Furious Rally Sends Nasdaq to Biggest Rebound Since March 2020

(Bloomberg) — Dip buyers rescued the Nasdaq 100 from a fifth straight loss, powering a rebound bigger than any the tech-heavy index had managed since the bottom of the pandemic bear market.

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The gauge wiped out a drop that reached 2.7% at its worst to finish higher by 0.1%. That snapped a four-day skid that had pushed it more than 8% below a November record. Whipped up as panic over inflation subsided and spurred along by mechanics of the options market, the rebound was the biggest since March 23, 2020.

Investors have been bailing on the expensive tech shares housed in the Nasdaq 100 ever since the Federal Reserve signaled it would move swiftly to combat the fastest rate of inflation in four decades. The market now anticipates the central bank will hike rates three times in 2022, with the first coming in March.

But dip buyers speculated that the Fed won’t derail an economy that is surging at the same time that signs emerged the omicron virus variant may be peaking in New York. According to an estimate by JPMorgan Chase & Co., the retail crowd snapped up more than $1 billion of stocks Monday, an amount that ranked in the 93th percentile in historic data on the group’s equity transactions.

“We’re in a fairly good spot and these are great buy-on-the-dip opportunities right now,” Sylvia Jablonski, chief investment officer for Defiance ETFs, said on Bloomberg’s “QuickTake Stock” streaming program. “The market got spooked by the idea that we’re going to have more rate hikes than expected and more quickly than we expected to have them, as well as a quicker tapering.”

The late-day bounce saw a “pretty wild reversal underneath the surface,” said Dennis DeBusschere, founder of 22V Research. In the S&P 500, technology stocks were among the outperformers, while utilities and staples straggled, meaning that “the stuff that lagged the most last week is having the most significant bounce today.”

Indeed, JPMorgan Chase & Co. strategists led by Marko Kolanovic put out a note Monday midafternoon calling the downturn overdone and saying that it was time to buy the dip. He argued that the prospect of higher rates won’t derail the bull market as the economy keeps expanding.

“The pullback in risk assets in reaction to the Fed minutes is arguably overdone,” Kolanovic wrote in a note. “Policy tightening is likely to be gradual and at a pace that risk assets should be able to handle, and is occurring in an environment of strong cyclical recovery.”

Read more: JPMorgan’s Kolanovic Says It’s Time to Buy the Dip in Stocks

The Nasdaq 100 ended Monday higher, but early in the session, there were five puts for every three calls on the Invesco QQQ Trust Series 1 (ticker QQQ) in a day that saw 170% its average daily volume before noon, a reading that retreated to 140% — and equally balanced between calls and puts — as volumes dissipated amid the strong bounce into the close, according to Alon Rosin, Oppenheimer & Co.’s head of institutional equity derivatives.

Charlie McElligott, a cross-asset strategist at Nomura Securities, said the options market had set up the potential for a sharp rebound. After selling put contracts on the QQQ ETF, dealers — who were then long the fund — hedged themselves by selling shares, which could act to “accelerate” flows as dealers close those positions, McElligott said.

If that’s what added to Monday’s rebound, the all-clear has not necessarily been sounded, he said. Outside of a weak reading on Wednesday’s consumer-price index report, it’s unclear what the near-term catalyst would be for bonds to rally, given the Fed’s commitment to fighting inflation, he said.

“At the end of the day, tech is going to be held hostage by whatever happens to Treasuries,” McElligott said. “It’s going to be hard for the market to get off the idea that the Fed is tightening financial conditions. You’re going to need to see data misses to see this trade really get legs again.”