Why stocks swung 5% in one day

A shock turnaround in equities sent Wall Street searching for something -- anything -- to explain how yet another red-hot inflation number translated into one of the best days of the year. Among the answers: increasingly sturdy positioning including well-provisioned hedges, a watershed moment for chart watchers, and several less-than-terrible earnings reports. Throw in some short covering, and the result was a trough-to-peak run-up in S&P 500 futures that reached 5.6% at its widest. Expect the unexpected has become the only mantra in a market when cross-currents are flowing from every direction, including a Federal Reserve bent on subduing inflation while keeping half an eye on financial stability. Thursday’s turnaround came after the S&P 500 erased half its climb from 2020’s pandemic low, a hit to wealth that while showing no sign yet of curbing inflation, may one day play a part in achieving that goal.

“It’s the nature of the beast these days where sometimes you get these intraday big swings. We can all speculate on what might be behind it,” said Liz Ann Sonders, chief investment strategist for Charles Schwab & Co. “A lot of it has to do, for lack of a better word, the mechanics of the market, the fact that there’s more shorter-term money in the market, there’s more money that moves around based on algorithms, quantitative strategies. And at any point in time you can have triggers that can cause a 180 in the middle of the day.” With calling the direction of stocks a near impossibility, professional traders have been busy limiting their exposure to surprise moves. Institutions bought more than $10 billion in puts on individual stocks last week, a record for that group and close to the most ever by any cohort of traders, according to Sundial Capital Research. There was circumstantial evidence those wagers paid off in the immediate aftermath of the government’s report on consumer prices, which showed hotter-than-expected inflation. While equity futures sold off, the Cboe Volatility Index, a gauge of market anxiety tied to options on the S&P 500, actually fell, potentially a sign of profit-taking by hedged traders. And as those positions were monetized, that prompted market makers to unwind short positions they had put on to maintain their neutral market stance. “It’s a combination of short covering/put selling,” said Danny Kirsch, head of options at Piper Sandler & Co. “It’s a very-well hedged event. It’s trading like event passed, sell your hedges, contributing to market rally.”