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Why Stocks Swung 5% in One Day

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(Bloomberg) — A shock turnaround in equities sent Wall Street searching for something — anything — to explain how yet another red-hot inflation number translated into the best day for bulls in a week.

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Among the answers: increasingly sturdy positioning including well-provisioned hedges, a watershed moment for chart watchers, and several less-than-terrible earnings reports. Throw in some short covering, and the result was a trough-to-peak run-up in S&P 500 futures that approached 5% at its widest.

Expect the unexpected has become the only mantra in a market when cross-currents are flowing from every direction, including a Federal Reserve bent on subduing inflation while keeping half an eye on financial stability. Thursday’s turnaround came after the S&P 500 erased half its climb from 2020’s pandemic low, a hit to wealth that while showing no sign yet of curbing inflation, may one day play a part in achieving that goal.

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

With calling the direction of stocks a near impossibility, professional traders have been busy limiting their exposure to surprise moves. Institutions bought more than $10 billion in puts on individual stocks last week, a record for that group and close to the most ever by any cohort of traders, according to Sundial Capital Research.

There was circumstantial evidence those wagers paid off in the immediate aftermath of the government’s report on consumer prices, which showed hotter-than-expected inflation. While equity futures sold off, the Cboe Volatility Index, a gauge of market anxiety tied to options on the S&P 500, actually fell, potentially a sign of profit-taking by hedged traders. And as those positions were monetized, that prompted market makers to unwind short positions they had put on to maintain their neutral market stance.

“It’s a combination of short covering/put selling,” said Danny Kirsch, head of options at Piper Sandler & Co. “It’s a very-well hedged event. It’s trading like event passed, sell your hedges, contributing to market rally.”

Elsewhere, a clutch of technical signals was on the bulls’ side, among them the 50% retracement in the 22-month rally that broke out in the S&P 500 in March 2020. When the index undercut the 3,517 level, some market watchers took that as a sign the nine-month selloff had gone too far.

Another buffer came in at the index’s 200-week average, a threshold that hovers around 3,600 and has become a battle line for bulls and bears in recent weeks. In 2016 and 2018, the long-term trendline halted big S&P 500 declines.

“We bounced off of this support level and that becomes self-fulfilling,” said Ellen Hazen, chief market strategist and portfolio manager at F.L.Putnam Investment Management. “There’s so much uncertainty in the market and so many data points are conflicting that the market responds to whatever is the most recent.”

It’s the first time since July that the S&P 500 wiped out an intraday decline of more than 2%, yet another of the wild swings is a signature of 2022’s stock market as traders struggle to guess the Fed’s policy path and its impact on the economy. The index has posted 2% reversal days, up or down, six times since January, poised for the wildest year since the 2008 financial crisis.

While providing support for tactical traders, the erasure of half the bull market’s bounty is another grim reminder of how brutal the market has been in 2022. With the S&P 500 is at risk of only its third 20%-plus calendar-year loss of the century. The dream state the ruled markets following the outbreak of Covid-19 is slowly lifting, leaving investors exposed to the impact of a hyper-aggressive Fed and bubble-like valuations.

One bull argument that has persisted throughout the selloff is the resilience of corporate earnings. With the third-quarter reporting season about to move into full swing, bulls may be taking cues from Thursday’s better-than-expected results from companies like Delta Air Lines Inc. and Walgreens Boots Alliance Inc.

Despite this year’s $15 trillion wipeout, stocks are far from screaming buys. At 17.3 times profits, the index’s multiple is above trough valuations seen in all previous 11 bear cycles, data compiled by Bloomberg show. In other words, should equities recover from here, this bear market bottom will have been the most expensive since the 1950s.

“People just realized the prolonged beating of risk assets has to end some time. FOMO leads people to chase this rally,” said Larry Weiss, head of equity trading at Instinet. “Unfortunately, we still have plenty of time to ruin this rally.”

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©2022 Bloomberg L.P.

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Reuters

Traders get no reprieve from volatility as CPI sends U.S. stocks on wild ride

Anyone hoping for calmer waters in markets this month is being badly disappointed, as turmoil in UK government bonds, surging oil prices and now another hot U.S. inflation reading ramp up volatility and create a perilous environment for investors. Thursday’s trading brought more eye-popping market gyrations, as a higher-than-expected U.S. inflation report sent the S&P 500 to its lowest point since November 2020 early in the session only to see stocks rip higher by mid-day, a swing of over 5 percentage points in total. Despite the upside move, “this sort of volatility makes markets feel a lot less rational and undermines confidence,” said Michael Farr, CEO of Farr, Miller and Washington LLC. “This is unnerving for longer-term investors.”

