Why this wild coronavirus rally has Wall Street experts fearing a bull-market trap; ETFs Have Passed Their Covid-19 Stress Test

Mar 27, 2020

Lead Stories

Why this wild coronavirus rally has Wall Street experts fearing a bull-market trap
Steve Goldstein – MarketWatch
Blink and you may have missed it — the Dow Jones Industrial Average is in a bull market, reached on a day when data showed a record number of people filing for unemployment benefits.
Yes, that’s right. The 21% gain in the last three days ends what was just an 11-day bear market for the blue chips.

****JB: Want to see something really scary? Watch this chart tracking unemployment claims since 1967 fill itself in (wait for it).

ETFs Have Passed Their Covid-19 Stress Test
Jon Sindreu – WSJ
What doesn’t kill a useful financial instrument will probably make it stronger.
During both the coronavirus selloff and this week’s bounce, big gaps have opened up between the value of exchange-traded bond funds and that of their holdings. Over the past two weeks, the iShares iBoxx $ Investment Grade Corporate Bond ETF—the largest of its type—has traded at both its largest discount and its largest premium to net asset value in 11 years.

ETF Options Commentary
The past couple of weeks saw substantial market volatility sweep across fixed income and equity markets alike, raising volumes across all securities markets as investors re-adjusted their asset allocations across asset classes. In these volatile times, many investors picked ETFs as their instrument of choice to manage their exposure across all asset classes. This was partially in response to the liquidity challenges seen across the entire cash bond market and was especially prevalent in corporate bonds.

Allianz Global Investors Liquidates Two Hedge Funds
Justin Baer – WSJ
Allianz Global Investors is liquidating two hedge funds after they took heavy losses in recent weeks on options trades. An Allianz Global Investors spokesman said the two funds, Structured Alpha 1000 and Structured Alpha 1000 Plus, had been net buyers of puts, or options giving the holder the right to sell an asset at a predetermined price in the future. But the nature of the recent move in markets “had a particularly large impact on the options positions held by Structured Alpha funds, particularly the two highest target alpha private strategies,” the spokesman said in an email.

Closing Markets Is Not the Answer
Phil Mackintosh – Traders Magazine
It’s difficult in a market like this to watch your 401k account shrink. To stop the flood of bad news, some have even suggested the markets should close until after the coronavirus uncertainty is over. But is that a good idea? There are not many data points to support this, as it hasn’t happened very often. But markets have indeed closed intentionally for multiple days, even if just a handful of times. When we look at the data, the closures rarely reduced volatility or even stopped markets falling. But risks seem aplenty.

Exchanges and Clearing

Euronext chief backs short-selling ban
Philip Stafford and David Keohane – Financial Times
The chief executive of Euronext has said he backs the French government’s decision to ban short selling in an attempt to restore calm to markets shaken by the impact of coronavirus.
The French markets regulator last week ordered a month-long ban on bets against locally-listed stocks, joining Italy, Spain and Belgium — and later Austria and Greece — in a crackdown. But other regulators across Europe, notably the UK and Germany, have not followed suit.

Regulation & Enforcement

SEC Gives Extra Time to File Reports as Firms Assess Coronavirus Impact
Paul Kiernan, Mark Maurer and Dave Michaels – WSJ
Public companies will have extra time to file annual reports and other major disclosures, as firms ranging from McDonald’s Corp. to Hershey Co. brace for a financial hit from the new coronavirus.
The Securities and Exchange Commission has given companies an additional 45 days to file the periodic reports that investors depend on to learn about financial performance and developing risks. The relief applies to filings that companies would normally make between March 1 and July 1.

Equity Trader Alert #2020 – 16 U.S. Market Holiday Reminder: Good Friday

Postponed – Amendments to Circuit Breaker Rules for CME and CBOT Interest Rate Futures and Options
CME Group
As announced in SER-8562R, the changes to circuit breaker rules for CME and CBOT Interest Rate Futures and Options previously scheduled for this Sunday, March 29, have been postponed.


‘Bit chompers’ bid up stocks — what coronavirus and recession, they say?
Nigam Arora – MarketWatch
The U.S. now has the most coronavirus cases. Still, “bit chompers” in the stock market helped produce a 20% gain in major indexes in only a few days.
That’s something I have not seen in my over 30 years in the markets.
Who are the bit chompers? The anecdotal evidence is that they are the same investors who were leveraged to the hilt and aggressively buying during the 10-year-plus bull market, leading the stock market index S&P 500 SPX to a new high Feb. 19. When the market crashed, they suffered massive losses.


Coronavirus turmoil delivers shock to the hedge fund industry
Robin Wigglesworth, Laurence Fletcher and Ortenca Aliaj – Financial Times
Earlier this year, hedge fund magnate Ray Dalio admitted that he and his team at Bridgewater Associates were “dumb shits” when it came to pandemics. The best they could do was to ride straight through the coronavirus-triggered market turbulence.
“It would be a mistake to whipsaw ourselves by overriding our process to react to the most recent headlines,” Bridgewater told investors in late February.

High-Frequency Traders Feast on Volatile Market
Scott Patterson and Alexander Osipovich – WSJ
Fast-trading investors have made big profits during the market’s volatility, with strategies ranging from sophisticated computer algorithms to ones as simple as “selling the rips and buying the dips.”
High-frequency traders, which typically deploy sophisticated algorithms and powerful computers to move in and out of markets at lightning speeds, tend to do well when markets are volatile.

U.K. Adds Self-Employed to Economic Safety Net. Why It’s Worth the Cost.
Pierre Briançon – Barron’s
The U.K. government Thursday added the country’s 5 million self-employed workers to the program it had already announced to shield employees from the harshest economic consequences of the coronavirus pandemic.

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