Feb 2, 2021 - Economy

Stock traders return to buy the dip

A trader in front of the stock exchange.

Stock indexes around the globe bounced back on Monday as traders bought the dip in equities following last week's market drubbing.

Why it matters: With hedge funds selling out of top tech names and volatility spiking, there had been worry that the market's bull run could be in danger. Monday's price action showed there is still a contingent of bullish traders willing to bargain hunt after stocks fall.

What happened: Major U.S. stock indexes had their worst weekly decline last week since October, with the S&P 500 down more than 3% from its January all-time high and the Nasdaq down more than 4% from its most recent record high.

  • On Monday, the S&P 500 jumped by 1.6% and the Nasdaq rose by 2.5%.
  • Major indexes in Europe, Latin America, Africa and Asia also saw solid gains, with the MSCI All-Country World index, which tracks major stock markets in nearly 50 countries, jumping by 1.65% after falling in three of the previous four sessions.

What they're saying: Investors are still largely wearing rose-colored glasses as they look out at the U.S. economy, despite weakness in the U.S. job market and the slow vaccine rollout thus far.

  • "We're seeing the resiliency of the market," Craig Fehr, investment strategist at Edward Jones, told The Canadian Press.
  • "I think we are seeing a bit of the shock and awe settle out today or to start this week, relative to what we saw last week," Fehr said.
  • But the big picture is that the fundamentals remain strong and will likely continue for the rest of 2021, he added.

Where it stands: As earnings season rolls on, S&P 500 companies have posted surprisingly strong results.

  • So far, 82% of companies have reported a positive EPS surprise for the fourth quarter.
  • If that rate holds, it will mark the second-highest percentage of positive EPS surprises since FactSet began tracking the metric in 2008.

Watch this space: The Cboe's volatility index, VIX, declined by 8.6% on Monday, dropping to 30.24. That's well below its levels from late in January — the index gained 45% during the month — but is still well above its levels from December.

  • Some investors expect volatility to edge down this week as many hedge funds have already reduced short positions on stocks that have attracted a tremendous amount of attention on the internet.

The bottom line: “There has always been, in financial markets, a desire on the part of investors to get rich quick and so you may still wind up with isolated incidents in which you wind up with volatile performance of certain assets,” BlueBay Asset Management CIO Mark Dowding told WSJ.

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