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The stock market has not been so frantic since the start of the pandemic

(Bloomberg) – Pick a direction and don’t follow it.

That’s been the story of stocks lately, with the S&P 500 alternating between gains and losses of at least 1% for four consecutive sessions – the longest period since June 2020. The same goes for stocks. fixed income, with 10-year Treasury yields hovering around 1.5%.

The heartbreaking reversals reflect a particularly sharp divide between bullish and bearish cases in the markets right now. On the one hand, risk appetite is curbed by lingering uncertainty about the public debt ceiling, Federal Reserve policy tightening and supply chain disruption. At the same time, sentiment is bolstered by improving trends in Covid, an economy that continues to grow, and forecasts of double-digit profit growth for US companies.

“The story has turned mixed,” said Bob Doll, chief investment officer at Crossmark Global Investments. “When you get legitimate listings on both sides of the ledger, you tend to have more volatility. “

Stocks rose on Tuesday, with the S&P 500 climbing 1.1%, as the US service sector activity indicator beat economists’ forecasts ahead of a key payroll report on Friday. The stock’s gain came a day after a tech sell-off triggered a similarly large drop in the index.

The resumption of volatility in both directions marked a departure from the third quarter, when the market mostly remained eerily calm. The S&P 500 spent 42 days through mid-September without gains of more than 1%, the longest drought since January 2020.

While wild price swings may provide better opportunities for stock pickers, the determination of bearish buyers faces the biggest test in a year after the S&P 500’s worst monthly drop since the pandemic trough in March. 2020. So far, ETF investors have not made a big comeback and retail traders have remained wary.

“I wouldn’t buy here. I think there are even more downsides, especially for these very expensive parts of the market, ”said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors. “I don’t think these expensive growth areas take into account higher interest rates or inflation that persists longer than expected, as well as the potential for corporate tax hikes.”

Despite Tuesday’s rebound, the S&P 500 remained below its 100-day average, key support during this bull market. It has yet to break through the resistance point near 4,385, which rejected attempts to break the index last week and into July.

With the market blocked by heightened volatility, options traders seemed reluctant to pay for downside protection on the S&P 500, a sign that RBC Capital Markets believes the worst of the rout may be over.

Likewise, as the Nasdaq 100 hit a new low this week, the Cboe NDX Volatility Index – a gauge that tracks the cost of options tied to the high-tech gauge – produced a low. This bullish divergence, along with a drop in the Nasdaq 100 relative strength index, suggests that the month-long rout is due to a hiatus, according to Jonathan Krinsky, chief market technician at Bay Crest Partners.

“Even if we don’t go back to new highs, the next significant move seems to be higher for us,” Krinsky wrote in a client note.

Read: Historic October volatility on display with stocks on the saw

But hedge funds seemed less optimistic. They have boosted short selling for eight straight days, according to data compiled by Goldman Sachs Group Inc.’s prime brokerage show. faster since July and have reduced their positions in tech mega-caps – Facebook Inc., Inc., Apple Inc., Microsoft Corp. and Alphabet Inc., a cohort known as Faang.

For Chris Harvey, strategist at Wells Fargo & Co., the current episode of market volatility has been partly due to the reallocation of assets by investors in anticipation of a potential change in monetary policy and growth prospects. global.

“We are in a period of transition. Some of the things that worked over the past few months don’t work anymore, ”Harvey said. “The gains will start in earnest relatively shortly, but until then the macro takes over. “

© 2021 Bloomberg LP

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