Shock Rally Sweeps Markets In Rebuke To Overconfident Bears
Investors were fleeing, the cryptosphere was crashing, and a monthly report that has been a disaster for traders all year was on tap. Then came Thursday’s session in stocks and bonds, the most violent repudiation bears have suffered across asset classes in more than a decade.
(Bloomberg) -- Investors were fleeing, the cryptosphere was crashing, and a monthly report that has been a disaster for traders all year was on tap. Then came Thursday’s session in stocks and bonds, the most violent repudiation bears have suffered across asset classes in more than a decade.
Bonds rose, torching bets against them placed in droves by hedge funds. Credit had its best day in two years, while stocks surged past three different key technical levels and the year-to-date loss in the Dow Jones Industrial average narrowed to less than 8% from more than 20% just six weeks ago.
Among much else, the session was a stark reminder that timing the market isn’t for the faint of heart -- missing marquee days like Thursday is why individual investors trail indexes when they take matters into their own hands. It was also testament to the power of positioning. A market overrun by sellers is also one where a lot people can change their mind at once, spurring bigger gains than might be warranted by any single economic report.
“Both the equity and bond markets had become very consensus driven, which means the markets had a strong negative bias,” said Mark Freeman, chief investment officer at Socorro Asset Management LP. “Once the markets started to move in the opposite direction, many traders and short-sellers found themselves in a significant offside position.”
From commodities to bonds and stocks, just about everything jumped Thursday after softer-than-expected data on October’s consumer price index sparked speculation that the Federal Reserve will be able to slow down its aggressive monetary tightening.
The S&P 500 surged 5.5%, the Nasdaq 100’s gain topped 7% and yields on 10-year Treasuries plunged more than 20 basis points. When measured by the performance of the largest exchange-traded funds tracking the S&P 500 and Treasuries, their combined gains summed to more than 9%, the best day for cross-asset returns since October 2008.
Two-year Treasuries, where large speculators last week built up record short positions according to data compiled by the Commodity Futures Trading Commission, saw a rally that pushed yields down 26 basis points, the most in more than a decade.
“There is no quit in today’s bond rally,” Jim Vogel, an analyst at FHN Financial. “Markets are starved for positive news, so they grasped at every ounce of inflation relief in the October CPI.”
Newfound risk-on nerves pushed equities past several milestones. The S&P 500 surpassed its October peak, reviving its recovery attempt since hitting its 2022 trough a month ago. The index also reclaimed key trendlines such as the average prices over the past 50 and 100 days.
But to Chris Senyek, chief investment strategist at Wolfe Research, it’s too early to call all-clear. The level he’s watching is the S&P 500’s 200-day average, a threshold that snuffed out the market’s August. That trendline now sits near 4,088, about 3% above the index’s close.
“We wouldn’t be surprised to see some near-term follow through,” said Senyek. “However, this morning’s report does not make us change our views that the FOMC will ultimately hike the fed funds rate to between 5%-6% and that a demand-driven recession will hit next year.”
Senyek’s skepticism was widely shared among investors. Heading into this week’s midterm elections and inflation report, hedge funds cut their equity exposure to the lowest level since 2017, according to data compiled by JPMorgan Chase & Co.’s prime broker. ETF investors have pulled $2 billion out of equities in November, poised for the first monthly outflow since April, data compiled by Bloomberg show.
While short sellers have reaped gains during the bear market, any such bets were backfiring Thursday. A Goldman Sachs Group Inc. basket of the most-shorted stocks surged 11%, snapping an eight-day slide and punishing bears by the most since March 2020.
Massive swings have been the defining characteristic of 2022’s equity trading, where macro events like economic data or central bank policy decisions have fueled lockstep trading. While volatile times are supposedly when active investing shines, the price of getting even a few things wrong in a market as turbulent as this one can be costly.
The penalty of bad timing can be illustrated by a statistic that highlights the potential harm an investor faces by sitting out the biggest single-day gains, moves such as Thursday’s. Without the best five, for instance, the S&P 500’s loss for this year widens to 31% from 17%.
Bryce Doty, senior vice president at Sit Investment Associates, attributes Thursday’s rally to short covering.
“Without a clear sign from the Fed that rate increases are slowing, market reaction seems to be getting ahead of itself,” he said.
--With assistance from .
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