At half past two o'clock in the afternoon of Wednesday local time, U.S. stocks suddenly dived, and the three major stock indexes collectively turned down and continued to decline, and finally closed down more than 1%.
At the close, the Dow fell 1.27%, its biggest drop since March October, the Nasdaq fell 1.50%, its biggest drop since Oct. 20, and the S&P fell 1.47%, its biggest drop since Sept. 26.
What ended the recent rally driven by Fed rate cut expectations and dovish turnarounds?
First, U.S. stocks are close to all-time highs and have encountered a lot of selling resistance, and this sell-off is expected. Second, FedEx, the "barometer of the U.S. economy", fell short of expectations for the new quarter, which broke the cold water on the "elastic" consumption expectations. Third, investors are buying a lot of put options on the S&P 500, which may have exacerbated the sell-off. Fourth, holiday trading is light, the market trading volume is not large, and a few selling orders can collapse the market.
Jay Hatfield, portfolio manager at InfraCap in New York, said the stock market was near all-time highs and had met a lot of selling resistance.
By Wednesday, the Dow had closed at all-time highs for five consecutive sessions, while the Nasdaq and S&P 500 had risen for nine and two straight sessions, respectively.
Hatfield added: "The sell-off came so violently that it was jaw-dropping, but it makes sense considering we've come a long way. ”
Despite strong home sales (a slight rebound from record lows) and a sharp rise in consumer confidence (falling inflation expectations), the earnings reports of FedEx and General Mills still poured cold water on the narrative of a "resilient" consumer cyclical rebound.
FedEx, which is seen as a "barometer of the U.S. economy," saw its first-quarter profit well below analysts' target, and it also lowered its full-year revenue forecast, expecting consumption to remain weak during the upcoming holiday period (Thanksgiving to Christmas and New Year's).
FedEx closed down 12% on the earnings report, leading the S&P constituents.
U.S. snack giant General Mills (General Mills) Q2 sales and adjusted earnings per share fell short of expectations, and the cumulative net profit for the first half of the year decreased by 10.41% year-on-year.
General Mills closed down 3.6% after the earnings report, and has fallen 22.7% for the year.
On top of that, some traders say the recent surge in S&P 500 put options may have exacerbated the sell-off.
A major put buyer bought a large number of S&P 500 puts with strikes at 4,755. This may have frightened the market and triggered a panic sell-off, causing the S&P 500 to suddenly dive below the previous support level of 4,755 points.
At the same time, the previous "zero-date option" 0-DTE traders held a large number of call options on the seven tech giants, but when it came to expiration, they suddenly sold these call options in their hands.
Some trading details can be seen from the Goldman Sachs trading platform:
Most of the S&P E-mini futures began to trade heavily after half past two in the afternoon, even before the S&P 500 fell below 4,800. Within 45 minutes after the stock market first started falling, there was a significant explosion of transactions, about 5 times that of usual. There was a large electronic trade in the purchase of a put option on the S&P 500 expiring on December 20 with a strike price of 4,755 points.
Last week, the Federal Reserve signaled that its tightening cycle was over and opened the door to a rate cut in 2024, with Chicago Fed President Goolsbee reiterating late Tuesday that cooling inflation to the Fed's annual target of 2% would drive a rate cut.
According to CME's FedWatch tool, there is a more than 70% chance that the Fed will start its first rate cut in March next year.
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