Wall Street Tames The Rebellion?

Yun Li of CNBC reports the S&P 500 rises to another record Friday, rallies 4.7% in best week since November:

U.S. stocks climbed on Friday, wrapping up a strong week on Wall Street as investors hoped a disappointing January jobs report would increase the likelihood of further stimulus.

The Dow Jones Industrial Average rose 92.38 points, or 0.3%, to 31,148.24, led by Nike and Cisco. The S&P 500 climbed 0.4% to a record close of 3,886.83 as 10 of the 11 sectors posted gains. The Nasdaq Composite advanced 0.6% to 13,856.30, also hitting a fresh closing high.

All three major benchmarks notched their best week since November. The blue-chip Dow gained 3.9% for the week, while the S&P 500 and the tech-heavy Nasdaq jumped 4.7% and 6%, respectively. The small-cap Russell 2000 rallied 7.7% for its best weekly performance since June.

The Labor Department said the U.S. added 49,000 jobs in January, slightly below the 50,000 payrolls expected by economists. The unemployment rate fell to 6.3%, better than projections of 6.7%. December’s numbers were revised much lower, with the month posting a loss of 227,000 from the initial reading of 140,000 jobs lost.

“The jobs number was particularly underwhelming as far fewer jobs were expected,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “Ultimately, the stock market is anticipating continuing healing in the economy and has been moving higher because of Federal stimulus, which arguably is the bigger story.”

The Senate passed a budget resolution early Friday, as Democrats move forward with the process to pass a $1.9 trillion coronavirus relief bill without Republican votes. The package includes $1,400 stimulus checks, a supplemental jobless benefit and Covid-19 vaccine and testing funds.

President Joe Biden on Friday warned that Republican efforts to pass a smaller bill would only prolong the economy’s path to recovery.

The Cboe Volatility Index, known as the VIX, has fallen more than 12 points this week to around 21 Friday with a speculative trading frenzy dissipating. Some on Wall Street believe if the fear gauge breaks below 20, it could send a big “risk on” signal as the level would trigger buying from algorithmic traders and other big players.

Wall Street was also in the middle of a solid earnings season. Of the 184 companies in the S&P 500 that have reported earnings to date, 84.2% topped analyst expectations, according to Refinitiv.

“The rally’s three pillars actually got stronger: Q4 earnings continue to dramatically exceed expectations, more stimulus is being poured into the economy, and the vaccination pace is accelerating,” Adam Crisafulli, founder of Vital Knowledge, said in a note.

It was another great week for stock markets with a lot less of the craziness we had last week when everyone was focused on the Reddit-WallStreetBets crowd.

By the way, last week, I told you not to buy into the nonsense that are a group of YOLOers are uniting and taking over Wall Street

Today, we got confirmation that the GameStop mania may not have been the retail trader rebellion it was perceived to be, and instead was driven by big hedge funds:

The prevailing narrative was that a band of Reddit-inspired small traders rose up against Wall Street by buying GameStop en masse, forcing a short squeeze by professional hedge fund managers, who were forced to cover their negative bets or risk catastrophic losses.

But several signs are pointing to institutional investors as big drivers of the wild price action on the way up.

“Although retail buying was portrayed as the main driver of the extreme price rally experienced by some stocks, the actual picture may be much more nuanced,” JPMorgan global quantitative and derivatives strategy analyst Peng Cheng told clients in a note. JPMorgan’s quant team uses public data from exchanges and applies a proprietary methodology to identify which flows are from retail traders. GameStop was number 15 on the firm’s retail buying list for January.

Anyway, the amount of pumping and dumping and shorting and squeezing going on between big hedge funds is unprecedented, and it's still going on, especially in the well-known meme stocks, many of which are still up huge this year:

And even in GameStop (GME), which got clobbered this week, some big hedge funds made off like bandits:

Interestingly, even though most retail traders got wiped, the GameStop battle continues as even today, big hedge funds were still pumping and dumping this stock:

Notice how it hit a low of $51 today and then ran up all the way to $95 before closing right under $64?

I was telling a friend of mine early this morning, I wouldn't touch this or AMC Entertainment (AMC) but wouldn't be surprised if GameStock shares bounce off their 50-day moving average and then spike near the 20-day moving average where short sellers will come back in to hit it hard:

Well, call it a fluke but that's pretty much what happened. Short sellers covered this morning, it spiked, they reeled in more institutional and retail suckers and then hit them hard again.

I don't blame the short sellers, I would have done the exact same thing but we are witnessing so much of these pump/ dump/ short covering/ short squeezing/ gamma squeezing/ high frequency trading bots/ naked short selling on a lot of stocks, not just meme stocks.

In fact, yesterday, Zero Hedge posted a comment on how biotech micro cap is where the insanity has migrated to, but to my surprise they left out the insane action that took place this week in shares of Anavex Life Sciences (AVXL) and Cassava Sciences (SAVA):

I'm telling you, the amount of pumping and dumping in these two micro cap biotech names alone this week was epic, and sadly, a lot of retail investors got swept into the mania and lost their shirts.

Admittedly, I've been trading biotechs for years, can tell you which big biotech fund owns which small name (scary that I know this off by heart now) as I track them all, and I've never seen such speculative nonsense in my life as I did this week in these two names that moved in tandem.

Not saying they're terrible biotechs, maybe they do have the cure for Alzheimer's and more, but wow, it was sheer nonsense this week (in general, if a biotech pops big any day, sell it, it's headed lower the next day, but these two biotechs were literally levitating this week as big hedge funds pumped them).

Today, it was shares of Ocugen (OCGN) which were massively pumped following a positive commentary from some analyst:

When you see massive volume like that on some small biotech, be careful, you know it's being manipulated by hedge fund sharks.

