The Musical Chair Market

Yesterday, I had one of those conversations that pops up every week or so.  This time, it was a tech executive who was up to his eyeballs in tech stocks and was growing very, very nervous.  He wanted to know if/when he should get out.

I’d just seen this chart from Christian Mueller-Glissmann of Goldman earlier in the day.  It reinforces what many of us believe about the recovery: we’re treading on dangerous ground.  I conveyed the info to my new friend, who replied exactly as I knew he would, “I’ll just have to get out whenever things start to get ugly.”Many investors have seemingly resigned themselves to the musical chair approach.  Hopefully, they’ll be able to grab a chair when the music stops. Listening to Powell’s testimony yesterday, there’s no reason to believe the Fed will willingly preside over such an event.

But, are things entirely under their control?  Can they keep the music playing for another few months or years?  Looking at the destruction of VIX, it’s easy to assume they can.  Yet, there are some natural limits to the means by which the market has been driven to these heights.  And, given that over 80% of daily volume is now machine-driven (algos, indexers, closet indexers, ETFs, etc.) perhaps a better analogy would be a crowded theater whose patrons are all eyeing the exit just in case someone yells “fire!”

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