former theme is an outgrowth or, better yet, a shift from the relentless institutional FOMO that drove big market inflows throughout most of this year.   No institutional fund manager can afford to drastically underperform the market on the way up, so they had to own big cap tech whether they liked it or not. 

Tech is too big to ignore and too big to avoid.  Its outperformance had led to a disproportionately high weighting in key indices, which in turn led to even more money flowing into the sector.  Yet now, many of those same institutional investors are as concerned, if not more so, with making sure they have profits to lock in before the end of the year.  That’s changing market psychology and dynamics. (Maybe I’ll call the phenomenon “FOLI”, or “Fear Of Locking In”. Give me time to work on that.) 

As for “buy and chase”, that is indeed a manifestation of FOMO.  If you’ve been trying to buy the dip and miss the absolute bottom, well, you still might want to follow the trend.  Doing so indiscriminately is a tacit way of saying “I don’t care about valuations, I just believe that someone will pay more than I am now.”  Never mind that we might have just read the definition of the “greater fool theory”.  This past year has taught many that there almost always IS someone who comes along to pay more.  It’s difficult to blame those who have come to expect that.

Chasing rallies becomes particularly treacherous in volatile markets, though.  Reduced liquidity makes the swings larger in both directions.  In volatile markets, market makers widen their spreads and cut back their sizes, thus reducing liquidity.  I was a market maker for over 25 years, and this is what we did during periods of volatility.  Hence, we get air pockets in both directions when traders rush in and out.  In the short term, that actually increases volatility, creating a feedback loop. 

Markets eventually calm down, and we might be beginning that calming process now.  But funny things can happen during short weeks – we are closed Thursday for Thanksgiving and have a half-day on Friday to facilitate either recovery from a food coma and/or rushing to the mall for Black Friday bargains.  It is difficult to expect the holiday period to improve liquidity conditions, especially with month-end positioning arriving three hours earlier than usual on Friday.

Finally, another factor affecting today’s trading is a newfound quirk of seasonality.  With apologies to the Boomtown Rats, Mr. Market DOES like Mondays, at least lately.  Last Monday’s decline broke a streak of 10 gains to start the week dating back to Labor Day.  That itself is a testament to investors’ ability to look at the glass as “half-full”.  Heck, if we’re going to up during any given week, why not start the week properly by going long, right? 

There are solid reasons for a bounce today.  Rate cut expectations have improved to over 70% on both the CME and ForecastEx and bitcoin is generally cooperating with the risk-on mood.  If you’re adding to positions based on those factors, it’s quite understandable.  If you’re blindly chasing today’s rally simply because you don’t want to miss a tradeable bounce, or if you simply think that someone will model your behavior at higher prices, then please be judicious.