Does the stock market's epic comeback have legs?

Bull and bear market

Kameleon007

Bulls stampeded back onto Wall Street yesterday, inspiring a stock market comeback for the ages.

Futures spiked on hope of a U.K. resolution to its debt liquidity crisis, plunged after core CPI came in hot, then rallied through the session. By the close, the S&P 500 (SP500) (NYSEARCA:SPY), Nasdaq (COMP.IND), Nasdaq 100 (NDX) (QQQ) and Dow (DJI) (DIA) had notched gains well above 2%.

“The term rollercoaster is one of the most overused, lazy terms to describe markets, but the last 24 hours are best summed up by being a major rollercoaster ride and actually home to one of the biggest intra-day turnarounds in living memory,” Deutsche Bank’s Jim Reid.

Tale of the tape: S&P futures peaked +1.57% ahead of the CPI release, bottomed out -2.4% and the S&P 500 closed +2.6% with a roundtrip intraday range of 5.52%, according to Deutsche Bank. The Dow rallied +1,400 points from its low.

The Tick Index, which compares gainers to losers at any point, went from -1,900 to +1,900, the first time there have been such extreme numbers on either end, according to Bloomberg data going back to 1990. It was just the 11th time since 1993 where SPY made a 52-week low and closed more than 4% above that low while also closing green, BTIG noted.

What sparked the buying?: The rally numbers are clear, the reason behind the buying not so much.

Some speculated that algos kicked in to buy when the S&P had given up 50% of its post-COVID rally. Bloomberg reported that options hedgers needed to unwind short positions when booking post-CPI profits on put options. Deutsche Bank’s Reid said there was “no obvious reason” other than stretched bears ahead of the CPI.

Yesterday “saw the market turn abruptly at 9:32 am with the S&P at 3491.58 and then, magically, and mysteriously, the entirety of the algorithmic investing community (and red-blooded SPY traders, too) were assured by (Harvard economist) Jason Furman’s third swing at the ol’ horsehide that ‘Today’s report was probably “peak” inflation for the core CPI,'” John Roque, head of technical strategy at 22V Research, wrote.

A blip or a bottom?: The question remains whether this historic reversal signals a base where bulls can gain further traction.

“Many proclaiming that ‘THE’ bottom is in likely have said that many times this year already,” BTIG strategist Jonathan Krinsky said. “From a seasonality standpoint, a low today fits the narrative. On the other hand, the VIX (VIX) is still sitting around 30. Of the prior 10 (big reversal) occurrences … four saw the VIX close below 37 on the day of the reversal. Only one of those (Dec. ’18) marked the final low.” (See chart at bottom.)

22V’s Roque noted that the febrile buying was heavily concentrated in the SPY: “Advancing Stocks beat Declining Stocks in the SPY by a ratio of more than 15:1. However, Advancing Stocks beat Declining Stocks on the NYSE only by a ratio of 2:1. If (Thursday) was a full-fledged reversal I think that the Advance Decline Ratios for the SPY and the NYSE would be more alike.”

Yesterday action “definitely gives the bulls some ammo they have been lacking much of this year,” Krinsky said. “At the very least, this could give some near-term relief. With that said, it’s far from an all-clear signal and we aren’t yet ready to proclaim that the worst is behind us.”

“There will be a day when a bullish narrative takes hold and the market makes its bear market low, but it’s hard for me to believe that’s happened just yet when private equity parties on the French Riviera are targeting retail investors,” Krinsky added.

Was this the “painful stock squeeze” Citi predicted?

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