On May 9, Goldman Sachs strategists warned that the S&P 500 faced a potential drop of 20%, to 4,600, while the US economy had a 45% risk of recession.
On May 13 in Barbara Kollmeyer’s Dow Jones Marketwatch Call of the Day column, the firm’s chief equity strategist David Kostin lifted his year-end target for the S&P 500 to 6,100 and chief economist Jan Hatzius cut recession risk to 35%.
What a difference a weekend makes.
As I write Tuesday the 13th, the S&P 500 is at a new high for the year, fear has faded, deals are getting done and like the Lego Movie, everything is awesome. We’ve snapped back, got the snapback cap back on.
So long as everyone was calling for a recession the probability of one was minimal. Now that blood has been hosed off the streets and the tarmac refinished in gold and green, I’m not so sure!
I jest.
But economists never predict recessions because it’s difficult to pinpoint when people run out of money. Central banks are always wrong. The bulls often run toward a cliff.
And a snapback market is new. The Oct 1987 plunge dropping stocks more than 20% in a day wasn’t erased until July 1989. In Feb 2009, the S&P 500 was slightly lower than in Dec 1996, no snapback after a burst Internet bubble, a financial crisis.
Almost never did stocks carom into a chasm and claw back out like Alex Honnold free soloing up Half Dome.
Now we’ve seen it four times in a year. It happened July 31-Aug 15, 2024. Guessers blamed a busted yen carry trade but the data say Fast Traders – machines with investment horizons of 400 milliseconds – did it. Demand for Tech stocks fell. Machines widened spreads. Options devalued. The market tanked.
And snapped back. By Aug 21, SPX was up 8.4% from pre-plunge levels even though buyers weren’t back. Volatility dropped by half.
In Snapback Number Two from Aug 30-Sep 30, stocks dropped and rose like a “V.”
It happened Dec 18-24, 2024. The market imploded in an hour. By Dec 24, it was back, although two more mini-vees followed before the market reached highs Feb 19, 2025.
There’s almost a Snapback 3A Mar 7-Mar 25, with the market tanking and baking.
Big Vee Number Four, the grandaddy thus far, gave us The Maw of Apr 2 to May 2. For five trading days Apr 4-10, volatility in SPY averaged 7.2%, a staggering 600% over long-run norms. Stocks fell 15%.
Yes, we were in randomly atomized Trump trade negotiations. Tariffs were changing like stock prices from high-frequency traders. Those things don’t buy or sell stocks, though. Machines do.
The Snapback GOAT happened in the Pandemic. Stocks tanked over 30% in two weeks in March 2020. And snapped back. We had V dumps and jumps in Jan, Mar, May, June and Sep/Oct of 2022.
That year gave us the bear. This one could too, if the pace of snapbacks continues. I don’t know. I’m making no predictions.
I’m explaining WHY these snapbacks are happening.
The market is not mostly investors buying and selling things. The market is mainly risk-management models, asset-allocation models, and machines profiting on a tight relationship between baskets of stocks, associated ETFs, and related derivatives from stocks, ETFs and indices.
They all must track each other. Just three firms are critical to equilibrium in the Big Three – stocks, ETFs, options. There are 8-9 big brokers executing most customer orders. There are secondary and tertiary market-makers. Call it a total of 30 firms executing 90% of volume.
A headline hits. Options devalue. Market makers widen spreads. Several can’t calculate total value at risk and quit one of the big three. Volatility rips through the basket of stocks – like UNH yesterday. Then ETFs are out of whack with the basket.
And the market plunges, and arbitragers rapidly buy and sell baskets of everything, and volumes explode, and volatility is consumed, and the surface of the waters of the market cease their roiling and go calm again.
This is how we get snapbacks.
Options expire this week that reflect the risk premia of April. Most snapback-driving disturbances occur with monthly or month-end options expirations.
The good news is a market built on getting stuff tracking other stuff snaps back. It’s resilient. It favors rising prices over falling prices.
The bad news is the market is not a barometer for risk or fundamentals.
I’ll share this last tidbit. Short Volume in Snapback No. Four hit an all-time record of 55% of volume in the S&P 500. It means investors were neither buyers nor sellers of size, up or down. Machines created liquidity to accommodate a 20% snapback in prices. And machines will have to remove it in 35 or fewer days say the rules.
That’s why I wrote Meme Stock Moment last week. It’s how so-called meme stocks work.
Now you know what’s happening. If you want help explaining the market to your executives, let us know. For help trading it, try us here.
