A Week of Surprises and Bullish Momentum in the Stock Market

The stock market witnessed a remarkable turnaround last week, with a series of unexpected events that left many traders reeling and, in some cases, reevaluating their positions. In this post, we’ll take a closer look at the recent stock market activity and what it means for investors.

A Sudden Rally

Last week, the stock market saw a significant rally that caught many by surprise. It was a pivotal moment as interest rates did a complete 180-degree turn, and all major stock indexes posted substantial gains. Notably, this rally coincided with a time when bearish sentiment was close to a 52-week high. It seemed as though the bears had jumped for the exit all at once, and the catalyst for this shift was the Federal Reserve’s recent meeting.

The Fed’s perceived shift towards a less hawkish stance was the primary driver of market enthusiasm. Investors were particularly excited about the Fed’s acknowledgment of tightening financial conditions, leading many to believe that rate hikes might be put on hold. The icing on the cake was a Goldilocks jobs report at the end of the week, indicating that the economy was still on track without signs of runaway inflation.

Rates and Bonds

One of the most significant changes last week was the movement of interest rates and bond prices. Both the 10-year and 2-year futures saw relative highs, breaking a long-standing trend. The impact of this shift in rates and bonds rippled throughout the market, affecting various sectors and asset classes.

Dollar’s Decline

Another noteworthy development was the significant fall in the dollar index. A weakening dollar acts as a tailwind for assets priced in dollars, including stocks. This is a crucial factor to watch, as it can influence the performance of various industries and the overall market sentiment. Moreover, as rates fell, the demand for dollars decreased, further supporting this trend.

Winners in the Rally

During the week’s surge, two standout performers were interest rate and economically sensitive home builders and regional banks. These sectors experienced remarkable gains, emphasizing just how quickly the market landscape can change. It’s evident that the short squeeze played a significant role in their rapid ascent.

Volatility Takes a Backseat

Perhaps one of the most telling signs of the market’s mood was the sharp drop in volatility. The SPIKE index, often referred to as the “fear gauge,” closed the week below 16, after spending the previous two weeks above 20. It’s interesting to note that sentiment appeared to be leaning bearish at the beginning of the week, but a look at volatility suggests a shift towards a more bullish sentiment.

In conclusion, last week’s stock market activity was full of surprises, and it provided ample opportunities for both traders and investors. The sudden reversal in interest rates, the dollar’s decline, and the impressive performance of certain sectors all contributed to the bullish momentum.

While it’s important to keep an eye on market sentiment and volatility, the positive developments from the past week indicate that bears may be on the back foot for now. As we move forward, investors will be looking for opportunities to capitalize on this momentum while remaining vigilant and adaptive in a dynamic market environment.

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Joe Tigay, Portfolio Manager
Joe Tigay, Portfolio Manager
Joe Tigay is Managing Partner at Equity Armor Investments, sub-advisor to a volatility-hedged equity strategy at Rational Funds. Joe began his career in finance as an options market maker with Stutland Equities LLC. in 2005, working on the Chicago Board of Options Exchange and specializing in electronic market making. In 2008, Mr. Tigay became a member trader of the Chicago Board of Options Exchange (CBOE). As a member trader, Joe was a very active market maker in both SPX and VIX options from 2008 to 2012. Discussing options, volatility, and market insight, Joe has appeared on Bloomberg, BNN, and has a regular segment on CBOE.tv. Joe graduated from Michigan State University with a B.A. in Economics. He currently holds licenses for Series 3, 56, 65.

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