Recency bias in markets is evident.

Funds are desperately trying to ensure their participation in the performing sectors and stocks. This means buying into fast-rising stocks at higher valuations. Their universe is restricted to 500 stocks and they are sticking to that space.

What is going on outside this space is even more fast-paced. The rush to buy the companies which are smaller and less owned by institutional investors has spawned a new trading culture among first-time market participants. Digital investing is speeding up the search, decisions, and trades.

Obviously, the churn is set to rise and volatility should also track the spike in churn. Liquidity is giving investors, both experienced and rookies, comfort in high volatility and churn. Everybody thinks they can sell and get out before the others do. And more people are jumping into stocks with the same expectations.

Naturally, nobody is selling anything aggressively. This means that increased risk-taking, rising momentum, and growing liquidity are going to make investors bolder. But, such bold risk-taking will only set itself up for a situation where bigger players start selling, and smaller players wilt under the pressure of leverage and fear.

For now, the party seems soaring in spirits.

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Posted on October 17, 2020

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