‘Completely bizarre’ stock moves leave traders scratching heads

For most of December, no rally had been safe in the Standard & Poor's 500 index. On Thursday the script was reversed.

The S&P 500 erased a 2.8 percent drop in an afternoon rebound, finishing the day with a 0.9 percent gain. It’s the first time since May 2010 that the index has posted such a huge upward reversal, data compiled by Bloomberg show.

The about-face came one day after a 5 percent rally that itself was the biggest since 2009. On the surface, the rally is good news for investors searching for a bottom after a three-month sell-off sent the S&P 500 to the brink of a bear market. But days like this are rarely good omens.

Since 1990, every comparable reversal came during the 2008-2009 bear market. In other words, as much as the market has shown the impetus to rally, violent actions like these normally don’t bespeak a healthy market. The latest bounce happened during a holiday week when prices are typically susceptible to swings because of low liquidity.

“How much do we trust the market’s message, up or down, over this holiday week?” Jeff deGraaf, co-founder of Renaissance Macro Research, wrote in a note. “About as much as we trust uncle Albert to drive home after Christmas dinner.”

Investors might want to get used to whiplash. Thursday marked the ninth time this quarter where the S&P 500 reversed an intraday move of at least 1 percent. That’s the most since 2011, when Standard & Poor’s downgraded the U.S. sovereign rating, sending stocks within points of a bear market.

One thing traders and investors can agree on: these are not usual times, especially for this time of year.

It’s “completely bizarre,” says Stephen Innes, head of trading for Asia Pacific at Oanda Corp. “It’s incredible just how harmful markets veer when sentiment slides.”

Innes has been taking profit on some winning investments, and snapping up blue-chip stocks whose valuations have dropped in the December sell-off, but for the most part he’s keeping his money on the sidelines. Like many other traders in Asia, he’s been watching events play out in the United States from a distance, amazed at what he sees.

“I’m on the golf course,” Innes says about how he’s responding. “As I have been most of the week.”

Mark Matthews, head of Asia research at Bank Julius Baer & Co. in Singapore, says two “golden rules” have been broken. First, since 1945, December has produced the highest average gains of any month, he says, but this month is set to be the worst of the year. Second, since the 1970s, the S&P 500 has never slumped when earnings growth was more than 10 percent, according to him. But as a long-only investor, Matthews is planning to ride it out. “I remain invested through good times and bad,” he says. “Not being invested, over the long term, is like betting against the house in a casino.”

Over in Sydney, Sean Fenton is scratching his head. “It’s certainly unusual for this time of year,” the portfolio manager at Tribeca Investment Partners says of the market moves. “You see people take holidays and sort of shutting up shop, not surges in volatility.”

Fenton, like Matthews, says he’s hunkering down, betting that the U.S. economy is robust and the sell-off will bottom out. For this time of year, he’s “probably a little more focused on the market,” he says, but that doesn’t mean he’s got reasons for the moves. “Trying to explain short-term movements in the markets is an exercise in futility because generally it’s pretty random,” he says.

In Tokyo, Hajime Sakai is just staying away from trading. The chief fund manager at Mito Securities Co. admits the whole thing took him by surprise. “I can’t really say I’ve been dealing with it,” he says. “I wasn’t quite able to respond.” That’s partly because of the time lag between when he makes a trading decision and when the trade is executed, which is often a day or two later. In markets this choppy, that gap makes trading close to impossible. “We’re increasingly faced with situations where the price is completely different at the point of execution versus when we made the decision,” he says.
Hold Cash

“We have never seen the U.S. market dropping at this magnitude and speed for the past eight to nine years,” says Margaret Yang, a market analyst at CMC Markets in Singapore. Yang’s solution is to go overweight cash for the time being. She expects the volatility to continue until year-end, until investors get a clearer picture from the holiday earnings season.

But longer-term, she doesn’t know if this will prove a “healthy correction” as investors find the S&P 500’s low valuations attractive and earnings come in above expectations, or if it will mark the end of the 10-year bull run. Either way, one thing’s for certain: “The recent movement is definitely unusual,” she says.

In South Korea, Lee Dong-jun agrees. The head of the global investment team at DB Asset Management in Seoul has also been staying as clear of the market as possible this week, tending only to existing investments and keeping away from new trades. “This isn’t normal,” he says of the market turbulence. “Investor sentiment is very bad.” And while “we don’t think this kind of huge volatility will persist,” he says, “our thinking is that it’s not a good idea to actively trade stocks in a market like this.”