Turnaround Tuesday: Stocks Pick Up Steam, Post Big Gains After Early Flop

Stocks posted a big late-day recovery after flopping out of the gate as buying interest emerged near the lows.

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(Tuesday Market Close) After Monday’s brutal plunge, trading remained volatile Tuesday but the results ended up looking very different than at the start of the day. Stocks rocketed back in the final hour after appearing to find some committed buyers down near the lows.

Major indices posted 1.7% to 2.3% gains when all was said and done, after falling around 4% the previous day. The late gains were a far cry from Tuesday’s open, when the Dow Jones Industrial Average ($DJI) took another deep dive, extending the more than 1,800 points of losses it had put together Friday and Monday. Cooler heads seemed to prevail by the end of the day Tuesday, as many investors looked over the market and saw that the fundamentals of most stocks are the same as a few days ago before all this started. Earnings season continues to go pretty well.

Volatility has been, in a word, volatile these past few days. After spending most of the last year below the mid-teens, and a good chunk of it around 10, the CBOE Volatility Index (VIX) spiked to a high last night of 50.3. While today's stock market bounce allowed the VIX to pull back to around 30, the reading reflects a still-heightened sense of fear. If the markets stabilize over the coming days, VIX may further recede, but it may be a while before it tests the single digits again. Investors might be re-evaluating some stocks, so continue to look for the ground to possibly shake under the market a little bit.

From a sector perspective, Tuesday’s action looked pretty constructive. Cyclicals topped the leader board, with big gains of more than 2% for materials, consumer discretionary, and info tech, while financials and industrials carved out better than 1% improvements. So-called “defensive” sectors like utilities and telecom, along with real estate, were the only sectors that lost ground.

Tuesday’s turn-around doesn’t necessarily mean investors are out of the woods. The worst of the selling could be over, but volatility could persist and history tells us it often does after these events. Typically, it takes two to three weeks before volatility eases. Think of it being like a big bell that’s been rung, and now the reverberations are still gyrating back and forth.

There’s general agreement among Wall Street analysts that fundamentally, things continue to look strong. Also, the fundamentals of companies didn’t necessarily change from Friday morning until tonight. The economy is still humming along, inflation remains muted (although there still remains a fear), energy prices aren’t out of hand, and borrowing costs remain low. 

People appear to have focused on several factors that might have helped lead to the correction, including bets by some investors on continued low volatility that blew up when volatility started to spike over the last week. These aren’t investments that retail investors typically get involved in, but their impact reinforces the point that some things are out of investors’ control, and that markets can get sidetracked despite solid economic fundamentals. That’s a hard lesson to learn, but an important one.

It’s also a good reminder that the market isn’t necessarily a benign place. It might have felt that way in 2017 and in January, but now it’s back to reality. Things can and do turn on a dime, and investors have to decide if they’re comfortable putting their money in a place where stuff can happen that’s beyond their control.  

And for anyone who needed further inspiration, The SpaceX Falcon Heavy rocket soared from the launch pad in Florida just as the market counted down its closing minutes. The successful launch came after CEO Elon Musk had told the media there’s a “lot that can go wrong.” The market saw a lot go wrong for it, too, this week, but Tuesday’s closing bell seemed to possibly pave the way for more optimism as we head into mid-week.

VIX

FIGURE 1: VOLATILITY OF VOLATILITY.

The CBOE Volatility Index (VIX) was rattled from an apparent dormancy this week, more than quadrupling from the low at one point. Data source: CBOE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Good Trading,
JJ
@TDAJJKinahan

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