Thursday, December 8 2022

The last two years have been an unprecedented time for the use of the word unprecedented. But it must nonetheless be said that the trading action in US markets on Monday, January 24 was, shall we say, unprecedented.

From the opening bell, the markets were in free fall, with the Dow Jones down 1.8%, the S&P 500 down 1.7% and the Nasdaq down 2%. This has pushed the S&P 500 into correction territory since the start of the year, with a 10% drop from its all-time high on Jan. 3.

The sale has not stopped.

Just after quarter past twelve, the Dow had fallen 3.6%, the S&P 500 4% and the Nasdaq more than 5%. Everywhere you looked there was blood in the streets. Even mega-cap market giants like Microsoft (-6.5%), Amazon (-4.9%) and Tesla (-9.7%) were getting slaughtered.

But then something suddenly changed. The dip was purchased. In size.

At the closing bell, somehow all three major indices were flat or slightly in the green.

To be honest, in our time of market tracking, FT Alphaville has never seen anything like it.

Some of the reversals below the surface were even more stunning. For example Sweetgreen, a $3 billion fresh salad restaurant chain that went public in November, recovered from a 10% decline to a 23% rise on the day. A reversal of 33 percentage points.

It just didn’t seem unprecedented. It was. Steve Deppe, Investment Director at Nerad + Deppe Wealth Management, account it was only the 12th time the S&P 500 had recovered in one day from a decline of more than 3% since 1950. It was the first time a reversal had occurred while the S&P 500 was in a decline by 10%.

So what made investors buy? Well, here are three ideas from FT Alphaville:

1. Rational markets

Using all publicly available information, investors calculated that the aggregate discounted cash flow of the US stock market was worth much less, then much more, in the span of 8 hours.

2. Hedgie explodes

Maybe a poor hedge fund was forced to cover its short positions. The gross exposure of some long-short funds is often over 200% (e.g. 140% long and 100% short), so it cannot be ruled out that losses in a long portfolio meant that other parts of a wallet had to be unrolled.

3. Bear market rally

Ah yes, that old chestnut tree. The shorties, after dropping stones 30-50% in three weeks, were taking profits. While TINA and the growth investor types, who have been driving down bank buys for nearly a decade, couldn’t resist the urge to make loose changes in the market. Simple.

We’re not sure any of these theories hold up, to be honest with you. But if you have any idea what happened, or at least a better thesis, ping us at [email protected]

In the meantime, if you’re wondering how the Nasdaq has fared historically following a one-day reversal after a 4% or worse loss, take a look at this chart that Brent Donnelly posted on Twitter:

In short: it is a rather bearish signal.

The sell-off appears to continue in pre-market trading. At pixel time, the Nasdaq is down 2%, the S&P 500 1.5% and the Dow 0.8%.

Related links:
US stocks reverse heavy losses as buyers step in – FT


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