The past two years have been an unprecedented time for use of the word unprecedented. But it must nevertheless be said that the trading action in US markets on Monday 24 January was, well, unprecedented.
Right from the the opening bell, markets were in free fall, with the Dow off 1.8 per cent, the S&P 500 down 1.7 per cent and the Nasdaq 2 per cent lower. That pushed the S&P 500 into correction territory year-to-date, with a fall of 10 per cent since its all-time-high on January 3rd.
The selling didn’t let up.
By just after quarter past noon, the Dow had fallen by 3.6 per cent, the S&P 500 by 4 per cent, and the Nasdaq by over 5 per cent. Everywhere you looked there was blood on the streets. Even mega-cap market generals like Microsoft (-6.5 per cent), Amazon (-4.9 per cent) and Tesla (-9.7 per cent) were getting slaughtered.
But then, something suddenly changed. The dip was bought. In size.
By the closing bell, somehow, all three major indices were flat or a touch into the green.
To be honest, in our time following markets, FT Alphaville has never seen anything quite like it.
Some of the reversals below the surface were even more astonishing. For instance Sweetgreen, a $3bn fresh salad restaurant chain that IPO’d back in November, recovered from being down 10 per cent to up 23 per cent on the day. A 33 percentage point reversal.
It didn’t just feel unprecedented. It was. Steve Deppe, chief investment officer at Nerad + Deppe Wealth Management, reckoned this was only the 12th time the S&P 500 had recovered in one day from being down more than 3 per cent since 1950. It was the first time that a reversal had happened when the S&P 500 was in a 10 per cent drawdown.
So what prompted investors to get buying? Well, here are three ideas from FT Alphaville:
1. Rational markets
Using all available public information, investors calculated the aggregated discounted cash flows of the US stock market to be worth a lot less, then a lot more, in the space of 8 hours.
2. Hedgie blow-up
Perhaps some poor hedge fund was being forced to cover its short positions. Gross exposure at some long-short funds are often more than 200 per cent (say, 140 per cent long and 100 per cent short), so it’s not out the question that losses in a long book meant other parts of a portfolio had to be unwound.
3. Bear market rally
Ah yes, that old chestnut. Shorties, having ridden some stonks down 30-50 per cent over three weeks, were taking profits. While TINA and growth investor-types, who have made bank buying the dip for almost a decade, couldn’t resist chucking any loose change into the market. Simples.
We’re not sure any of these theories hold up, to be honest with you. But if you have any idea what happened, or a better thesis at least, ping us at [email protected]
Meanwhile, if you’re wondering how the Nasdaq has performed historically after a one-day reversal from a 4 per cent loss or worse, take a look at this table that Brent Donnelly posted on Twitter:
In short: it’s a pretty bearish signal.
The sell-off seems to be continuing in pre-market trading. At pixel time, the Nasdaq is off 2 per cent, the S&P 500 1.5 per cent and the Dow 0.8 per cent.
US stocks reverse severe losses as buyers step in — FT