By Alessandro Albano
Investing.com – Thursday’s session on Wall Street kicked off today’s rally in European and Asian stocks after several bearish sessions, with up 1% and up 3.3% . But what triggered the U.S. index reversal during trading?
While the gain +2.6% after recovering from a decline of 2.4%, analysts put forward several explanations. The 40-year high reading initially sparked strong futures selling, followed by an incredible rebound that saw US indices recover more than 5% from their lows. .
According to Bloomberg, which has been collecting this kind of data since 1990, never before has the market seen such extreme values in both directions in a single trading day.
The rally in , which gained over 800 points yesterday, coincided with a test of the lows at the end of September, while for , the floor was around 20% of the high seen during the summer, so the movement may have had a huge technical component, at least initially.
“What followed was extraordinary and may have been exacerbated by short hedging, maybe even a bit of panic,” comments Craig Erlam, principal analyst at Oanda.
Some are motivating the rally with support from the daily charts or hedging from options traders who had to liquidate short positions when investors started taking profits on put options during the previous slump.
Others, on the other hand, have positive expectations for the start of earnings season. “It’s a combination of hedging short positions and writing put options,” Danny Kirsch, head of options at Piper Sandler & Co, told Bloomberg. “It’s a very well hedged event. Trading is like a past event, you sell your hedges, helping the market rally.”
This rebound could indicate that the market has bottomed out for now, but, explains the Oanda analyst, “given the extent of the declines since the peak in August, this does not necessarily mean that the worst is suddenly behind us.”
Not when inflation is so tenacious, the labor market so tight, and the Fed so determined to make more aggressive hikes.”
The coming weeks could therefore depend on how investors have positioned themselves and how they react to the earnings season, which kicks off today with quarterly updates from JPMorgan (NYSE:), Citigroup Inc (NYSE:) and Morgan Stanley (NYSE:).
“Needless to say, we enter this season with very low earnings and outlook expectations, both positive and negative. It’s just a question of how pessimistic companies will be and how prepared investors will be. close your eyes”, underlines Mr. Erlam.
According to the London-based broker, “it all depends on how high the bar is and, given how the US equity markets have performed lately, I don’t think there will be much light below.”