A trader works in the dealing room of the New York Stock Exchange (NYSE) in Manhattan, New York, United States on December 17, 2021. REUTERS / Andrew Kelly

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NEW YORK, Dec. 17 (Reuters) – Investors are watching the stock market shrink and other signs of waning risk appetite, as markets digest a hawkish Federal Reserve pivot, a surge in the inflation and concerns over a new wave of COVID-19 cases.

According to data from Refinitiv, only 31% of Nasdaq stocks (.IXIC) are trading above their 200-day simple moving average despite the index’s 18% gain since the start of the year, according to the reports. Refinitiv data, the lowest level in at least a year. . That number rises to 36% for the Russell 2000 focused on small caps.

S&P 500 stocks are doing better, with 68% of the components trading above this moving average. Yet just five stocks – Apple (AAPL.O), Microsoft (MSFT.O), NVIDIA (NVDA.O), Tesla (TSLA.O) and Alphabet (GOOGL.O) – accounted for about half of the gain in the index since April, data released by Goldman Sachs earlier this week showed. The S&P is up about 24% for the year and is near record highs.

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The narrowing of the scope may portend a difficult trading period, with larger-than-average declines and lower overall returns, Goldman data showed. Analysts at the bank said the declines could be limited this time around by factors such as strong corporate earnings and a market that may already have built in a more hawkish Fed.

Others are less optimistic. Tom Siomades, chief investment officer of AE Wealth Management, believes investors should prepare for greater market volatility.

“If you can’t live with that, you should definitely lower the risk a bit,” Siomades said.

The S&P is up 1.2% and the Nasdaq is down 2.4% this month, as focus on an increasingly hawkish Fed has dried up risk appetites in some corners of the market. The central bank said on Wednesday it would speed up the unwinding of its asset purchases and paved the way for rate hikes of three-quarters of a percentage point in 2022, as it battles persistent inflation. Read more

Exhausted nerves have also been apparent in the Cboe Volatility Index (.VIX), known as the Wall Street fear gauge, which is about 5 points above its long-term median. High-growth stocks that thrived in 2020 fell, along with many of the so-called memes stocks that rallied this year.

The percentage of investors with a near-term bullish outlook for the U.S. stock market fell to its lowest level in three months in the latest American Association of Individual Investors (AAII) sentiment survey, released Friday. Read more

Next week, investors will monitor U.S. consumer confidence numbers to see if buyers are changing their buying habits amid concerns of high inflation and COVID-19.

The reduction in width poses several potential risks to stocks, investors said.

“In order for the market to continue to grow, it is becoming… less and less dependent on names,” said Peter Cecchini, research director at Axonic Capital. “Any reversal in the performance of names carrying the market will not be met by force in any other part of the market. “

Concentrated positioning can also exacerbate volatility if the appetite for risk suddenly dries up, sending investors to exits all at once.

“The door may not be wide enough to accommodate all of those who want to rush in,” said Siomades, from AE Wealth Management.

There are signs that the recently high volatility may be contained. Derivatives markets show expectations of volatility falling between Christmas and New Years, said Garrett DeSimone, chief quantitative at OptionMetrics.

This roughly coincides with a historically strong period for the markets. Since 1945, the S&P has gained an average of 1.2% in the last five days of December and the first two days of January, according to CFRA data, a phenomenon some investors have dubbed the Santa Claus rally.

Meanwhile, a survey by BoFA Global Research of global fund managers showed liquidity allocations were at their highest level since May 2020. High levels of liquidity have in the past been a bullish sign for stocks. , the bank said. Read more

The tightness of the stock market can continue for long periods of time and does not necessarily mean that a steep decline is coming.

The scope of the S&P 500 narrowed through most of the second half of the 1990s, before the dot-com bubble burst at the turn of the century and through the latter part of the past decade, analysts wrote. from Capital Economics.

Andrew Thrasher, portfolio manager at Financial Enhancement Group, believes the breadth of the market reveals the state of the market, but doesn’t view it as a signal to trade.

Last year “was an iconic example of a market that can bend because of its narrow width but not break because of it,” he said.

(This story corrects the name of the company in the 5th and 14th paragraphs to AE Wealth Management from Advisors Excel Wealth Management)

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Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Leslie Adler

Our Standards: Thomson Reuters Trust Principles.