It’s been a dramatic few weeks in the equity market, and retail investors are driving it, Roger Hirst told Real Vision during today’s Daily Briefing.

Retail investors are trading small and often in an options-led equity exuberance, and as a result, the institutional whale is having less impact on direction and on absolute volatility. Hirst said this is basically an air pocket, as nothing obviously structural is driving all that volume.

Hirst said the impact options trading is having on the equity market is linked to contract expiries. The majority of the volume is happening on options with less than two weeks until expiry, and when you get close to the expiry date, gamma picks up, he explained.

Increased volatility is common around expiry periods, and it has nothing to do with macro fundamentals, Hirst said. He pointed out that historically, we have had air pockets just before expiry dates, and therefore, they should be on people’s radar.

“They don’t define the direction, but they can be critical to the direction of the market in both directions because of the inventory management that happens around them,” he said. Hirst advised investors to be aware of when we are getting close to an expiry date, as we now are, because they tend to change market dynamics. He believes a lot of the upward pressure we’re seeing will disappear after the September expiry.

While all of this is an exuberance, Hirst said he does not think it is a structural risk because retail investors are playing it from the long side, and as long as they’re not using leverage in their margin accounts to buy the premiums, they’re limited to losses only on those premiums.

READ ALSO  Implementing a radical strategy at Red Bull’s football teams

“It’s not the massive structural short that can often unwind positions,” he said.

Hirst wrapped up the interview with a discussion of the next phase of the market that he believes will prove problematic: the insolvency phase.

Looking at the credit market, Hirst said he sees a big long-term health issue for the market in large-cap companies that should be going under but aren’t because their bonds will be bought by the central bank through QE, while the smaller end of the market (i.e., mom-and-pop businesses, restaurants) is going under.

Hirst said we’re seeing a pickup of insolvency at the micro level and a pickup in zombie companies at the large-cap level, and eventually, the problems at the micro level will feed through to the macro level. The more zombies you have, the worse growth will be, he said, and the misallocation of capital will continue.

“For a strong economy, capital needs to find productive means, but we are in a world where yields and growth expectations are subdued,” he said. “If you as an investor think there’s going to be no growth for 10 years, but the equity market is going up 10% every year, you don’t put your money into productive capital – you do buybacks and then there’s no capital being put into future growth.”

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is pretty obvious, but we should probably say it anyway so that there is absolutely no confusion… The material in REAL VISION GROUP video programs and publications (collectively referred to as “RV RELEASES”) is provided for informational purposes only and is NOT investment advice. The information in RV RELEASES has been obtained from sources believed to be reliable, but Real Vision and its contributors, distributors and/or publishers, licensors, and their respective employees, contractors, agents, suppliers and vendors(collectively,”Affiliated Parties”) make no representation or warranty as to the accuracy, timeliness or completeness of the content in RV RELEASES. Any data included in RV RELEASES are illustrative only and not for investment purposes. Any opinion or recommendation expressed in RV RELEASES is subject to change without notice. RV Releases do not recommend, explicitly nor implicitly, nor suggest or recommend any investment strategy. Real Vision Group and its Affiliated Parties disclaim all liability for any loss that may arise(whether direct, indirect, consequential, incidental, punitive or otherwise) from any use of the information in RV RELEASES. Real Vision Group and its Affiliated Parties do not have regard to any individual’s, group of individuals’ or entity’s specific investment objectives, financial situation or circumstances. RV Releases do not express any opinion on the future value of any security, currency or other investment instrument. You should seek expert financial and other advice regarding the appropriateness of the material discussed or recommended in RV RELEASES and should note that investment values may fall, you may receive back less than originally invested and past performance is not necessarily reflective of future performance.Well that was pretty intense! We hope you got all of that – now stop reading the small print and go and enjoy Real Vision.

READ ALSO  SE: 'Bloomberg Technology' Full Show (09/18/2020)