Heart-stopping swings abound in low-conviction markets

The S&P 500’s biggest plunge since 2020 has now been followed by its biggest rally. Hedge-fund and short-seller stocks are sailing around at extreme speed.

The S&P 500’s biggest plunge since 2020 has now been followed by its biggest rally. Hedge-fund and short-seller stocks are sailing around at extreme speed. Banks, slammed when war broke out, are suddenly surging as traders pile into bullish options. 

Investors have a multitude of worries when it comes to Ukraine, the economy, central banks, and the pandemic. Making everything harder has been an easy-to-scare market that has gotten a lot jumpier at the surface.

While nobody’s saying anything’s broken, small moves are quickly becoming large ones thanks not only to geopolitical stakes but also a host of structural forces that often stir alongside big macro threats. 

Measures of market liquidity in index futures began the month as weak as they’ve been in years. Options dealers sitting on giant positions are working furiously to keep books balanced by buying and selling shares. Hedge funds are pulling out while day traders dive in, spurring dizzying swings in the S&P 500. In its latest twist, the gauge surged 2.6 per cent Wednesday, paring a 4.9 per cent drop over the previous four sessions.

“Unwinding of hedges is definitely contributing to the upside move,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “Given how much investors have been reducing their positions so far this year, I’d think some real money that wants to buy the dip is contributing as well.”