You might be asking where are the SEC and other regulators? They're in bed with large hedge funds which is why Janet Yellen will never investigate all these shenanigans for the simple reason that big hedge funds pay big commissions to big Wall Street banks, end of story

These markets are treacherous, there are so many funny games being played in the background on so many stocks, it's no wonder big pensions and sovereign wealth funds are focusing on private equity where they have more control in a company's future.

Let the big hedge funds cannibalize each other, most big investors are just getting turned off and walking away from all this nonsense.

There are tons of mini speculative manias going on in the stock market right now, no thanks to the Fed and other central banks promoting and backstopping this nonsense with a tsunami of liquidity.

Even in the credit markets, however, things are getting wonky when money managers are having such a tough time getting their hands on debt in the $2.8 trillion market for junk bonds and leveraged loans that they’re calling up companies and pressing them to borrow, instead of waiting for bankers to bring new deals to them.

Not surprisingly, US junk bond yields are making another record low today, standing just a hair above 4%, roughly a third of where they were less than a year ago in March:

Insanity rules the day in the stock and credit markets and we are wondering why investors are petrified, these are truly unprecedented times.

And don't kid yourself, "Risk-On" is back on the table as hedge funds add to their long and short positions to make up for losses last month:

Hedge funds, which were forced to retreat furiously last week amid a retail-fueled short squeeze, have since been busy adding stocks on both the long and short side of their book. Their gross trading flow jumped on Tuesday at the fastest pace since the bear market bottom in March, according to data compiled by Goldman Sachs Group Inc.’s prime brokerage unit.

The process was also on display among hedge fund clients at Morgan Stanley and JPMorgan Chase & Co., easing concern that the industry’s latest chaos may spread. As the S&P 500 sets an all-time high, fund managers are starting to chase gains to make up for losses that for some reached double digits in January. They’re tilting bullish more than ever, with the industry’s long-short ratio climbing to the highest since Goldman began tracking the data in 2011.

“There has been an obvious ‘everything up’ trade across themes/factors this week,” Charlie McElligott, a cross-asset strategist at Nomura Securities, wrote in a note to clients. “As everybody shed exposure, the point of pain then became a market move ‘higher.’”

Risk-off attitudes started to subside on Thursday, when a Morgan Stanley index tracking the industry’s most popular versus the least popular stocks not only turned back in hedge funds’ favor, but delivered the best daily return on record. Since then, fund managers have boosted bets particularly on the long side.

It’s hard to tell whether a stabilizing market has encouraged risk taking or the risk-on mode contributed to equity gains. For now, the double blow -- longs were down while shorts were up -- has come to a halt.

A Goldman exchange-traded fund tracking hedge funds’ favorite stocks has jumped 7% this week, reversing the worst weekly decline since October. Meanwhile, heavily-shorted companies such as GameStop Corp. -- the ones inflicting hedge fund pain when Reddit traders joined forces to bid up their prices last week-- have collapsed, easing pressure for short sellers. A basket of the most-shorted shares is down 4.5%, poised for its first weekly slide in five.

The favorable performance, along with a rising market, has allowed money managers to make up some lost ground. By JPMorgan’s estimates, long/short hedge funds suffered losses averaging about 6% to 7% in January. Now, their year-to-date losses have more than halved. While data from Goldman and Morgan Stanley pointed to a less painful January, both showed similar improvement this month.

“The performance rebound likely reduces odds of larger de-risking,” JPMorgan’s prime brokerage unit wrote in a note. “However, that doesn’t mean we couldn’t still see some aftershocks over the next 2-4 weeks given exposure levels (both gross and net) are still quite high, performance is mixed, and the recent events are still very fresh.”

So what's the end game to all this insanity? Typically, as rates creep up, which they've been doing, risk assets will get hurt.

But I doubt we are going to see a massive spike in long bond yields. They first have to pass the massive stimulus package, and then all that stimulus has to work its way into the economy.

With vaccinations going relatively well in the US, I suspect by this summer, the yield on the 10-year US Treasury note will climb above 1.5% and that will cool things down for hyper growth names and speculative micro cap names too, and it should be positive for cyclical stocks, especially financials and energy.

We shall see, a lot of things can happen over the next six months, I am just giving you one scenario and I agree with those who think handicapping the market’s upside from here as stocks run up the score on bonds, stretch valuations.

I'm relatively optimistic on stocks even if some sectors are way overvalued and due for a big correction. 

Below, the best performing S&P sectors this week:

Interestingly, Energy (XLE) came roaring back this week led by stocks like Exxon (XOM) but it was a strong week all around for all sectors except for healthcare (XLV) which was flat. 

And here are the top performing US large cap and small cap stocks this week:

Again, these stocks don't tell you the full story of the insanity that went on this week in some sectors, especially with meme stocks and some low float biotech stocks that were being pumped and dumped like crazy.

Lastly, here are the top performing stocks year-to-date, most of which nobody has ever heard of:

One thing is for sure, the WallStreetBets YOLOers are less vocal this week, they're still around but I think many of them got utterly destroyed and now realize they've been duped and paid a heavy price.

The game is rigged folks, don't bother going against Wall Street titans, just try to survive knowing the game is rigged and for most people, low cost ETFs is the best way to survive all the nonsense going on below the surface.

Alright, let me wrap it up there. 

Below, CNBC's "Halftime Report" team discusses Big Tech stocks, including software names and valuations.

And CNBC's Brian Sullivan discusses markets with Ernesto Ramos of BMO Global Asset Management and Michelle Meyer, head of U.S. economics at Bank of America Global Research.

Lastly, a great scene from one of the greatest movies of all time. Remember, friends don't leave friends holding the bag, if you need a friend, get a dog!