Bipolar U.S. Stocks See Biggest Mood Swing in Three Years

By Oliver Renick and Lu Wang

The U.S. stock market can’t seem to make up its mind.
After plunging 1.5 percent on Oct. 7, the Standard & Poor’s 500 Index (SPX) rallied almost 1.8 percent yesterday, the biggest turnaround in almost three years. As investors weigh the prospect of slower economic growth overseas against the benefit of U.S. interest rates staying near zero, a measure of 10-day volatility has risen to the highest level since April, data compiled by Bloomberg show.
Yesterday’s rebound in the S&P 500 came after minutes from
the Federal Reserve’s last meeting suggested monetary policy may remain accommodative if the global economy falters. The measure is still 2.1 percent away from its all-time closing high of 2,011.36 reached Sept. 18 as investors assess concerns ranging from valuations to oil prices and growth in Europe.
Stocks “really turned around coinciding with the Fed minutes, as the overall reaction was they aren’t going to raise rates a lot sooner,” Joe Bell, a senior equity analyst in Cincinnati at Schaeffer’s Investment Research Inc., said by phone. “The market has been extremely volatile.”
A number of Fed officials said the U.S. expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated,” according to a record of the Sept. 16-17 Federal Open Market Committee meeting.
Equities began to rise after S&P 500 futures approached 1,918, a two-month low and a level seen as support by some technical analysts. The index ended yesterday up 1.8 percent at 1,968.89, bringing the gain for 2014 to 6.5 percent.

Market Reversal

The move in stocks was a reversal from the previous day, when the S&P 500 slumped 1.5 percent after the International Monetary Fund cut economic-growth forecasts and warned of “frothy” equities. The Chicago Board Options Exchange Volatility Index (VIX) is up 10 percent this year to 15.11.
There have been six other instances since March 2009 when the S&P 500 fell more than 1.5 percent and then posted a bigger gain the next day, according to a report from Bespoke Investment Group LLC. In those cases, the index fell 2.1 percent on average in the following week.
“You may think it’s bullish to see an upside day that eclipses extreme losses on the day prior,” according to a note from the research firm. “That hasn’t been the case.”
Alcoa Inc. unofficially started the earnings season after U.S. markets closed yesterday. Profit for S&P 500 companies probably increased 4.9 percent during the third quarter, down from an estimate of 7.8 percent in July, according to analyst data compiled by Bloomberg.

Confidence Knocked

Falling oil prices and concern over the stronger dollar have hurt investor confidence in recent weeks, leaving the S&P 500 down 1.6 percent in the past month, the worst pre-earnings season performance since 2009.
“Sometimes it feeds upon itself,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto. The firm manages about C$5 billion ($4.5 billion).
“Once the market starts to go down there’s a bit of panic, almost like a fire, people want to get out the door as soon as possible and not ask any questions,” he said. “We’re still in an upward trending market. It’s a matter of we needed some sort of comfort we’d still have accommodative policy.”