Bizarre Week for Markets
The S&P 500 and Nasdaq 100 just had one of the most volatile weeks of 2017. To recap, stocks opened up largely higher on Monday of last week before inexplicably declining to finish out the day. Tech shares sold off dramatically, for the second time, on Tuesday and dragged many large-cap stocks along for the ride.
Investors evidently took advantage of Tuesday’s sell-off and bought the dip on Wednesday. The S&P 500 had its third best day of 2017 on Wednesday as it rallied almost 1% while the Nadsaq 100 was up nearly 1.5%. History tells us that when stocks have such a strong rally, it’s not uncommon to see the rally extend for several more days. This is especially the case when stocks close at the high of the day, as they did on Wednesday.
After the market closed on Wednesday, the Federal Reserve announced that every major bank, except for Capital One, passed their “stress test” and had more than enough cash on hand to withstand adverse economic conditions. As a result, banks rushed to announce shareholder buybacks and increased dividends.
Bank stocks rallied tremendously after hours and pushed the S&P 500 and Dow Jones Industrial Average up around 25 basis points (0.25%). The rally held right up until Thursday morning when the Nasdaq began declining sharply due to weakness in tech stocks. The selling didn’t stop and S&P 500 futures plummeted from $2,445.00 to $2,402.75 before rebounding 20 points to close out the day.
However, the real focus was on volatility. Because of the sharp and relentless decline in stocks on Thursday, the VIX soared over 40% and peaked at 15.16. The mysterious volatility buyer mentioned in last week’s article, who purchased over $3 million worth of VIX premium, saw almost a three-fold profit on the risky trade.
Needless to say, market participants were scrambling on Thursday. Although the Nasdaq was off more than 2.5%, the S&P didn’t even come close pushing past the 2% mark.
“When you get extended rallies, the kind we saw in technology shares, prices tend to come down a lot faster. Though, when markets drop 1%, it's hardly a selloff,” said Joe Saluzzi , partner, co-head of equity trading at Themis Trading.
“It is still perplexing to see the stock market climb to highs when the bond market is signaling a slowdown. One of these markets is not right,” Saluzzi went on to say.
Regardless of where market participants think the market will go in the coming months, the dynamic has undeniably changed. For the first time since the November 8th election, sell-offs are occurring more frequently and with far more velocity. Enough velocity, in fact, to get a spike in the VIX of 40%, which is not trivial.
Unusual market moves also occurred in the precious metals realm last week. Early Monday morning, when liquidity is typically less than during normal market hours, a massive order to sell 1.8 million ounces of gold took prices down nearly $20. Many brokers and CTAs chalked the order up as a “fat finger” trade, which is trader jargon for an accidental trade. Gold recovered relatively quickly after the massive order but finished out the week with a bit of a whimper beneath the key level of $1,250 per ounce.
Trading was shortened this week by the Independence Day holiday yesterday, so volume and activity is expected to be lighter than normal for the remainder of the week. Liquidity, or the number of people willing to buy and sell securities at specific prices, will also be lighter than normal. Judging by last week’s activity, it wouldn’t be unusual to expect more volatility in the coming weeks with less liquidity due to summertime.