Week of Fading Gambler Spirits Ends With a Bang for Stock Bulls
(Bloomberg) -- Friday’s bounce in equities turned an awful week into a moderately bad one. For investors who had watched warily for days as several big pillars of the 2021 bull market gave signs of weakening, it was a lifeline.
How big was Friday’s advance? Ten of 11 industries in the S&P 500 rose and the benchmark index climbed 11 points above its average price in the last 100 days of 4,346, a chart line whose reliability in stanching selloffs remains unblemished for a decade.
The turnaround capped a stretch in which many of the market’s foundational forces had wavered. Options traders, whose relentless call buying helped propel a 20% rally in the S&P 500 through August, had begun to back off. Exchange-traded funds suffered the longest outflows since last October. Even retail daytraders, one of the more reliable sources of dip-buying euphoria, gave evidence of exhaustion, with new accounts falling at Robinhood Markets Inc. and Charles Schwab Corp.
Friday’s recovery demonstrates that none of these forces dooms a rally that had lifted equity values by $10 trillion in the first eight months of the year. It helped restore spirits among bulls who had taken lumps last month as the Federal Reserve cemented its resolve to remove emergency stimulus and consumer giants Nike Inc. and FedEx Corp. slashed forecasts amid supply chain bottlenecks.
“We certainly enjoy seeing the markets move higher, but you always want to make sure that investors aren’t getting complacent and they’re taking note of the potential risks,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “Volatility is healthy.”
The S&P 500 ended the week on a positive note, posting its second daily gain of at least 1% in as many weeks after the longest drought of big up days in 20 months. Still, the rebound back to 4,357 didn’t clear the resistance near 4,385, which rejected the index’s breakout attempts on Wednesday and Thursday.
Down for a third week in four, the S&P 500 at one point fell 5% from its Sept. 2 peak, ending an 11-month run without a retrenchment of that size. The Nasdaq 100 tumbled 3.5% over five days, the worst weekly performance since February, as a spike in Treasury yields weighed on richly valued technology shares.
Among other things, the selloff has started to undermine a strategy that corporate America has counted on to expand businesses: takeovers. Earlier this week, Zoom Video Communications Inc.’s deal to use its stock to acquire Five9 Inc. collapsed after a plunge in the buyer’s share price.
For investors, the past few weeks have been particularly painful because the usual haven assets such as government bonds offered no buffers for equity losses. The Bloomberg U.S. Treasury Index also fell, stringing up six consecutive weeks of negative returns.
Facing fewer choices to hedge risk, traders flocked to options -- not to speculate on gains, but for protection. Based on its 10-day average, a Cboe put-to-call ratio that tracks the volume of options tied to everything from single stocks to indexes has reached an 11-month high.
“Investors are waiting for more of a correction,” Ryan Nauman, market strategist at Zephyr, said by phone. “Even though markets have come down in September, valuations remain elevated and you have some parts of the economy that are slowing and I that’s all starting to play a role in investor sentiment.”
Indeed, the current mantra is, don’t stand in the way of a downdraft. Investors pulled roughly $2 billion out of ETFs focused on U.S. stocks during the week through Thursday, extending outflows for a second week. That contrasts with torrid year-to-date inflows, which have topped $300 billion, data compiled by Bloomberg show.
The once-hot retail impetus is cooling, with sign-ups at online and retail brokers dropping substantially. Robinhood’s app downloads, a proxy for account openings, plunged 78% in the third quarter from the previous three months, according to analysts at JPMorgan Chase & Co., citing tracking data from Apptopia. At Charles Schwab, about 800,000 new clients enrolled in July and August. That’s less than half the pace seen during the first two months of 2021.
To Larry Adam, chief investment officer at Raymond James, it’s healthy for the market to drain out excessive optimism and the growing caution sets the stage for equities to resume their advance.
“One of the things that was worrisome to me was that people were getting uber optimistic on the markets as we went through the summer,” Adam said. “You don’t want everybody on one side of the trade, right? So the fact that there are people getting nervous, to me that’s the contrarian sign that we’re setting up for the reverse to occur and for the market to move higher.”
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