The stock market is a ‘drunken psycho.’ Why this hedge-fund manager is shorting some of the market’s biggest stocks.

Our call of the day from the president of Seabreeze Partners Management’s Doug Kass is among them as he likens stock market activity in 2023 to that of a “drunken psycho.”

“The bottom line is that the optimism embraced since the beginning of 2023 and manifested in well above historic valuations now seems likely to be reversed – led by a reset lower in price [to] earnings multiples,” said Kass, adding that he is now proceeding cautiously.

Opinion: How safe is the stock market?

He blames a wrong-way “chorus of optimism” that has seeped into markets over the past month. “That chorus is led by cheerleaders in the business media and by quant strategies and products – some/many of which worship at the altar of price momentum, knowing little about value but everything about price,” says Kass.

Kass ticks off a few things worrying him right now, starting with strong jobs numbers that to him spell stubborn wage inflation and mean faster Fed rate hikes that stay higher for longer. He’s also looking at a renewed yield curve inversion between the 2-year Treasury
TMUBMUSD02Y,
4.462%
and 10 year
TMUBMUSD10Y,
3.651%
Treasury note, along with disappointing big tech results. Lastly, he notes violent speculation in call options — the right to buy an asset at a future time at a specific price, often viewed as bullish — that has coincided with topping action for stocks in the past.

He also noted that short sellers capitulated last week, resulting in the biggest amount of short covering in a decade:

In recent days, Kass curbed Seabreeze’s risk profile, adding new shorts on iShares Russell 2000 ETF
IWM,
-0.78%,
Microsoft
MSFT,
+2.43%,
Apple
AAPL,
+0.49%,
3M
MMM,
-0.99%,
Lululemon
LULU,
-0.24%,
GE
GE,
-1.98%
and Boeing
BA,
+1.78%,
and selling Alphabet
GOOGL,
+1.10%,
Amazon.com
AMZN,
-3.60%
and Disney
DIS,
-0.25%.

“There are simply too many made up narratives on the markets — in an attempt to explain the daily moves,” says Kass. “They are a reaction to the notion that ‘price is truth,’ which ends up influencing sentiment and clouding the facts.

He says while January progressed bullishly, many became convinced of a new rally, but haven’t taken on board the changing market structure that has been influencing market direction — ETFs and quant strategies and products. He also notes the newest speculation —zero days to options expiration (ODTEs) that are basically puts and calls on stocks and indexes with 24-hour expirations. The latter started popping up in October.

These have all “likely become the tail that wags the market dog,” as a fear of missing out has seen defensively positioned retail and hedge funds rush in to drive markets even higher, he says.

So buckle up, Kass advises. “Above all dismiss made up narratives that bend with the market’s wind and are designed to fit into and to be compatible with the last tick of stock prices.”

Read: Look for stocks to lose 30% from here, says strategist David Rosenberg. And don’t even think about turning bullish until 2024.

The markets

Stocks
DJIA,
-0.45%

SPX,
-0.24%

COMP,
-0.02%
are mostly lower in early trading. Treasury yields
TMUBMUSD10Y,
3.651%

TMUBMUSD02Y,
4.462%
are creeping higher, the dollar
DXY,
-0.31%
is up, along with gold
GC00,
+0.42%
and oil prices
CL.1,
+3.51%
are seeing a sizeable lift.

Read: A digital currency is likely to be needed, says U.K. Treasury and Bank of England

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Bed Bath & Beyond shares
BBBY,
-47.78%
are sinking after executives late Monday announced plans to sell convertible shares to get out of a loan default and fight bankruptcy. Webush slashed its target to zero.

DuPont
DD,
+5.80%
shares are down after the chemicals giant gave soft guidance. Still to come is Royal Caribbean
RCL,
+3.84%,
followed by Chipotle
CMG,
-0.51%
after the bell.

Baidu stock
BIDU,
+10.34%

9888,
+15.33%
is up 14% following confirmation by the China internet group that it will launch an AI chatbot next month.

After reporting slightly disappointing results, BP
BP,
+7.95%

BP,
+7.28%
says it’s increasing investment in oil and gas, alongside renewable spending.

Fed Chair Powell will speak at the Economic Club of Washington at 12:40 p.m., with Fed Vice Chair for Supervision Michael Barr due at 2 p.m. The U.S. trade defiict widened by 10% in December. Still to come is consumer credit at 3 p.m.

U.S. President Joe Biden will deliver his State of the Union speech later on Tuesday.

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The chart

Amid talk about a meme-stock redux, here’s a throwback chart from Julian Emanuel, strategist at Evercore, who touches on the current wave that has driven up shares like Carvana
CVNA,
-4.58%
this year. The 2021 “Meme Peak left the S&P 500 volatile/lower over the following weeks while ending the year positive nonetheless,” he says.

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.

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