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Bull Market Mystery: Exploring Recent Stock Market Rollercoaster


In recent months, the stock market has experienced several steep one-day falls, only to bounce back quickly. This has left investors pondering the driving force behind a bull market that has propelled the S&P 500 and Dow industrials to multiple record highs in 2024.

According to Tim Hayes, chief global investment strategist at Ned Davis Research, the reason for the swift recovery lies in the fact that a mere delay in rate cuts does not spell catastrophe, despite the knee-jerk reaction witnessed on Tuesday. In a note, Hayes emphasized the importance of distinguishing doubts about the timing of something bullish, like rate cuts, from fears of something bearish such as resurgent inflation or collapsing economic growth.

On Tuesday, the Dow suffered its worst day since March of last year, plummeting over 500 points (1.4%), while the S&P 500 and the Nasdaq Composite also experienced losses of 1.4% and 1.8% respectively. This decline was initially triggered by another higher-than-expected inflation reading from the January producer-price index.

However, despite these setbacks, the Dow managed to end the week 0.1% higher, and the S&P 500 climbed back above the significant milestone of 5,000. Both indexes are on track to achieve their sixth consecutive weekly gain.

The recovery in stocks and the subsequent decline in the Cboe Volatility Index (VIX), commonly referred to as Wall Street’s “fear gauge,” provide some valuable insights, according to Hayes. The VIX had breached the 15 mark on Tuesday, ending a streak of 63 sessions below that threshold. However, it had dropped back to 14.41 by Friday morning.

Hayes highlighted that if the decline in equities had been driven by mounting fear, particularly fears of renewed inflation, we would not have witnessed the subsequent recovery over the past two days. Furthermore, the rapid drop in the VIX reinforces the notion that fear did not persist for long.

In this ongoing bull market mystery, investors must continue to analyze and interpret market fluctuations, carefully differentiating between short-term doubts and genuine concerns.

Resurgence of Volatility Bets Raises Concerns

As the stock market experienced a quick rebound after a recent slump, some traders are growing frustrated with the lack of sustained pullbacks. The options market has seen a resurgence in bets on declining volatility, which has caused worries among market watchers. The forced unwinding of these positions during the surge of the VIX (Volatility Index) was partly blamed for Tuesday’s stock selloff. Analysts caution that further market ructions could be on the horizon, reminiscent of the “Volmageddon” episode that rattled markets in 2018.

Frustration with Short-Lived Market Dips

Technical analyst Mark Arbeter, President of Arbeter Investments, expressed increasing frustration with these short-term market downturns being treated as buying opportunities. He believes that these one-day wonders do not provide a sustainable pullback and hinder traders looking for more significant market movements.

Recent Stock Market Performance

Over the past two months, there have been three significant downward moves in the stock market. On December 20, the S&P 500 fell 1.5%, followed by a brief five-day rally, a minor pullback low, and then reaching record highs. On January 31, the index dropped 1.6%, which was followed by a seven-day rally to reach another round of highs.

Technical Analysis and Potential Downsides

Arbeter suggests that while the market is technically due for more downside, the major indexes remain in uptrends since their October 27 lows. The S&P 500 recently fell near its 21-day exponential moving average, an essential level of support on the chart, before rebounding. As of now, it stands at 4,930. However, if it breaks below this level, Arbeter identifies minor support and the 50-day simple moving average at 4,800. A drop below 4,800 would open the door for a potential decline to 4,600, which is a strong chart support.

In summary, concerns arise as volatility bets resurge in the options market. Traders grow frustrated with short-lived pullbacks, while analysts caution of potential future market disturbances akin to the “Volmageddon” episode. Despite recent rebounds, technical analysis suggests there may be more downsides ahead.

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