S&P 500 wipes out $600B in early-morning flash crash, now in the green

At 4:40 AM ET, the S&P 500 futures market collapsed, erasing $600 billion in market cap in under two hours. By 6:20 AM, the market had tanked without warning. Then, just as fast, it reversed course and turned green. There were no major headlines to explain the sudden selloff, leaving traders scrambling for answers.

These flash crashes are not just limited to stocks. They’ve been hitting crypto, too. On February 25, $300 billion was wiped from the market in 24 hours with no clear trigger. Earlier in the month, Ethereum lost 37% in 60 hours, even though trade war concerns had already been priced in.

Hedge funds dump stocks while retail buys the dip

One of the few major headlines overnight came from Switzerland, where the Swiss National Bank cut interest rates to their lowest level since September 2022. But this move was widely expected, so it doesn’t explain the sudden collapse in S&P 500 futures.

Investor sentiment is at rock bottom. AAII data shows 58.1% of investors are bearish, marking the fourth consecutive week above 55%. At the start of the year, bearish sentiment was below 30%, but now it’s acting like we’re in a major market meltdown. Meanwhile, the S&P 500 is only 7% off its all-time high.

Hedge funds have abandoned tech stocks. They dumped shares at the fastest pace since January 2021, just weeks after buying them at the fastest pace since the 2022 bear market. Now, they’ve rotated out of U.S. stocks at the fastest pace in history. They’re running toward gold and silver, which have been on a non-stop rally.

Retail investors, however, are all in. They don’t see this drop as the start of a crash. They’re pouring money into equities. Retail inflows into Nasdaq 100 stocks just hit 0.1% of market cap, the highest level in a year. JPMorgan’s retail sentiment score hit 4 points, even higher than the meme stock mania peak in 2021.

Crypto is seeing the same battle. Ethereum shorts jumped 40% in February and 500% since November, making Wall Street more bearish on Ethereum than ever. But retail investors keep buying, creating a market full of “air pockets” where price movements are violent and unpredictable.

Market rebounds after economic data calms recession fears

Despite the morning’s chaos, the S&P 500 is currently in the green. The index has surged by 0.5% at press time, while the Nasdaq Composite climbed 0.7%. Tech stocks led the recovery, with Meta jumping 4% and Amazon adding 1%. The Dow Jones rose 217 points.

The sudden rebound came after strong economic data. The National Association of Realtors reported that sales of previously owned homes in February rose 4.2% from January when analysts expected a 3% drop. Jobless claims barely moved, and layoffs remain historically low.

Federal Reserve Chair Jerome Powell addressed the economy on Wednesday, saying it remains “strong overall” and that the Fed is in a “good place” to react to any signs of weakness. Powell also said the impact of tariffs on inflation will likely be short-lived.

The Fed held interest rates in a range of 4.25% to 4.5% but raised its inflation outlook and lowered its economic growth projection. Despite this, traders don’t expect the Fed to make any major moves soon.

Stocks bounced back after the Fed’s announcement. The Dow gained 0.9%, while the S&P 500 rose just over 1%. The Nasdaq surged 1.4%, but it’s still down 11% for the month, officially in a correction.

The S&P 500 briefly slipped into correction territory last week, and it remains 7% below its record high. Over the last month, it has fallen nearly 7%.

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