Traders whose bullishness on the Standard & Poor’s 500 Index (SPX) surged to the highest levels in 12 months last week finally got a break.
U.S. stocks rallied for the first time since the start of the year yesterday, rising 1.2 percent after suffering the fifth decline of 4 percent or more since last January. Relief that Federal Reserve minutes signaled no change in interest rate policy and optimism on employment growth helped break an 88-point slide in the benchmark gauge for American equity.
That was overdue news for speculators who had cut bearish bets on the SPDR S&P 500 exchange-traded fund to the lowest in a year and built long positions in futures to a 12-month high, data compiled by Bloomberg showed. The rebound came after trading in contracts tied to equity volatility flashed a signal on Jan. 6 that five days of selling had gone on too long.
“We’re trained like Pavlov’s dogs,” John Manley, who helps oversee about $233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in
a phone interview. “It’s been a little bit of a rubber-band phenomenon for the past six months or so. The market was thirsty for news, and we got some today.”
The S&P 500 rallied the most in three weeks. It rose at the market’s open as data on the labor market and the U.S. trade deficit bolstered confidence in the strength of the economy. Gains extended at midday as lawmakers in Chancellor Angela Merkel’s coalition said Germany is leaving the door open to debt-relief talks with Greece’s next government.
Short Interest
Undaunted by the worst start to a year for stocks since 2008, speculative investors have been trimming bearish bets on the market. Short interest in the SPDR S&P 500 (SPY) ETF declined to 2.8 percent on Jan. 5, the lowest in almost a year. In S&P 500 e-mini futures, long positions climbed to the highest since November 2013, according to data compiled by Bloomberg.Market bulls got a mid-afternoon boost from the minutes for the Fed’s December meeting. Most central bank officials agreed their new policy guidance means they are unlikely to raise interest rates before late April and a number expressed concern inflation could remain too low.
The minutes also showed some Fed officials are concerned about risks posed by overseas economies. Policy actions by foreign central banks may help, the minutes said.
Central Bankers
“‘Nothing bad is allowed to happen’ is still the mantra,” said Michael Block, chief equity strategist at Rhino Trading Partners LLC in New York. “The minutes were mildly dovish, the ECB is on an inevitable crash course with quantitative easing, and the Germans are blinking hard on playing tough on Greek austerity.”Investors were betting on a smoother ride for equities in 2015 before today’s better-than-expected economic data and the release of December Fed minutes. Prices for contracts tied to levels of expected stock turbulence in months through September show traders expect this month’s swings to calm down as the year progresses.
The Chicago Board Options Exchange Volatility Index (VIX), a measure of demand for options on the S&P 500, dropped 8.6 percent to 19.31 after rising six times in the previous seven days. At 21.12 on Jan. 6, the gauge was higher than all nine of its monthly futures contracts with expiration dates ranging from Jan. 21 to Sept. 16.
VIX Slope
Contracts expiring Jan. 21 finished yesterday at 18.85, while those expiring in February closed at 18.73 and March futures ended at 18.83. The slope in prices is a sign investors believe swings in underlying stocks will smooth out.The five-day, 4.2 percent slump in the S&P 500 came just 13 days after the index dropped 5 percent between Dec. 5 and Dec. 16. The span between the two dips was the shortest since two retreats of more than 4 percent in late 2011, data compiled by Bloomberg show. Since 2009, retreats of this magnitude have happened every 51 days, on average.
“More than anything, this is a reversal from a substantial correction over the past few days and the idea that U.S. growth may not be as bad as the loss indicated,” Krishna Memani, the New York-based chief investment officer at Oppenheimer Funds Inc., said by phone.
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