Crisis averted.
What crisis, you may ask? The one that investors seemed to be expecting. April had been painful—the
dropped 4.2%, its worst month since September—and sentiment had soured heading into the last week of the month. The Institutional Investors Bull/Bear ratio slipped to 2.1 from 3.9, the largest week-over-week slide in bullishness since February 2018, according to Oppenheimer’s Ari Wald. Despair was in the air, and it hadn’t taken much to get it there, just some hotter-than-expected inflation data and the possibility that the Federal Reserve might be forced to raise interest rates.
“We think it’s telling how fast bulls ran for the exit against just a whiff of market volatility,” Wald writes.
Still, it appeared that the pessimism might be warranted as April eased into May. A strong employment cost index reading on Tuesday sent the S&P 500 to its worst day since Jan. 31, while earnings “disappointments” from
and
overshadowed a positive read from
and got Wednesday started on the back foot. The index snapped back after Fed Chair Jerome Powell leaned dovish in his press conference following the latest Federal Open Market Committee meeting, but the market was unable to hold on to its gains and finished lower for the day.
Worse still, the S&P 500 dropped 0.6% during the last 10 minutes of the trading day on both Tuesday and Wednesday. The selling gave the impression that someone—perhaps someone smarter than you or me—knew something and was using strength as an opportunity to lighten up on stocks.
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There might have been less to the selling than met the eye. Those drops occurred on April 30 and May 1, the last day of the old month and the first of the new, days that often feature large orders that need to be filled at the closing price, resulting in what’s known as a market-on-close imbalance, explains Mizuho’s Daniel O’Regan.
When the imbalance leans bullish, stocks can head higher as market makers seek enough sellers to fill all the orders. The opposite happens when there’s an imbalance of sellers. The fact that the first and last days of the month also occurred on days when Amazon was releasing earnings and the Fed was releasing its monetary policy statement likely contributed to the moves as well.
It’s rare to see one day end with a decline of 0.5% or more during the last 10 minutes of trading. It’s even rarer for that decline to happen for two consecutive days. The last time it occurred was in February 2018, during what became known as Volmageddon, when a sharp rise in market volatility wiped out exchange-traded products that had been short the
or VIX. Other notable occurrences came in August 2015, when China devalued the yuan, and in October 1987, during the Black Monday selloff. Overall, it has happened just 10 times going back to 1985, according to Bespoke Investment Group data, including this past week—each time during a crisis, some bigger than others.
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Before Wednesday, the S&P 500 had been at least 10% away from its 52-week high when each of the drops occurred—meeting the definition of a correction—but usually far more. Indeed, the index was down an average of 28% from its 52-week high when the previous nine events occurred—or 19%, if you include just one of the four times it happened during the 2008-09 financial crisis. That helps explain why the S&P 500 was higher 12 months later in each case, and was lower just once six months later—following the October 2008 collapse of Lehman Brothers.
There was no precipitating event for the two late-day selloffs—no bank collapse, central bank action, or financial product implosion to send everyone running for the exits. What’s more, the S&P 500 is off just 4.5% from its record high following the late-day selloffs, less than halfway to a correction. With the market down so little, the strong selling might not be enough to signal the kind of bounce typically seen after such selling, Bespoke Investment Group’s Paul Hickey writes. “While forward returns were overwhelmingly positive, the fact that the S&P 500 is in much shallower of a hole this time than it was in any of the other prior periods could be a factor that keeps it from rallying anywhere near that much in the months ahead,” he explains.
There’s another possible explanation. Between the shift in sentiment and the massive at-the-close selling, investors might have been preparing for a crisis that doesn’t seem like it’s going to occur. April’s payrolls number was weaker than expected but strong enough; the 10-year Treasury yield, which had been threatening to make a run at 5%, has pulled back; even
Apple
’s
earnings were less bad than expected, leading to a big gain. Combined, all this suggested that inflation might not be as big a problem as thought and that the granddaddy of all tech stocks isn’t dead yet.
We should know soon whether the current downturn is more than just a run-of-the-mill pullback. Warren Pies, founder of 3Fourteen Research, notes that about three-quarters of corrections play out in 60 days or less—the current pullback began 24 trading days ago on March 28—which would coincide with the end of June, when the S&P 500 usually begins to rally in presidential election years.
If the market needs an excuse for a pullback, it has plenty of options to choose from. Pies notes the release of April’s consumer price index on May 15,
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Nvidia
’s
earnings on May 22, and the release of the personal consumption expenditures price index on May 31 as events with market-moving potential.
For now, though, the S&P 500 is looking set for a two-week winning streak, rather than the resumption of a losing streak. Despite all the Sturm und Drang, it might simply be a reminder that investors should never let a good crisis go to waste—especially one that never materialized.
Write to Ben Levisohn at Ben.Levisohn@barrons.com
