Traders work on the floor of the New York Stock Exchange May 7, 2010.
Credit: Reuters/Shannon Stapleton
SINCE NOTHING IMPROVES A BAD MOOD like spreading it around, this latest global outburst of negativity should ultimately make you feel better.
After months spent fretting about jobs, the hiring of 290,000 new workers in April — the best in four years! — couldn’t stop the slide of a stock market unsettled by Europe’s fiscal deterioration, China’s slowing growth and their combined drag on the U.S. economy. The flight from risk sent U.S. stocks down 6.4% last week, wiped out all 2010’s gains and, for a few minutes Thursday, set off a freefall that slashed a record 998.50 points off the Dow Jones Industrial Average.
The selling jag was quickly blamed on technical glitches, but the speed and ease with which the market fell apart won’t be forgotten quite as speedily or easily. The ensuing panic, however, helped wipe out some of the market’s recently excessive optimism — the first steps toward finding a short-term bottom.
Consider: Fear of sovereign defaults sent traders to hedge their exposure to financial firms, and a Bespoke Investment Group index tracking the risk of bank default jumped 25%. The lunge at safety drove 10-year Treasury yields toward 3.4%, down sharply from 4% a month ago, while gold climbed to a 2010 high. Thursday’s selling gave the Nasdaq its busiest session, and the New York Stock Exchange its second busiest. Investors rushing to buy protection in the option market traded more than 30.8 million contracts Thursday, besting the record set during the 2008 credit crisis.
How drastic was the mood swing? On April 15, bulls chasing the rally bought 1.85 calls for every put at the International Securities Exchange, a 52-week high. By Friday, that call-to-put ratio was plumbing a 52-week low of 0.59. Money managers were so unnerved by immediate risk they bid up premiums of one-month options on the Standard & Poor’s 500 above that for one-year options. This rare inversion may persist for a while before stocks rebound, but it’s often a first sign of capitulation, says one Wall Street analyst.
In a rare reversal, blue chips outgunned their smaller, riskier peers, even as the Dow suffered its worst start to May ever. It ended the week down 628, or 5.7%, to 10380. The S&P 500 index has pulled back 8.7% from its April 23 high, but is still 64% above its 2009 low. The Nasdaq Composite Index fell 196, or 8%, to 2266, while the Russell 2000 fell 64, or 8.9%, to 653.
Investors are nudging the odds of risky tail events like sovereign-debt defaults from “possible” to “probable,” says one well known strategist. “But are not equities more attractive now as tail events are discounted?” (Source: Barrons Online).