Bloomberg | The sharemarket’s shocking reversals Thursday after a hotter-than-expected inflation report caught many on Wall Street by surprise. Just ask IUR Capital’s Gareth Ryan.
Futures contracts on the S&P 500 and Nasdaq 100 indexes plunged after the consumer price index rose more than anticipated in September. Ryan, a managing director at the London-based investment advisory firm, was watching the profit-and-loss statements for some of his clients who were short the futures going into the CPI report. It looked like a winning bet — and it was, until the markets started moving against them.
“They had a period of about 20 minutes where P&Ls were solid, and then they got absolutely hammered as it went the other way,” Ryan said by email. “They had no upside hedge.”
Ryan’s clients cut losses early in the session, before the S&P 500 recouped its early-day loss to stage a 3 per cent rally. In doing so, the gauge posted a 194-point reversal after touching 3,491.6, its new low for the bear market, before jumping to a session high.
Several factors buttress the eye-popping rebound that came after official data showed that core inflation — which excludes food and energy — rose to a 40-year high last month, buttressing the case for the Federal Reserve continuing with its aggressive interest-rate hikes.
One of those factors is technical: at a session low of 3,491.6, the S&P had given back half of its post-pandemic rally, a threshold that triggered a wave of buying by computer-based funds.
Short covering also had a role to play, says LPL Financial LLC’s Quincy Krosby. Before Thursday’s rebound, stocks plunged 25% on a year-to-date basis, pushing some on Wall Street to think the most of the damage has already been done.
“Short-sellers are covering their positions, which is adding strength to Thursday’s rally — but having said that, the S&P 500 still has a lot of work to do,” Krosby, chief global strategist at LPL Financial, said by phone. “The line of thinking among some on Wall Street is, ‘if we get a recession, maybe it won’t be as deep.’ That is actually a big question.”
Whatever the longer trajectory of the stock market holds, options traders that loaded up on bearish options going into the CPI report are feeling the heat.
Institutional investors spent more than $10 billion on put contracts on individual stocks last week, a record, according to estimates compiled by Sundial Capital Research. At a session low, a lot of the contracts became immediately profitable, causing traders to cover their put positions.
Market dealers, who had to react to that flow, bought the shares, supporting the market on the way up, said Brent Kochuba, founder of SpotGamma.
“One we hit 3,500, there wasn’t this appetite to push the market further down,” Kochuba said. “At 9:30 a.m., when you owned put contracts, you thought you were the king of the world. Suddenly, it’s not necessarily the case.”
