(Bloomberg) - The whipped up volatility that is pushing Nasdaq futures up and down at twice last year’s rate is making for queasiness among the buy-and-hold set. But it’s the kind of market a lot of traders have been waiting on for a while.
Among them is anyone who still has the guts to make bearish bets on the market, a class of speculator that has struggled mightily amid years of mind-numbing gains. While up weeks like this are still testing their resolve, measures of such positioning are rising at the fastest rate in four years. Other categories, including various types of systematic funds, have snapped into action as the market’s chaos quotient rose.
While an incursion by traders hoping stocks will fall or twist wildly sits uneasily with many investors, in many ways it’s a sign of health -- or at least normalcy -- in a market where uncertainty around monetary policy is opening a new chapter for speculators. Volume shows they’re diving in -- a 10-day average of the value of all stocks traded in the U.S. stands at $820 billion, 46% above 2021’s average.
Gone are the days where a dovish Federal Reserve kept everything predictable. Now, investors who want to make judgments between winners and losers have something to get excited about, with earnings from Amazon.com Inc. and Facebook parent Meta Platforms Inc. sparking two of the largest daily changes of share values in American history. (They were in opposite directions.)
“There are players out there who view this heightened volatility as something a bit more sinister and as a sign that maybe we’re going to see the indexes play more catch-down to what frankly has been a lot of underlying weakness in the market,” said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. “If you’re more trading-orientated, you don’t like a perpetually low volatility period. You want higher volatility. That’s where the opportunities come.”
This week’s trading was the kind of gauntlet volatility-addicted pros love. Monday saw stocks cap the biggest two-day rally since 2020 -- even as it ended the worst month for equities since the pandemic crash. The S&P 500 shot up again Wednesday following robust results from Google, before plunging three times as fast on Meta Platforms’ harrowing quarter.
On Thursday, investors faced surprisingly hawkish remarks from the Bank of England and European Central Bank, though Amazon’s post-market results delivered another shocker, with its market value soaring Friday. Meanwhile, government data pointed to unexpected strength in the labor market, adding more pressure on the Fed to raise interest rates.
All told, the S&P 500 advanced 1.6% over the week for the best performance since December. And the tech-heavy Nasdaq 100 put up a similar gain, rounding out a second weekly advance.
“The combination of heightened market volatility and high-profile earnings beats and misses -- all happening with the specter of an alleged hawkish FOMC -- has created the perfect scenario for the wild swings we’ve been seeing,” said Frank Cappelleri, a trading-desk strategist at Instinet. “This has put traders on edge and made it very difficult to trust any of the sizable moves for longer than a few days -- sometimes hours.”
Violent intraday reversals have become a feature of 2022’s stock market as gains and losses of 2% or more have been quickly wiped out. Trading ranges have widened as investors struggled to get a grip on a market where the Fed is tightening and the outlook for corporate earnings remains murky amid supply-chain disruptions and wage pressure.
From peak to trough, futures on the Nasdaq 100 swung 6.3% during the week. By comparison, in the final six months of 2021, the gyration averaged 2.8%.
The Cboe NDX Volatility Index, a gauge of option costs tied to the tech-heavy gauge, averaged 29.9 this week, a level that before this year was last seen in March 2021.
The sudden turmoil has prompted computer-driven funds to respond with a sharp reduction in equity exposure, according to JPMorgan Chase & Co. Trend-following funds are now “outright short” stocks, while volatility-targeted funds have “significantly reduced leverage,” the firm’s data showed.
While misjudging the stock reactions of Facebook or Amazon to earnings could put a career in danger, the upheaval is manna for most traders, according to Art Hogan, chief market strategist at National Securities.
“The folks doing this on an intraday basis are getting exactly what they want,” Hogan said by phone. “The guys that trade minute-by-minute instead of month-by-month are in the ideal universe for that profession -- it’s the kind of swings that they largely didn’t see for most of the 18 months of the market rally post the discovery of Covid-19.”
With S&P 500 posting its worst January since 2009 and the Nasdaq 100 down 11% for the year, bears quickly seized the chance to reload positions. They boosted short sales by $65 billion last month, the largest increase since at least 2018, data compiled by Morgan Stanley’s trading desk show.
Short sales jumped on the biggest exchanged-traded fund, SPDR S&P 500 ETF Trust (SPY), with bearish bets rising to a 13-month high, according to data from IHS Markit. Short interest also increased for Invesco QQQ Trust (QQQ), the largest exchange-traded fund tracking the tech-heavy Nasdaq 100, hitting the highest since the 2020 pandemic crash.
Rather than a soothing force to market turbulence, as it has been most of the time since the Covid outbreak, this reporting season has served as a source of volatility. Halfway in, at least four firms in the S&P 500 have seen their shares falling 20% or more on the first day post earnings. In the prior full season, three stocks scored moves of that magnitude.
While bears are on the rise, it’s a contrarian signal that bodes well for the market, said Sonders at Charles Schwab.
“In general it’s healthy to have views and positions both on the optimistic side and on the pessimistic side,” she said. “It’s when everyone is on the same side of the ship, everybody is sort of wildly long and wildly optimistic that’s typically a negative and vice versa.”
By Lu Wang and Vildana Hajric
