(Bloomberg) – Investors were fleeing, the cryptosphere was collapsing, and a monthly report that has been a disaster for traders all year was available. Then came Thursday’s session in stocks and bonds, the most violent repudiation bears suffered in any asset class in more than a decade.
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Bonds rose, igniting bets against them placed en masse by hedge funds. Credit had its best day in two years as stocks surged above three different key technical levels and the Dow Jones Industrial Average’s year-to-date loss narrowed to less than 8% vs. over 20% just six weeks ago.
Among other things, the session was a stark reminder that market timing is not for the faint of heart – missing marquee days like Thursday is why individual investors follow indices when taking things into account. hand. It was also a testament to the power of positioning. A market overrun with sellers is also a market where many people can change their minds at the same time, generating greater gains than could be justified by a single economic report.
“Equity and bond markets had become very consensus-driven, which meant the markets had a strong negative bias,” said Mark Freeman, chief investment officer at Socorro Asset Management LP. “Once the markets started moving 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 on Thursday after weaker-than-expected October consumer price index data sparked speculation that the Federal Reserve might be able to slow down. its aggressive monetary tightening.
The S&P 500 jumped 5.5%, the Nasdaq 100 gain topped 7% and 10-year Treasury yields plunged more than 20 basis points. Measured by the performance of the largest exchange-traded funds tracking the S&P 500 and Treasuries, their combined gains amounted to more than 9%, the best day for multi-asset returns since October 2008.
Two-year Treasuries, where big speculators piled up record short positions last week according to data compiled by the Commodity Futures Trading Commission, rallied that pushed yields down 26 basis points, the most for over a decade.
“There is no giving up in today’s bond rally,” said FHN Financial analyst Jim Vogel. “Markets are hungry for positive news, so they grabbed every ounce of inflation relief in the October CPI.”
Newfound nervousness for risk pushed stocks through several stages. The S&P 500 has moved past its October peak, reigniting its attempted recovery since hitting its 2022 low a month ago. The index also picked up key trendlines such as average prices over the past 50 and 100 days.
But for Chris Senyek, chief investment strategist at Wolfe Research, it’s too early to say that everything is clear. The level he’s watching is the 200-day average of the S&P 500, a threshold that stifled the market in August. This trend line is now near 4088, about 3% above the index close.
“We wouldn’t be surprised to see a short-term follow-up,” Senyek said. “However, this morning’s report does not change our minds that the FOMC will eventually raise the federal funds rate to between 5% and 6% and that a demand-driven recession will hit next year. “
Senyek’s skepticism was widely shared by investors. Ahead of the midterm elections and this week’s inflation report, hedge funds have reduced their equity exposure to the lowest level since 2017, according to data compiled by prime broker JPMorgan Chase & Co. ETF investors withdrew $2 billion worth of shares in November, set for the first monthly outflow since April, according to data compiled by Bloomberg.
As short sellers reaped gains during the bear market, such bets backfired on Thursday. A Goldman Sachs Group Inc. basket of the most shorted stocks jumped 11%, snapping an eight-day slide and punishing the bears the most since March 2020.
Massive swings have been the defining feature of equity trading in 2022, where macroeconomic events such as economic data or central bank policy decisions have fueled trade at a snail’s pace. While periods of volatility are supposed to be when active investing shines, the price of getting even a few things wrong in a market as turbulent as this can be costly.
The penalty of bad timing can be illustrated by a statistic that highlights the potential harm an investor faces by holding back from the biggest single-day gains, such as Thursday. Without the top five, for example, the S&P 500’s loss for this year jumps from 17% to 31%.
Bryce Doty, senior vice president at Sit Investment Associates, attributes Thursday’s rally to short hedging.
“Without a clear signal from the Fed that rate hikes are slowing, the market reaction seems to be getting ahead of itself,” he said.
–With the help of Isabelle Lee.
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