A Hedge Fund Goes Rogue — And What It Means For The Market

Major market averages showed strong gains on Friday. That one day pushed SPDR S&P 500 ETF (NYSE: SPY) to a gain for the week.

The next chart shows the intraday action during the week. The last 15 minutes on Friday stand out as unusual.

Friday’s trading was unusual in other ways. The day’s biggest losers were large-cap stocks.

Source: Yahoo Finance

Usually, the list of the day’s biggest losers will include smaller, volatile stocks like FUBO, which is on Friday’s list. Larger stocks like Viacom and Discovery rarely make this list.

But they were liquidated on Friday as Bloomberg reported:

“Several major investment banks with ties to Tiger Cub hedge fund Archegos Capital Management LLC liquidated holdings, contributing to the slump in share prices of ViacomCBS and Discovery, IPO Edge reported, citing people it didn’t identify.”

The fund’s manager, Bill Hwang, has had run-ins with the SEC and regulators around the world. Rumors indicate his latest fund was subject to a margin call.

What This Means For Us

This could be a minor story, but it highlights the dangers in the current market environment. Liquidation of a hedge fund with a few billion dollars under management led to large losses in some stocks. The selling in the stocks wasn’t related to the fundamentals in the companies. Declines seem to be caused solely by the fact one investor had large positions in the stocks.

That risk is significant after many new investors entered the market in recent months. If there are other liquidations like this, fear could take hold in the market as these investors learn that stocks don’t just go up for no reason… they can just as easily go down.

(Related: What This Crazy Picture In The News Can Teach Us About Risk)

Those risks can be seen in the next chart. In the bottom panel, you can see that my Income Trader Volatility (ITV) indicator (red line) crossed above its moving average (blue line) last week. ITV is the award-winning indicator I use to identify trades in one of my premium advisories. It’s one of the first indicators I developed (but not the only one). It works similar to VIX in that it rises as prices fall. If ITV remains above its MA, a decline is likely.

Our last chart this week shows my Profit Amplifier Momentum (PAM), which is bullish. PAM is shown on the daily chart of SPY below.

PAM is designed as a short-term indicator.

The mixed signals tell me this week will be important to watch. I expect to see prices continue to rally as the danger in the market increases.

As these risks pop up in the market, it’s important to pay attention to them — but not panic. That’s why I’ve been telling readers about my market “insurance” strategy that can help protect us (while still profiting)…

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