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Why stocks rose 5% in one day


(Bloomberg) – A shock in the stock market has Wall Street looking for something – anything – to explain how another red-hot inflation number turned into the best day for the year. bulls for a week.

Among the answers: an increasingly solid position including adequate hedging, a pivotal moment for chart-watchers and some less dire earnings reports. Throw in some short-term stocks, and the result is a bottom-to-top rally in S&P 500 futures of nearly 5% at its widest.

Expecting the unexpected has become the sole mantra in the market as cross-flows are flowing from all directions, including the Federal Reserve trying to contain inflation while eyeing financial stability. main. Thursday’s shift came after the S&P 500 erased half of its gains from the 2020 pandemic low, hitting wealth that, while showing no signs of curbing inflation, a day may play a part in achieving that goal.

“That’s the nature of the beast today, where sometimes you get big swings during the day. We can all speculate on what might be behind it,” said Liz Ann Sonders, investment strategist at Charles Schwab & Co., “A lot of work to do, for lack of a better word.” , the mechanics of the market, the fact that there are more short-term money in the market, the more money moves based on algorithms, quantitative strategies. And at any time you can have triggers that can cause a 180 in the middle of the day.”

With calling a stock’s direction near-impossible, professional traders have been busy limiting their exposure to unexpected moves. According to Sundial Capital Research, institutions bought more than $10 billion in deposits in individual stocks last week, a record for that group and close to an all-time high for any which group of traders, according to Sundial Capital Research.

There is incidental evidence that bets have been settled shortly after the government report on consumer prices, suggesting hotter-than-expected inflation. While stock futures sold off, the Cboe Volatility Index, a measure of market anxiety tied to options on the S&P 500, actually fell, potentially signaling profit-taking. hedging traders. And when those positions were monetized, it prompted market makers to pull out of the short positions they had placed in order to maintain their neutral market stance.

“It’s a combination of semi-covered / short-lived,” said Danny Kirsch, head of options at Piper Sandler & Co.. It is trading like the event has passed, sell your hedge, contribute to the market recovery. “

Elsewhere, a flurry of technical signals are on the bulls side, among them the 50% retracement of the 22-month rally that broke out in the S&P 500 in March 2020. As the index This drop to 3,517, some market watchers took as a sign that the nine-month sell-off had gone too far.

Another buffer lies at the index’s 200-week average, which hovers around the 3,600 level and has become a frontline for bulls and bears in recent weeks. In 2016 and 2018, the long-term trendline prevented a major drop in the S&P 500.

“We came out of this support and that became self-fulfilling,” said Ellen Hazen, chief market strategist and portfolio manager at FLPutnam Investment Management. “There is so much uncertainty in the market and so many conflicting data points that the market reacts to whatever is most recent.”

It was the first time since July that the S&P 500 erased its more than 2% drop on the day, but another one of the sharp swings is a sign of the stock market in 2022 as traders struggle to guess the way. Fed policy and its impact on the economy. The index has posted the number of days that reverse 2%, up or down, six times since January, poised for its wildest since the 2008 financial crisis.

While providing support to tactical traders, the bull market bounty halving is another grim reminder of just how brutal the market is in 2022. With the S&P 500 only having risk of losing 20% ​​over the third calendar year over the century. The dream state of markets ruled by the Covid-19 outbreak is slowly lifting, leaving investors exposed to an overly aggressive Fed and bubble-like valuations.

One bullish argument that has persisted throughout the sell-off is the resilience of corporate earnings. With the third-quarter reporting season about to kick off, the bulls may be eyeing Thursday’s better-than-expected results from companies like Delta Air Lines Inc. and Walgreens Boots Alliance Inc.

Despite the $15 trillion write-off this year, stocks are far from bullish. At 17.3x returns, a multiple of the index is higher than the bottom valuation seen in all 11 previous bear cycles, data compiled by Bloomberg shows. In other words, if stocks recover from here, this bear market bottom will be the most expensive since the 1950s.

“People are realizing that long-term risk-taking takes a while to end. FOMO leads people to follow this rally,” said Larry Weiss, head of equity trading at Instinet. “Unfortunately, we still have plenty of time to ruin this rally.”

More stories like this are available on bloomberg.com

© 2022 Bloomberg LP

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