On a daily basis I watch major indices, the main factors (momentum, value, quality, and low volatility), the sectors, and then some bellwether exchange traded funds (“ETFs”). Normally, things line up. For example, if the NASDAQ is doing well, then momentum stocks (i.e., issuers that drive market indices), technology, biotech, and certain ETFs that correlate with the NASDAQ are also doing comparatively well. Sometimes I may see small divergences, but when I dig further, there is typically an explanation (e.g., one large stock that had a news event). Occasionally, there is a divergence that can’t be easily explained. That’s when I know something else is going on that will probably show up in the news shortly.

Last week, and specifically Friday, was one of those times. It turns out a massive family office had too much leverage and had a major margin call. This forced them to sell a number of Chinese technology stocks, Viacom, Discovery, and maybe some other names. The family office was called Archegos Capital, and it is run by a former Tiger Cub (disciple of Julian Robertson). Rumor has it they were running 5x leveraged and/or they were using derivatives to magnify their bets.

So besides Friday being a bad day for Archegos, what does this mean for the market as a whole? That depends. First, we heard that he just had to meet margin calls, but now we are hearing the entire fund may be liquidating. That means there could be more to sell, possibly a lot more. The second major concern is who, if anyone, has somewhat the same positioning, and is there a possibility of a domino effect? Archegos, being a Tiger Cub, is significant, since the Tiger Cubs all share the same mentor, which also means they may share similar investment methodologies. The third major concern is which banks may have exposure. So far, available information points to Credit Suisse and Nomura and perhaps others, including Goldman and Morgan Stanley.   

If this is just a one-off event, then a couple of stocks may get crunched short-term, after which we move on. If there is a domino effect, then it can last a while and cause some damage. There are two takeaways I see here for investors:

  1. Once again, we see individual common stocks being moved irrationally. In the beginning of the year, we saw retail traders crushing the hedge funds. This time, it is the other way around. What does this do to the skeptical retail investor who already believes Wall Street is rigged?
  2. You can’t protect yourselves from these moves in individual stocks, necessarily. But what you can do is revisit how you weight stocks. Volatility weighting is an example. With volatility weighting you weight stocks in your portfolio by how volatile they are. So you may not avoid these types of stocks, but you wouldn’t have as high an allocation.

Besides that, this week is the end of the first quarter, so where flows go could be interesting. Of the investment banks we talk to, some see selling this week, others see buying, so that’s not very helpful. Volatility is likely, as a lot happened the quarter and portfolio managers will have to re-jigger. In the markets and the economy, everything else looks strong. Growth and value returned about the same last week, so maybe the market has found some sort of equilibrium there. Of course, when you can’t find anything to worry about, that’s when you should be most worried.

Finally, Bloomberg reported that ARK changed their prospectuses to add language that they may buy into SPACs. That probably wouldn’t be such a bad thing for the SPAC market.

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