Understand the strange rallies as seen by the market on Monday
Jane MarczewskiMay 15, 2022
What explains those head-scratching rallies we’ve been seeing lately? In the last hour of trading on Monday, the S&P 500 rose 80 points in half an hour. There was no news and certainly no fundamental reason for an 80 point rally off the lows as stocks drifted lower throughout the morning. What explained this rally? There are the obvious explanations: 1) oversold conditions and 2) it’s the first of the month, traditionally a positive day because new money usually comes in. All possible explanations, but the most likely explanation is simpler: poor liquidity. What is bad liquidity? When things get crazy – and it’s been crazy lately – the trading community reacts in very predictable ways. They release smaller sizes and the bid-ask spread widens. This has the effect of amplifying modest moves in the market. For example, if you want to buy 100 S&P 500 futures contracts, three months ago you might have moved the market say 2 points. Today you could move the market a lot more – say 4 points – if you want to fill that order in a hurry. This is a sign of poor liquidity. How does bad liquidity translate into an 80 point rally in half an hour? Buyside traders keep a large portion of their orders for the end of the day. So instead of allocating 15% for each hour, a buyside trader could keep 25% of what he needs to buy for the close. In a low liquidity market, when you get modest buying pressure, the sellers that were there disappear and markets have to rise to attract sellers. There is a fast feedback loop that drives prices up quickly. Incidentally, earlier in the day the opposite happened. Shares drifted lower on moderate volume as there was no buying interest. This is the classic sign of poor liquidity. Another point about Monday’s rally: Several traders wrote to me that this was just before a Fed meeting and attributed part of the rally to “Fed drift,” the market’s tendency to rise before Fed meetings. Is the Fed drifting back? The old pattern of stock prices rising ahead of a Federal Open Market Committee meeting hasn’t held up too well lately. Interactive Brokers’ Steve Sosnick notes that the S&P has closed lower in the three days following 10 of 12 sessions since March 2020. But since the Fed turned more hawkish in September 2021, the pattern has changed again. Since then, four out of five post-session periods have seen higher close, Sosnick told me.
Traders work on the floor of the New York Stock Exchange.
What explains those head-scratching rallies we’ve been seeing lately?
https://www.cnbc.com/2022/05/03/making-sense-of-the-strange-rallies-like-the-market-saw-on-monday.html Understand the strange rallies as seen by the market on Monday