December’s big sellers were hedge funds, which, chastened by wrong-way bets on high-flying software firms, spent the month slashing high-momentum trades.
While a three-day rally restored order in the S&P 500 now higher by 26% in 2021, doubts remain about the path of omicron and how central banks will fight inflation.
“With risk having been significantly reduced and investors now looking past omicron, there is now a lack of selling supply as momentum has changed,” said Eric Johnston, head of equity derivatives & cross-asset products at Cantor Fitzgerald.
Surprisingly strong earnings and optimism about the economy powered the S&P 500 to almost 70 all-time highs this year, on course for the second-best annual tally ever.
For those who watched the S&P 500 double in 20 months and worried about bubble valuations, rising skepticism is perhaps a welcome development, putting the market on healthy footing.
Over the past few weeks, the Russell 2000 of small-caps fell into a 10% correction, newly minted shares sank into a bear-market decline of 20%, and a group of profitless technology firms plunged almost 30%.
Carnage in the riskiest corners dealt a particularly harsh blow to hedge funds who had piled into to high-growth, high-valuation stocks, prompting a swift unwinding.
Among amateur investors, the once-raging gaming spirits are ebbing.
A week ago, when the S&P 500 fell on all but one day, investors poured $30 billion into exchange-traded funds focusing on U.S.
A closer look at stock performance revealed a clear preference for safety.
“Investor confidence is in somewhat short supply,” said Nicholas Colas, co-founder of DataTrek Research.