Biggest Worry for Traders? They Don't Know Why Stocks Are Moving

(Bloomberg) -- It would be nice to write the market's convulsions off to liquidity failures, or tariffs, the Federal Reserve or tech valuations.

But for the people living through these swings on trading desks, none of those explanations does the trick -- and that's what really worries them.

Markets have grown so jittery that moves seem detached from the fundamental or technical analysis that traders use to underpin investment decisions. Thursday alone brought the biggest reversal for the Nasdaq 100 Index since April, a swing of almost 3 percent amid relatively little news. That was after the overnight futures session began with so much selling pressure the exchange operator had to pause trading to ensure orderly execution.

Yes, there is a plethora of viable reasons for rising volatility, from the uneasy trade truce to a suddenly uncertain path for Federal Reserve rate hikes and the persistent concerns that the U.S. economy is headed for a slowdown next year. It's just that traders have become unable to anticipate what issue will drive the day's trading and when it will hit.

“The market truly is trading off of headline risk, that being across the board,” said Scott Bauer, chief executive officer of Prosper Trading Academy. “There's never been a time in my 30 years of professional trading where there have been so many hot points at one time, any of which could make the market move on their own let alone multiple headlines at once.”

Also vexing traders is the nature of the news driving markets. There are models for projecting the expected path of interest rates or interpreting technical signals. What to do, though, when the market-moving event is the arrest of a high-profile Chinese tech executive in Canada?

For Michael O'Rourke, JonesTrading's chief market strategist, a lot of the news just cannot be properly interpreted.

“This is why people don't like geopolitical risk,'' he said by phone. “You can't analyze how the Trump meeting with Xi is going to go, you can't analyze that we're going to have a Chinese executive arrested. What you get is not a typical thing that happens.”

News that Huawei's chief financial officer was detained for possible extradition to the U.S. became part of the trade war narrative, at least for half a day. Futures began the overnight session sharply lower on the report, and the S&P 500 plunged as much as 2.9 percent in morning trading.

Then came positive comments from the head of the International Monetary Fund and a trade deal seemed more likely at the same time that Fed officials yet again struck a more dovish tone on interest rates. While the market rebounded, traders remained uneasy.

“It was mostly jawboning,” said Matt Maley, equity strategist at Miller Tabak & Co. “There's some indications of capitulation. The market got a little bit washed out and therefore was susceptible or ripe for a bounce on any kind of good news.”

It's still unclear if the recent swings are primarily a response to trade developments or if the markets have sussed out a sign that the economy is set to falter next year. The flattening of the yield curve that traders have been watching for a recession signal eased on Thursday, giving rise to speculation that a good jobs number Friday could rekindle a positive sentiment.

For Dennis Debusschere, head of portfolio strategy at Evercore ISI, there's still far too much risk to wade back into a market this riven by volatility.

“Overall still untradeable in our opinion, until we get more clarity on trade and we think it will pay to wait this out,” he wrote in a note to clients Thursday. “That being said, our desk is open for business if you're feeling up to trading this backdrop.”

--With assistance from Carolina Wilson.

To contact the reporters on this story: Vildana Hajric in New York at vhajric1@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Eric J. Weiner

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