For at least the third time since late December, the stock market suffered a steep one-day decline only to quickly regain what it lost, leaving investors speculating what will really drive the bull market that has pushed the S&P 500 and Dow industrials to multiple record highs. In 2024.
Here's what happened. January's consumer price index on Tuesday came in hotter than expected, forcing investors to reconsider their expectations of as many as six interest rate cuts by the Federal Reserve starting in March or May. Over the next two days, stocks regained all or most of Tuesday's losses, with the S&P 500 SPX closing Thursday at its 11th record close of 2024.
Stocks have recovered because a mere delay in cutting interest rates is not the disaster that the knee-jerk reaction implied Tuesday, Tim Hayes, chief global investment strategist at Ned Davis Research, said in a note.
“Doubts about the timing of something bullish” — in this case, interest rate cuts — “should be distinguished from concerns about something bearish, such as the return of inflation or a collapse in economic growth,” he wrote.
The Dow Jones Industrial Average on Tuesday fell more than 500 points, or 1.4%, on its worst day since March of last year, while the S&P 500 also lost 1.4% and the Nasdaq Composite lost 1.8%. After a two-day bounce, stocks fell on Friday after another hotter-than-expected inflation reading, this time from the January Producer Price Index.
That sent the Dow Jones down 0.1% for the week, while the S&P 500 fell 0.4%, ending a streak of five straight weekly gains.
Stocks rebound, along with a decline in the Cboe VIX Volatility Index,
Hayes said the measure of expected volatility in the S&P 500 over the next 30 days was clear. The VIX, often referred to as Wall Street's “fear gauge,” broke above 15 on Tuesday, ending a streak of 63 sessions below that mark, but was trading at 14.41 on Friday afternoon.
“If stocks had fallen because of rising fears, in this case fear of renewed inflation, we would not have seen the recovery in the last couple of days,” Hayes said. “We would never have seen the VIX decline so quickly.”
However, there are concerns among some market watchers about renewed bets on lower volatility across the options market. The forced unwinding of these positions as the VIX rose was blamed for Tuesday's stock sell-off, and analysts warned of the potential for more turmoil ahead, pointing to the “Volmageddon” episode that rocked markets in 2018.
Need to know: This Analyst Says 'Volmageddon 2' May Be Coming to a Stock Market Near You
Meanwhile, the rapid recovery in the stock market has frustrated traders looking for a sustained decline.
“I'm increasingly frustrated with these one-day wonders, as one-day sweeps continue to be used as buying opportunities,” technical analyst Mark Arbeter, president of Arbeter Investments, said in a note Thursday.
With Tuesday's decline, he said, the stock market has had “three bad days in less than two months,” the first on Dec. 20 when the S&P 500 fell 1.5% and the second on Jan. 31 when the index fell 1.6%. .
The Dec. 20 low was followed by a five-day mini-high, a slight pullback, and then a record high. The January 31 low was followed by a seven-day rally to another round of highs.
Arbiter stressed that the market looks “definitely due for further downside from a technical standpoint,” but noted that major indices remain in uptrends away from their October 27 lows. The S&P 500 fell near its 21-day EMA — an important support level on the chart — before bouncing back. As of Thursday, it stands at 4,930 points, and if it breaks down, the secondary support and the 50-day simple moving average stand at 4,800 points, Arbiter said.
He said a drop below 4,800 would present a “clear opportunity” for a drop at 4,600, which represents strong support on the chart.
