S&P 500 rebounds into 4530s on dip-buying/short-covering, set to end choppy session on front foot

Tuesday has thus far been a choppy session for US equity markets, but as the end of the session approaches, the major indices have swung back into positive/neutral territory. The S&P 500 has rebounded from 4480ish lows where it was trading 0.7% lower on the day and has pushed into the 4530 area, where it trades around 0.4% up on the day. Having been as much as 1.2% lower earlier in the day, the Nasdaq 100 index is back to flat, though remains unable to crack back above the psychologically important 15K mark. Finally, the Dow is the outperformer on the day, up just over 0.5% and back above the 35K level.  

Analysts attributed a combination of dip-buying and short-covering as driving the day’s gains. “A part of the rally is explained by dip-buying from those who believe stocks hit a bottom as a result of aggressive hawkish Fed pricing across the market,” analysts at Swissquote explained. “Part of it is explained by some short covering, which got traders to buy back shares they initially bet against to close their positions,” they continued. Tuesday’s gains mean that the S&P 500 is now more than 7.0% up from last Monday’s lows near 4200, meaning the index has gained back nearly half of the drop from its record highs printed at the start of the year.

But "this will be the year when Fed will pull back support ... the markets will not be on steroids anymore and may go through a phase of detox” cautioned one analyst at Commonwealth Financial Network. Some might argue US equities are currently in the midst of this “detox” phase and that the road ahead remains bumpy amid uncertainty about future Fed policy. On which note, a barrage of Fed speakers this weak have had left markets with the broadly consistent message that, while it is practically guaranteed that tightening will begin soon, the pace and extent of it depends on economic developments.

That means markets (including equities) will be even more sensitive to economic data than usual. The most important US data to look at this week is thus Friday’s January jobs report. Fed policymakers and economists expect a weak headline NFP number as Omicron disrupted usual labour market churn. They (and markets) will be looking most intently at measures of wage growth (average hourly earnings) and labour market slack (unemployment rate, participation rate). As Fed policymakers leave open the possibility of more aggressive tightening in H2 this year, further tightening of the labour market and build-up of wage pressures might encourage markets to add to Fed tightening bets.

This presents the most downside risk to duration-sensitive big tech and growth stocks which are heavily concentrated in the Nasdaq 100. Data on Tuesday (ISM Manufacturing and JOLTs), while making for interesting reading, did not move markets. The former showed the PMI index falling to its lowest level since November 2020 as the spread of Omicron hampered manufacturing output growth, while the latter showed that labour demand remains very robust, with nearly 11M job opening at the end of 2021.

Other risk events to consider this week relate to earnings; Google’s parent company Alphabet is posting earnings after the closing bell ahead of earnings from fellow tech giants Apple and Meta Platforms (Facebook) later in the week. So far, S&P 500 earnings have been broadly positive and supportive of market sentiment. According to Reuters, of the 184 S&P 500 companies to report thus far, 78.8% have beaten analyst earnings forecasts.