What Caused the Stock Market to Swing 5% in One Day

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Last Updated on October 14, 2022 by Bitfinsider

There are a few reasons for this, including several less-than-terrible earnings reports, a watershed moment for chart watchers, and increasingly solid positioning that includes well-provisioned hedges. When short covering is factored in, the result is a trough-to-peak run-up in S&P 500 futures that reached 5.6% at its widest point at its most extreme point.

The only mantra that applies in a market when cross-currents are flowing from every direction, including a Federal Reserve intent on taming inflation while keeping half an eye on financial stability, is to expect the unexpected. This has become the only mantra that applies. The turnaround that occurred on Thursday came after the S&P 500 erased half of its climb from 2020’s pandemic low. This hit to wealth, while not yet showing any signs of curbing inflation, may one day play a part in achieving that objective.

It’s just the way things are these days, and it’s inevitable that there will be some big swings during the trading day. According to Liz Ann Sonders, chief investment strategist for Charles Schwab & Co., “We can all speculate on what might be behind it.” “For lack of a better word, a lot of it has to do with the mechanics of the market, the fact that there is more money in the market that is invested for shorter terms, and there is more money that moves around based on algorithms and quantitative strategies. And triggers can strike at any time, even in the middle of the day, which can cause a complete turnaround in your mood.

Due to the near impossibility of predicting the direction in which stocks will move, professional traders have been busy reducing their exposure to unexpected price movements. According to Sundial Capital Research, institutions purchased more than $10 billion worth of put options on individual stocks during the past week. This figure represents a new high for this category of traders and comes close to matching the all-time high for any group of investors.

In the immediate aftermath of the government’s report on consumer prices, which showed hotter-than-expected inflation, there was circumstantial evidence those wagers paid off. While equity futures were falling, the Cboe Volatility Index, which is a measure of market anxiety tied to options on the S&P 500, was actually falling. This could be an indication that hedged traders were taking profits while equity futures were falling. And as those positions were monetized, that result prompted market makers to unwind short positions they had put on in order to maintain their neutral stance in the market.

Danny Kirsch, the head of options at Piper Sandler & Co., described the transaction as “a combination of short covering and put selling.” “It’s a very well-hedged event,” the speaker said. It’s trading as though the event has already happened; you should sell your hedges to contribute to the market rally.

Elsewhere, a slew of technical signals was on the bulls’ side, including the 50% retracement in the 22-month rally that broke out in the S&P 500 in March 2020. This particular signal was one of a clutch of signals that were on the bulls’ side. When the index dropped below the 3,517 level, some people who follow the market took that as a sign that the decline over the previous nine months had gone too far.

A further support was found at the index’s 200-week moving average, a barrier that is currently located close to 3,600 and has emerged as a front line of conflict between bulls and bears in recent weeks. The long-term trend line was able to halt significant declines in the S&P 500 in both 2016 and 2018.

According to Ellen Haze, chief market strategist and portfolio manager at F.L.Putnam Investment Management, “We bounced off of this support level and that becomes self-fulfilling.” Because there is a great deal of unpredictability in the market and because many different data points provide conflicting information, the market reacts to whatever information is the most recent.

The S&P 500 erased an intraday decline of more than 2% for the first time since July, marking yet another of the wild swings that are a signature of 2022’s stock market as traders struggle to guess the Fed’s policy path and its impact on the economy. This is the first time since July that the S&P 500 has wiped out an intraday decline of more than 2%. Since the beginning of the year, the index has experienced six days of a 2% reversal in either direction, setting the stage for the most volatile year since the global financial crisis of 2008.

The eradication of half of the bull market’s bounty is yet another sobering reminder of how treacherous the market has been in 2022, despite the fact that it does provide support for tactical traders. The S&P 500 currently faces the possibility of suffering only its third annual loss of more than 20% during this entire century. The dream state that ruled the markets after the outbreak of the Covid-19 virus is slowly lifting, leaving investors vulnerable to the impact of a hyper-aggressive Fed and valuations that are comparable to bubbles.

The stability of corporate earnings has been one of the bullish arguments that has remained consistent throughout the selloff. Companies like Delta Air Lines Inc. and Walgreens Boots Alliance Inc. reported results on Thursday that were better-than-expected, and investors may be taking cues from those results as the third-quarter reporting season is about to move into full swing.

Despite the $15 trillion that has been wiped out this year, stocks are not exactly screaming buys. According to data compiled by Bloomberg, the index’s multiple currently sits at 17.3 times profits, which is higher than the trough valuations seen in any of the previous 11 bear cycles. To put it another way, if stocks are able to recover from their current level, the current bear market bottom will have been the most expensive one since the 1950s.

People have recently come to the realization that the sustained outperformance of risk assets must come to an end at some point. Larry Weiss, the head of equity trading at Instinet, said that fear of missing out drives people to chase this rally. “Unfortunately, we still have a lot of time to completely derail this rally,” said one participant.

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