Consecutive days of big downturns have become more frequent in December, and this leaves traders, accustomed to the bullish trend of the index over the past year, in a restless mood. A plummeting buy - a trade that has rewarded almost every time a stock rolls back in 2021 - is becoming more expensive and less justifiable.
The fall of the markets cost traders $30 billion, but perhaps we are dealing with a new trend, and it was a waste
Having fallen hard on Monday for two consecutive sessions, the S&P 500 has now fallen by 1% twice in a row over the past month, which has not happened to it over the past year. This is an alarming departure from the recent past, when 1% of dollars were immediately cut off or erased the next day 68% of the time, making 2021 one of the best years for dip buyers.
The inability to bounce occurs in the form of a number of stressful factors that put pressure on the bulls, and thrills those who are used to this established trend. Last week, when the S&P 500 index was falling for almost all but one day, investors invested $30 billion in exchange-traded funds, focusing on US stocks, which is the largest inflow since March.
To their chagrin, stocks began the new week with another unpleasant note: Senator Joe Manchin's unexpected rejection of President Joe Biden's tax and spending package added to the long list of market problems, from the aggressive Federal Reserve to the rapidly spreading Omicron variant.
While the S&P 500's famous ability to contain declines at a widely observed chart level may still reassure bulls betting on a repeat of the historically favorable seasonal pattern before the end of the year, the gloomy economic outlook means that many traders may be ready to lock in profits this year while the index is up 20%.
The market is ready to "take a break after a huge growth. It is tiring, and has worked hard," Bob Doll said in an interview with Bloomberg. "The Fed said, 'We're going to pick up the punch bowl. We can all argue about the pace of this, but the Fed is moving away from our best friend, and they will eventually become our worst enemy when it comes to the market."
Monday's drop was the fifth in six sessions - one of the worst periods of volatility since the pandemic sell-off in early 2020. As the Fed increases its aggressiveness, and the Omicron variant causes more restrictions on travel around the world, the tone of the market is changing slightly.
Even now, shopping fatigue has crept up to the most dangerous corners. Over the past few weeks, the Russell 2000 for small-cap companies has fallen by a 10% correction, newly issued stocks have fallen by 20% on a bearish wave, and a group of non-profit technology companies has fallen by almost 30%.
"The aggressive buy-on-the-down mentality that has proved so profitable over the past year and a half, especially in the corners of the market with a large number of multiple segments, has been reinforced by a tidal wave of incentives that is now receding," wrote Adam Crisafulli, founder of Vital Knowledge.
Nevertheless, bulls are not ready to give up so easily, especially in the segment of large capitalization. Thus, the SPDR S&P 500 ETF Trust has attracted money for the fourth consecutive week, which is the longest streak of inflows since September 2020. Invesco QQQ Trust, the largest ETF tracking the Nasdaq 100, added about $5.5 billion last week. investments, which is the highest indicator for 15 months.
The Nasdaq 100 index rose 2.4% last Wednesday as the Fed announced a faster end to its economic stimulus program and signaled two rate hikes next year, only to nullify all gains in the next session. Overall, the high-tech index has fallen by more than 3% in five days, which is one of the worst weeks this year.
It is not difficult to understand why bulls prefer to stay close. At the moment, all the overall risk has not yet turned into any real damage to corporate earnings - one of the key pillars supporting this bull market. In fact, over the past month, analysts have raised their profit forecasts for 2022, while their estimated earnings for all S&P 500 firms increased by more than $1 to $221.10 per share.
No matter how ominous the daily decline looks, the S&P 500 has managed to stay above its average price over the past 100 days, maintaining a trend line that has consistently acted as a low during every major sell-off since the bear market pandemic. During trading on Monday, the index reached a threshold value that recently stood at about 4,523 points before bouncing back.
"The market has been patient enough so far and has not overreacted," Lori Calvasina said in an interview with Bloomberg TV. "That's how it's going to continue for the next few weeks.".
Well, news time is coming to an end. In the next two weeks, the market will determine liquidity, so this is partly true. Nevertheless, February is likely to bring its own corrections, as the reduction of bond repurchases by banks, preparations for the spring revival of demand for tourism and other factors will come into effect.
However, there is another opinion.
The trend of wild volatility is now pronounced, especially in the speculative end. For example, on the Nasdaq 100, the absolute volume of close-to-close fluctuations this month was about 1.5% per day - up or down. This is three times more than in any December after the Christmas debacle of 2018, and almost twice as much as the average over the past year.
This is partly a consequence of the influence of an overly saturated news background - from data on the rapidly spreading Omicron variant to inflation, falling industrial output and a reduction in monetary sweets.
During the week, there were serious reversals as investors tried to understand whether Fed Chairman Jerome Powell would be able to provide a soft landing, restraining inflation without restraining growth. While investors initially consoled themselves with Powell's firm support for the economy, describing demand and income as high, later there was a sense of anxiety associated with a fall in long-term treasury bond yields, which revived concerns about its preservation.
The smooth running that has been the hallmark of this bull market is under threat. The Nasdaq 100 has shown five daily movements of at least 2% over the past three weeks - three up and two down. This corresponds to the total number of approximately the same wild sessions over the previous five months. In other words, market fluctuations accelerate over time.
There are many contradictory stories. While strategists at Credit Suisse Group AG point to history and say it's safe to buy stocks at the initial stage of the policy tightening cycle, their colleagues at Bank of America warn that this time things may be different, because inflation is out of control.
"I have no convictions. And I think a lot of investors are like that," says strategist Michael Zigmont. - They look at the world, and they have a point of view, but it's not a very strong point of view. Without any conviction, but with a lot of trend following, you can get that zest that we've seen." In other words, he suggests taking into account a new trend – fluctuations in his daily forecasts.
In fact, if this trend continues, it will not benefit the markets. Too large swings indicate the growing doubts of investors about the global trend. In other words, we can observe nothing more than the struggle of bullish and bearish trends, which is still supported by bulls out of a stubborn desire to extend the regime of investment to the limit.
However, now we have something that was not even in that pessimistic period when we faced the Delta variant - accelerated inflation. In fact, Omicron played into the hands of the markets by moderating consumer fervor, otherwise now we would be dealing with stagflation – this older and even more frightening brother of price growth. And although the markets as a whole are even less optimistic, the first restrictions on the repurchase of bonds from central banks may strike a series of blows early next year.
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