Friday, January 21

Bad month for stocks ends with few signs the drama is over


The end of September in the stock market was a time of volatility, accelerated coverage and economic malaise. However, it did not cause an extreme rearrangement in trader sentiment, and for some of Wall Street’s old guard that is concerning.

While the S&P 500 posted its worst monthly performance since March 2020, there were no signs of the kind of cathartic surrender opponents seek when trying to call in funds. Amid another sell-off earlier in the week, hedge funds tracked by Goldman Sachs Group Inc. were just “modest” sellers. On Tuesday, when the benchmark index suffered its biggest drop in four months, outflows of exchange-traded funds were down to just a fraction of what they had seen the previous week.

At the same time, the shopping sprees that marked exits from past crashes were also not apparent. Retail traders turned away from their favorite speculative instrument. The S&P 500 approached 4,385 twice Thursday before declining. The failure came a day after the level, which acted as a top in July and then served as support in August, thwarted all four attempts to break the index.

“Until we see a flop or impulsive buying, a move to 200 DMA on the S&P 500 cannot be ruled out,” said John Kolovos, chief technical strategist at Macro Risk Advisors. The index’s 200-day moving average stood near 4,135, down 4% from its last close.

Stocks have slumped as rising bond yields led investors to flee high-value tech stocks. Adding to the list of concerns is concern over the public debt ceiling, increased political static around the Federal Reserve, and supply chain disruptions.

But panic was absent during the worst day of the carnage. On Tuesday, when the S&P 500 fell 2%, hedge fund short sales were flat, unlike on Sept. 20, when a minor drop triggered a 5.5% jump in bear positions, according to show customer data compiled by Goldman. And publicly traded fund outflows that day hit $ 1.7 billion, behind the $ 12 billion of withdrawals seen since Sept. 20, according to Bloomberg data.

Underpinning Tuesday’s sell-off was systematic traders allocating assets based on volatility, according to Nomura Securities strategist Charlie McElligott. He estimated that volatility control funds and specific risk strategies likely reduced stock holdings by $ 35 billion on that day alone.

Generally speaking, fear has not yet reached levels that signal a buying opportunity. Nicholas Colas, co-founder of DataTrek Research, says that one indicator he tracks is the Cboe Volatility Index, or VIX. The indicator hit a high of 25.7 this month, below the 36 reading that normally indicates what he calls a “trade low.”

“We are waiting for better levels before we get tactically bullish again,” Colas said. “We advise long-term investors to prepare for the difficult weeks ahead.”

Regular dive shoppers weren’t enthusiastic either. Retail investors, one of the bull market’s biggest allies, have slowed down their bull option buying while raising the stakes against stocks.

In fact, a trader just put a massive hedging position through options to protect a portfolio of stocks in the event that the S&P 500 losses soar to 20% during the fourth quarter.

For Matt Maley, chief market strategist at Miller Tabak + Co., the market is likely to follow the pattern of a year ago, when the jump in Treasury yields sent the S&P 500 toward a 10% correction. And with the Fed getting more aggressive on monetary policy, investors better prepare for further turmoil, he said.

“We think the correction will probably be deeper,” Maley said. “This year, the Fed is about to phase out its massive QE program and start talking about raising rates earlier than the market has been setting. Last year, at this time, the QE program was running at full speed “.

© 2021 Bloomberg


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