The market in 2022 has changed investor behavior

The 2022 rally in US stocks picked up steam last week, with stocks on Thursday The biggest drop in a day since the beginning of the pandemic. The drop comes just a day after Federal Reserve Chairman Jerome Powell appeared to clear the way for a stock rally by raising interest rates by more than half a percentage point is unlikely.


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The size of Thursday’s drop and the recent increase in volatility have raised questions about larger issues in the market, such as the cancellation of leveraged trades or the ability to liquidate funds later. Big wrong bets. But many investors and analysts see the move largely in line with the broad market pullback this year, driven by expectations that rates will rise. Portfolio managers say rising interest rates will tend to benefit dividend-paying stocksfor example, while adding pressure on speculative transactions became popular and profitable when money was free.

For stocks, that trend means pain for the shares of companies that have risen in price during the pandemic years and have massive valuations.

Netflix Inc.,

NFLX -3.90%

one of the hottest tech stocks in recent years, down 70% this year. Inc.

AMZN -1.40%

down 31%, lagging major stock indexes that are plunging. Below, we look at some signs of instability in the market as buy soaked no longer pay predictable benefits immediately.

Cracks in the market

The breadth of the sell-off in the market has been striking. Very few shares have been spared.

Just 35% of stocks in the S&P 500 were trading above their 200-day moving average on Thursday, according to FactSet. This is down from 74% in January. In the Nasdaq Composite, just 20% of stocks traded above the 200-day moving average that day, down from 38% in January.

“There is a lot of weakness going on below the surface,” said Willie Delwiche, investment strategist at All Star Charts.

This process has dragged stock market valuations lower.

Even so, even after the recent pullbacks, the S&P 500 still looks expensive relative to its valuation over the past decade. According to FactSet, the S&P 500 index traded last week at 17.7 times expected earnings over the next 12 months, well above the 10-year average of 17.1 times earnings. With the Fed poised to continue tightening monetary conditions, many investors think stocks still aren’t cheap.

Buzz option fades

As stocks fell, investors reduced their enthusiasm for risky bets in the options market.

Over the past two years, individual investors have flocked to the options market to bet maximum on stocks. Options betting became synonymous with the frenzy surrounding meme stocks, as stocks of companies like

GameStop Corp.

GME -3.72%


AMC Entertainment Holdings Inc.

AMC -6.33%


Now, much of that speculation seems to be easing. Net call volume in single stocks recently hit its lowest level since April 2020, according to Deutsche Bank.

According to Credit Suisse, the price of the bullish option on the stock also begins to fall relative to the call option price. That’s a reversal from much of the past few years, when investors looking to increase their bets on specific stocks fueled heightened demand for bullish options.

Cryptocurrency Slips

Other risky markets have been affected. Bitcoin price peaked this year in March and has generally fallen since then to trade around $36,000.

The origins of cryptocurrencies can have a dramatic impact not only on individual investors but also on a growing number of institutional investors. While cryptocurrencies in their early days were mainly bought and sold by retail traders, hedge funds and registered investment advisors have become more present in the market in recent years. recent years.

Pessimism develops

As the process leaves money managers with little room to hide, surveys have shown that individual investors are becoming increasingly pessimistic about the stock market.

The percentage of investors who believe the stock market will decline in the next six months ending April is the highest since March 5, 2009, according to the American Association of Individual Investors.

Widespread pessimism isn’t necessarily bad news. Some analysts see the AAII survey as a contrarian indicator, betting that as sentiment seems to have taken a turn for the worse, the market is poised for a bounce. (Back in 2009, the S&P 500 hit its lowest point at the close of the financial crisis just four days after reading AAII.)

“The sentiment data could say that, if we’re not exactly at the bottom of the market, we could be in the playing field,” said Ross Mayfield, investment strategy analyst at Baird. “So if you’re a very tactical person, it’s a good time to put the money to work.”

There are several reasons why some investors are looking at the market with hesitation these days: inflation. After the factoring surged, the S&P 500’s earnings margins fell dramatically. That has made it harder for investors to justify paying a premium to own stocks than other investments, says Morgan Stanley Wealth Management.

Some investors braced for further turmoil are turning to inverse funds, which offer buyers the opportunity to bet on a decline in a stock or index. According to Jason Goepfert, founder of Sundial Capital Research, activity in such funds recently hit a decade high.

“Retail investors are betting on stocks,” said Mr. Goepfert. “They are hedging their portfolios.”

Write letter for Akane Otani at [email protected]Karen Langley at [email protected] and Gunjan Banerji at [email protected]

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