Practically everything went up this week, with traders crawling out of seven weeks of wreckage. From speculative flyers to bluer chips, via junk and corporate bonds to Treasuries and commodities, the path of least resistance has been, for once, upward.
Climbing more than six percent in five days and 9 percent from last Friday’s low, the S&P 500 snapped its longest streak of weekly declines in a decade, posting its best rise since 2020. Out-of-stock returns were smaller, though Although the positive tone prevailed. Almost all major assets rose, a feat not seen since December. Only the dollar and cryptocurrencies fell.
While the big weeks certainly feel comfortable for swing traders, they are part of a bigger picture where this year’s high volatility comes at a heavy cost to anyone who fails to timing the swings perfectly. Right now, the S&P 500 is down 13 percent in 2022. If you subtract the five worst days, the return is 2.6 percent. At the same time, missing the biggest five days increases the year-to-date decline to 24 percent.
“This is not a time to try to chase and call a bottom, or call a top, or call an inflection point — because, frankly, inflection points happen daily,” Liz Young, SoFi’s head of investment strategy, said on Bloomberg. the television. “You can feel like you’re wrong on a daily basis, and that’s when you start making mistakes.”
The meaning of high-speed assemblies is also hotly debated. For the bulls, this show’s gains are a feature of bottoms, a kind of blanket realization that enough damage has already been done to prices. Skeptics say that in bear markets it’s perfectly normal for emotions (and shorts to cover) to briefly take over and push prices higher in an almost unanimous fashion.
“When you go down that far, it doesn’t take much for stocks to go up. Those spikes are coming in sharply,” Joseph Saluzzi, co-head of stock trading at Themis Trading LLC, said by phone. The middle ground between inflation and stagnation.
Volatility has been the norm in 2022 as uncertainty about the Fed’s policy path and its impact on the economy reinforces extreme views. Earlier this month, the prevailing narrative was that the central bank’s aggressive anti-inflation campaign would spur a recession. Now, weak data on housing and inflation, and relatively rosy minutes since the last Federal Reserve meeting, have prompted traders to bet that policy makers may pause or slow the pace of tightening later this year.
As investors scaled back interest rate hike expectations, Treasuries rose for a third week through Thursday, the longest rise since early December. Investment-grade and high-yield bonds jumped 1.5 percent and 2.7 percent, respectively, and both posted their best week in nearly two years. Meanwhile, higher oil prices helped push the Bloomberg Commodity Index to an eight-year high.
Shares were boosted by upbeat earnings from retailers such as Nordstrom Inc. and Macy’s Inc. After disappointing expectations from Walmart Inc. and Target Corp to sell a week ago. A basket of unprofitable tech companies rose 5.4 percent over five days, ending a seven-week record low.
“The Fed is doing exactly what it needs and the market knows they have the tools to get it done,” JoAnne Feeney, partner at Advisors Capital Management LLC, said on Bloomberg TV. “Obviously, long-term inflation expectations are well held.”
Investors who have dumped stocks for six consecutive weeks are finding their way back into the markets. They added about $20 billion to global stocks in the week to May 25, according to EPFR Global data.
There were also signs that the short sellers contributed to the recent rally as they were forced to cover bearish bets. The basket of most hated stocks is up more than 8.1 percent during the week, while the SPDR S&P 500 ETF Trust (SPY Index) has seen short interest as a percentage of outstanding shares down for seven consecutive days.
After the S&P 500 plunged last week to the brink of a 20 per cent bear market and valuations shrank to their historical average, the desire to buy the dip resurfaced. The situation had also become so low that the foundation for energy transformation was laid. Hedge funds have reduced equity exposure to multi-year lows and funds’ cash holdings by some measures have risen to their highest level in two decades.
However, previous reversals have not been kind to the bulls. Consider anyone who bought in mid-March, when the S&P 500 was up more than six percent over five days — the only other jump of this size in the past 18 months. They were treated for 8.8 percent in April, the worst month in two years.
The S&P 500 rose 2.5 percent to 4,158.24 on Friday, erasing its May loss.
For Dennis DeBusschere, founder of 22V Research, the index will likely be stuck in a 3800-4200 range until the market becomes more clear about whether the central bank can control inflation without disrupting the economy. He says the key data point is the monthly jobs report due in a week which will shed new light on the labor market.
“If consumer data points are strong, it will indicate that financial conditions are not tightening enough and risky assets will fade,” DeBusschere wrote in a note. “We will be hiding the market on the payroll next week and will continue to focus on the 3800-4200 range until it becomes clearer if an opportunistic inflation cut results in.”