Investor’s Business Daily

Stock Market Reverses Higher Even As Inflation Picks Up; Earnings Lift These Stocks

The stock market sold off at Thursday’s open after September core prices jumped to a 40-year high. The Nasdaq composite plummeted more than 3% at the open but was up 1.2% before the noon hour on Wall Street. Volume jumped on the NYSE and Nasdaq compared with the same time on Wednesday.

Reuters

Fed’s Bowman says more big rate hikes on table if inflation will not cool

Federal Reserve Governor Michelle Bowman said on Wednesday that if high inflation does not start to wane she will continue to support aggressive rate rises aimed at taming price pressures. “Inflation is much too high, and I strongly believe that bringing inflation back to our target is a necessary condition for meeting the goals mandated by Congress of price stability and maximum employment on a sustainable basis,” Bowman said in the text of a speech to be delivered before a gathering in New York City. The policy maker said Fed rate rises this year, which have been very large relative to the pace of past rate rise campaigns, had her full support.

Bloomberg

Fed Wise to Hike Despite Strong Dollar, South Africa Central Bank Chief Says

(Bloomberg) — The Federal Reserve is doing the right thing by raising interest rates to tackle hot inflation, even as this strengthens the dollar and has spillover effects for other nations, South Africa’s central bank chief said.Most Read from BloombergCore US Inflation Rises to 40-Year High, Securing Big Fed HikeStocks Roar Back From Inflation-Triggered Losses: Markets WrapIntel Is Planning Thousands of Job Cuts in Face of PC SlumpWorld Faces New Threats From Fast-Mutating Omicron VariantsHer

TipRanks

Inflation at 8.2%: 2 ‘Strong Buy’ Dividend Stocks to Protect Your Money

Last month, the Federal Reserve implemented its fifth straight interest rate hike this year, and its third consecutive hike at 75 basis points, bringing its key funds rate up to the 3% to 3.25% range. The move showed that the central bank is deadly serious about taking on the stubbornly high inflation that has been plaguing the economy since the middle of 2021. The Fed’s turn toward an aggressive anti-inflationary policy may not be hard enough, however, as the September data, released this morni

RealVision

The Fed Will Stick To Its Waste-Laying

The Producer Price Index for September came in hotter than expected, as investors brace for the Thursday morning release of Consumer Price Index data. Minutes to the most recent meeting of the Federal Open Market Committee reveal a central bank as determined as ever to “stay the course” toward “restrictive rates in the near term.” With cracks in the global financial system getting bigger by the day, Maggie Lake welcomes Cem Karsan, the founder of Aegea Capital Management, to talk about the significance of the monetary regime change and to answer one simple question: How do we play this volatility? We also hear from ZipRecruiter.com Chief Economist Julia Pollak about the enduring strength of the U.S. labor market. Watch the full conversion between Julia Pollak and Maggie Lake here: https://rvtv.io/3MoBEwJ. And We want to hear from you too – please share your questions in the comments! Editor’s Note: Our live chat feature will be unavailable for four to six weeks as we upgrade our video player technology. We apologize for the temporary loss of function. But we assure you the upgrade will more than justify the wait. In the meantime, we will be monitoring the comments section. So, in addition to conversing with your fellow community members, please share your questions there.

The Telegraph

George Osborne says another mini-Budget U-turn is inevitable

George Osborne, the former chancellor, has urged Kwasi Kwarteng to make another “inevitable” U-turn on his mini-Budget rather than waiting until the end of the month to change course.

TipRanks

Jim Cramer Says Stocks Will Climb Once Fed Signals Shift; Here Are 2 Names to Watch

Inflation is high, the Fed is aggressively hiking interest rates, and the markets keep testing their lows for the year. The rest of this week will see several key monthly reports, including the consumer price index, or the inflation report, on Thursday. Currently, inflation is up 8.3% since last year, and economists are expecting that number to decline to 8.1%. Jim Cramer, the well-known host of CNBC’s ‘Mad Money’ program, is finding a silver lining in the current situation, telling investors, “

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