Stock Market Strategist Says ‘Minsky Moment’ Collapse May Have Arrived

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Written by Dana Sanchez
Minsky
A stock market strategist says a ‘Minsky Moment’ collapse may have arrived — a tipping point when speculative stock market activity becomes unsustainable. Photo by: STRF/STAR MAX/IPx 2020 7/22/20

Stocks kept falling on Friday after Thursday’s mini-crash selloff led the S&P 500 to its worst single-session drop in almost three months, following Wednesday’s record highs for both the S&P 500 and Nasdaq.

Asset prices could be on the edge of a collapse like the one last seen in March — aka a “Minsky moment” — according to Ron William, market strategist and founder of RW Advisory.

A “Minsky moment” — a stock market tipping point — is named after economist Hyman Minsky and refers to a sudden market collapse following an unsustainable bull run like the one that may have been created from unprecedented fiscal and monetary stimulus measures, CNBC reported.

The Minsky moment could see assets fall by “20 to 30 percent or more,” William said on CNBC’s “Squawk Box Europe” Thursday, causing the current “V-shaped” recovery to lead to a “rolling W retest of the March crash low.”

In a Minsky Moment, a market collapse is typically brought on by the reckless speculative activity that defines an unsustainable bullish period.
These crises generally happen because investors, engaging in excessively aggressive speculation, take on additional credit risk during bull markets, according to Investopedia, leading to rapid price deflation and unpreventable market collapse.

Bullish call-option buying exploded over the past month, Barrons reported. Traders bought almost 15 times the number of call options expiring in November of FAANG stocks — Facebook, Apple, Amazon, Netflix and Alphabet, as well as extraordinary activity in Microsoft and Tesla stock.

Call-option trading volume in those tech stocks was down Thursday by about two-thirds compared with recent highs. The FAANG is still up about 50 percent on average year to date. 

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“Without a significant new round of payments for people who are out of work, the market slide could accelerate further,” CNN reported. “Businesses may also feel less comfortable hiring people back.”

“You have to wonder about the expiration of stimulus and inability of Washington to do more,” said John Pataky, executive vice president and chief banking officer with TIAA Bank. “There could be further declines around the corner if this is not rectified.”

Financial giants American Express, JPMorgan Chase and Travelers were Dow leaders Friday.