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Stocks Sell Off a Day After Furious Rally as Volatility Returns

(Bloomberg)

(Bloomberg) -- Investors hoping for a quiet summer are being sorely disappointed as turbulence pummels the stock market, spurring outsized swings in US equity indexes with the dog days of August now upon us. 

A spike in realized volatility and a massive rush to the safety of US government bonds turned a busy week into a frantic one for traders trying to wrap their arms around the Federal Reserve’s plans for interest rates after it signaled a rate cut could be coming soon. The yield on 10-year Treasuries fell below 4% to its lowest level since Feb. 1 as markets anticipate a sharp reduction in borrowing costs before long.

In response, stocks are whipsawing. The technology-heavy Nasdaq 100 Index soared 3% on Wednesday and then retreated almost that much on Thursday, before paring the decline at the close, for its biggest up-to-down rotation since May 2022. The S&P 500 Index sank 1.4%, just one day after rallying 1.6%. The Cboe NDX Volatility Index, which measures the 30-day implied swings in the Nasdaq 100 Index, rose to near 25, while the Cboe Volatility Index briefly traded above 19.

No clear narrative explains the sudden burst of turbulence, though there are plenty of possible culprits. 

Cracks in the labor market are beginning to emerge, with initial jobless claims climbing to the highest level in nearly a year. Earnings reports from Corporate America are showing a mixed picture of the state of the US consumer, and raise questions about whether heavy spending on artificial intelligence efforts is paying off for technology giants. Moreover, investors wonder if the stock-market rally that has seen the S&P 500 soar 14% this year is showing signs of fizzling out.

An earnings readout from Amazon Inc. after Thursday’s close added to worries around megacap technology, with the e-commerce giant sinking as much as 5% in after hours trading following a sales miss.

“There has been a shift in the sense that bad news is now bad for stocks more broadly than what we saw in May and June, where it was good for megacaps,” said Michael Kantrowitz, chief investment strategist at Piper Sandler & Co. “Part of the volatility is a narrative shift. Investors keep asking the data, ‘What have you done for me lately?’”

Here’s how other strategists and traders reacted to the swings:

Keith Lerner, Co-chief Investment Officer, Truist Advisory Services:

“Overall, the reason behind today’s selloff appears to be that investors are growing concerned that the economy may be slowing down at faster rate and the Fed may be waiting too long to cut rates. As a result, we are seeing an overall defensive market tone. Micro caps and small caps are selling off as they are more economically sensitive and the weakness in data is outweighing the potential benefit of lower rates. There is a move into defensive areas, such as utilities along with staples and health care, which are less economically sensitive. We also have investors that are selling into the tech bounce, as the prior selloff likely had many managers realizing they were too heavy positioned in the sector and are using the rebound to lighten up .”

Kevin Gordon, Senior Investment Strategist, Charles Schwab & Co.:

“Up until the June CPI report, we were mostly in a duck market: indexes were calm on the surface but paddling like the dickens underneath. Now, we’re experiencing the opposite as indexes start to become more volatile, even on days when breadth might skew positively. I wouldn’t be surprised to see more ‘catch down’ from the indexes, because we have to keep in mind that the average maximum drawdown for S&P 500 members has already hit correction territory this year, and is approaching -20%.”

Dave Lutz, Head of ETFs, JonesTrading:

“This is Nvidia’s world, and we all just live in it. Nvidia ripped higher on Advanced Micro Devices and reports of China Exemptions for Chips, but ARM was a stark reminder of the headwinds encountered by AI. Meanwhile the macro backdrop has soured, with today’s ISM and Jobless Claims readings fueling some “hard landing” angst.”

Stuart Kaiser, Head of US Equity Trading Strategy, Citigroup Inc.:

“People are taking down some exposure that they had added over the course of the day yesterday. It’s been pretty broad-based selling across stocks, definitely with a bid for safety and a bid for convexity. It’s a classic risk-off day with a bid for defensives and people using VIX and VVX to for some tail protection or convexity to hedge their portfolios. It was a little surprising to see such a big move on economic data and I think the market, like the Fed, is data dependent right now”

Quincy Krosby, Chief Global Strategist, LPL Financial LLC: 

“In terms of seasonality, it’s a difficult time. You’ll have pockets of volatility that will equate to pockets of opportunity, but it’s a period typically of a lot of chop. We’ve maintained that the market wants to see a rate cut and a series of rate cuts that are predicated on inflation easing so that the economy doesn’t need to have a higher rate regime. That’s what the market wants. The market does not want rate cuts because the economy is moving towards a more material economic slowdown. The concern is that the Fed is behind the curve again. They were behind the curve in cutting rates. Now the view is if this prevails they’re behind the curve yet again in beginning to ease monetary policy.” 

Chris Murphy, Co-head of Derivatives Strategy, Susquehanna International Group:

“We’re seeing a fair amount of put selling in general, including puts on Big Tech stocks like Apple, but it’s not like a panic mode. The small-cap trade is over, at least for now.”

Art Hogan, Chief Market Strategist, B Riley Wealth Management Inc.:

“The logic behind today’s sell off is pretty hard to discover. But I would offer up that the narrative shift could flip on you pretty quickly on a summer Friday if Apple and Amazon put up some nice numbers and the unemployment rate stays at 4.1% or less, and we create 175,000 jobs. We’ll be back to thinking, ‘remain calm.’ But right now, it’s just difficult, and the rug pull on the market today was just astonishing. I think investors that were looking for reasons to take profits, find a reason in a piece of economic data and then get concerned.”

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