Caution rules after retail, derivative flows pull U.S. markets off lows

Traders work on the floor of the New York Stock Exchange shortly after the opening bell as trading is halted in New York, U.S., March 16, 2020. REUTERS/Lucas Jackson/File Photo

Jan 25 (Reuters) – Investors are wary of rushing to scoop up stocks ahead of highly anticipated Federal Reserve announcements due later this week and Monday’s rare bounce has done little to dispel concerns about the market’s outlook.

In a rare reversal, Wall Street recovered from a steep sell-off on Monday to close higher on the day with the help of retail punters and options-related flows and with volumes the highest in almost a year.

Retail investors piled a net $1.36 billion into U.S. stocks, the most since Jan. 18, according to Vanda Research data, suggesting market dips continued to attract retail buyers. But the presence of a short ETF (exchange traded fund) – the ProShares UltraPro Short QQQ (SQQQ.O) – among the top five products with the most net inflows on that day suggested a degree of caution.

“Every time the market rallies from now on, you’re going to see some selling into it,” said Keith Temperton, a sales trader at Forte Securities.

“You might see a turnaround rally like yesterday, but you’ve got a lot of options protections being taken off. That takes the market off the lows but next time we have a selloff no one wants to cover their protection.”

Markets have had a rocky start to the year with nearly $3 trillion in market value of the tech-heavy Nasdaq 100 (.NDX) wiped out, as investors dumped tech stocks on the view that the less severe Omicron coronavirus variant will allow the Fed to hike rates fairly aggressively, which will compress valuations.

Investors expect the Fed to signal on Wednesday that it plans to raise rates in March, tightening policy for the first time since it slashed borrowing costs to near-zero soon after the onset of the coronavirus pandemic nearly two years ago. read more

The broad U.S. index (.SPX) was briefly down more than 10% so far this year on Monday, before rebounding to end with year-to-date losses of nearly 8%.

Citi data on investor positioning show that bearish sentiment was spilling beyond the usual tech counters. U.S. stock short futures positioning on the S&P 500 (.SPX) is now at $34 billion, almost 1.5 times that of long bets.

Reporting by Danilo Masoni, Medha Singh and Sruthi Shankar ; Editing by Saikat Chatterjee and Tomasz Janowski

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