(Bloomberg) — A tense stretch for Wall Street that capped a 20% drop in the Nasdaq 100 and a correction for the S&P 500 somehow ended with another big twist: Both indexes turning on a dime to finish the week higher.
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While the S&P 500 led a powerful market bounce Friday to close 2.2% higher, the reversal in the Nasdaq 100 is even more striking. After falling as much as 21% below its November high in the Thursday session, the gauge has clawed back 8%.
The dip-buying impulse’s arrival, even as Russia launched a full-scale invasion of Ukraine, is the latest head-scratcher for investors caught off guard by the lurch lower in major benchmarks this year.
But the military crisis has made clear several key investing trends that may have room to run.
One: A cohort of traders is rediscovering their fondness for Big Tech at a time of global stress, partly on a bet the Federal Reserve will be less aggressive in its tightening path.
“This was obviously a big shock, but the shock has boosted bets that the Federal Reserve will have more options in how fast it’s going to act,” said Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York. “As a result of that, bulls are coming back from the sidelines, and money is rushing to the sector that was beaten down the most — tech companies with stable balance sheets and strong fundamentals.”
Two: Money managers who downsized risk positions and amassed stock hedges in January and early February are earning their pay.
“If you’d been hedged at the end of the last week and you had closed those positions out, say yesterday morning around the open, in all likelihood yes — it would have paid off nicely,” said Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.
Higher inflation prints still threaten rate-sensitive investing styles such as technology and other growth stocks. Data Friday showed the PCE price index, which the Fed uses as its preferred inflation gauge, rose 0.6% in January from a month earlier and 6.1% a year ago — the most since 1982. And that’s spurring all manner of cross-asset hedging.
On Wednesday, the Invesco QQQ Trust Series 1 (QQQ), which tracks the Nasdaq 100 Index of tech names, saw 5.5% of shares on loan to short sellers, the highest amount since 2018, according to data from IHS Markit.
Investors cut positions and bought hedges in the run-up to the dramatic swings in recent days — one reason for the relative resilience of stock gauges when Russian forces launched its invasion.
Before this week, concern about the war helped push the ratio of bearish option bets on individual stocks to bullish ones to 0.61 on a 20-day rolling basis, the level last seen in March 2020. Other asset classes also show concern that markets will keep dancing to the risk-off beat.
As the stock market retreated last week, hedge funds also added to their short positions, pushing net leverage among long-short equity funds to 48%, data compiled by Morgan Stanley’s prime brokerage desk show. That’s the lowest level since June 2020 and the bottom 28th percentile of observations since 2010.
“The short interest is a piece of the positioning profile of the market. They are telling us that folks are taking down risks,” said Scott Ladner, Chief Investment Officer of Horizon Investments.
Money managers also reduced their stock holdings by a third in two weeks, according to a survey by the National Association of Active Investment Managers that tracks investment advisers from 125 firms overseeing. With all bulls and bears included, equity exposure fell to 44% this week, a level last seen in the spring of 2020.
None of these steps has left anyone immune from pain at a time market stresses are multiplying. Even accounting for double-digit losses, the S&P 500 is trading at more than 22 times annual earnings, while the Nasdaq’s price-to-sales ratio remains higher than almost any time in the last two decades. Still, the emergence of dip-buyers was an encouraging sign after weeks of day-after-day pounding, a sign the psychological conditioning that has marked the post-pandemic era hasn’t been completely flushed out of the market.
‘’The Ukraine situation could not have come at a worse time for tech stocks. It just exacerbates risk-off sentiment and valuation compression, which pours gasoline on the fire that’s been tech in 2022,” said Dan Ives, an analyst at Wedbush Securities, in a phone interview. “But a lot of large-cap tech is approaching some of the most oversold levels since 2015. In geopolitical conflicts, the knee jerk reaction is to yell fire in a crowded theater. But history has proven these are more opportunities in periods of crisis for the right names.”
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