Herd trading is causing some investors to be ‘forced out of business almost,’ Citi says

Traders work on the floor of the New York Stock Exchange.


A recent shift toward momentum trading in certain assets could see value-driven investors nearly “forced out of business,” according to Citi Global Markets Strategist Matt King.

Typically unfavored stocks like GameStop have recently enjoyed highly publicized rallies based on retail investors piling into the stock, creating a short-squeeze on Wall Street hedge funds. A short-squeeze is a sharp increase in a share that forces traders with short positions, or bets on its decline, to buy it back in order to avoid further losses.

Although the Reddit-fueled momentum has now mostly subsided, the likes of Tesla and other U.S. tech giants, along with cryptocurrencies like bitcoin, have seen more sustained astronomical climbs to record highs in recent months.

Speaking to CNBC’s “Street Signs Europe” on Thursday, King suggested that flows and positioning had become a bigger driver of markets than businesses’ fundamentals.

“Value-driven investors are being forced out of business almost, and indeed what we have seen for several years now is traditional patterns of mean reversion — you buy when it is cheap, you sell when it is expensive — those are kind of going out of the window, and being replaced by momentum and herding, again driven ultimately by the quantity of money being pumped into the system by the central banks,” King said.

Value investing involves seeking out companies whose share price is underestimated by the market relative to their intrinsic value.

Bitcoin surged above $46,000 earlier this week, now up more than 354% over the past year, after Tesla bought $1.5 billion worth of the cryptocurrency and said the company plans to accept it as payment. Tesla itself has seen its share price rise more than 1,014% since a low in March last year.

King added that this kind of asset price inflation creates a difficult environment for traditional investors, with the prevailing trend forcing strategists to change their focus away from consensus positioning among active investors and underlying fundamentals, and toward anticipating momentum shifts.

“Instead, for us, for a while it has all been about measuring the quantity of money coming in, looking at fund flows, looking at reach for yield, looking at central bank purchases and balance sheets as a measure of this.”

Central banks have deployed unprecedentedly large monetary stimulus measures in response to the Covid-19 pandemic, with policy likely to remain loose for the foreseeable future as the global economy looks to emerge from the crisis without suffering any structural damage.

U.S. Federal Reserve Chairman Jerome Powell on Wednesday vowed that monetary policy will need to remain “patiently accommodative” and warned that the U.S. is “a long way” from where it needs to be in terms of employment.

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