Monday’s stock market washout has been all but mopped up this afternoon—a sign that high-volume volatility is likely to be a multi-week event, not a few days’ dalliance.
Volatile Monday action follows a gut-check that marked the biggest weekly declines for Wall Street since 2011. But volatility could be two-sided. If you need proof, look at Apple (AAPL) shares on Monday. They tumbled some 10% in the early going before turning positive and almost single-handedly allowing the Dow Jones Industrial Average ($DJI) to erase its Monday deficit. Corn prices, swept up in the deeper commodities rout, turned positive Monday afternoon, too.
Also notable: it’s very rare to see a 25-point retreat in the S&P 500 (SPX) that’s not accompanied by a stampede into the perceived safety of bonds and gold. Did that happen this time? No sir.
Some traders will argue that the best position right now is small and nimble. This is not over, yet.
Eyes on China
Many traders held their collective breath over the weekend, wondering if Chinese officials would step in with any teeth to shore up stock declines there. No dice. China’s Shanghai Composite closed down 8.5% Monday. It has erased all gains for 2015—a bumper year for bulls until recently. Japan’s major stock market retreated Monday as did Europe.
The uncertainty for China’s economy and its currency, along with Federal Reserve meeting minutes that added more questions than answers for interest rate policy, had many scratching their heads, and still is. A commodities rout continued to deflate oil stocks, a crack that unhinged a range-bound, apparently top-heavy S&P 500 (SPX). Crude oil prices hit 6 ½-year lows overnight as concerns over demand from China gripped energy markets. Europe-traded Brent crude is below the $45 per barrel level, while U.S.-listed WTI crude is back into the upper $30s. Many industry watchers think prices could have more room on the downside as OPEC producers continue to produce more oil than currently needed.
What’s more, those momentum stocks—including technology—that had been broader-market influencers are now leading on the way out, too. All told, money managers are having trouble figuring out who the Q4 winners might be and that uncertainty sent many into sell mode.
Spooked or Scared?
The CBOE Volatility Index (VIX), the broader market’s “fear gauge,” shot up some 110% last week (figure 1), logging its largest weekly percentage gain ever. VIX hit an intraday high of 53.29 Monday—its highest reading since January 2009—before dropping back near 30 Monday afternoon. Gold, a sometimes-safe-haven, rose 4% last week. Bonds drew some demand away from stocks but not to the degree that might be expected.
Friday’s most notable move may be the big volume behind the selloff. For some Street analysts, that’s the confirmation they’d expect to portend deeper drops from here. For long term investors, any pronounced retreat could mark the buying opportunity that’s proven elusive for some, considering range-bound trading near record highs as colored this market for months.
The SPX’s ability to hold 1960 support is a potentially significant driver. Watch the charts (figure 2). Even an early-week rally could be met with skepticism until key technical levels are subjected to a proper test.
Fed: Business as Usual?
Economic data, especially reports that essentially fill in the past rather than sketch out the future, may be overshadowed in a volatile week. But I’d argue that reports are increasingly important as we draw near to the September Fed meeting that a few weeks ago was considered all but a lock to deliver the first interest rate hike since 2006. It’s true that this stock shakeout only complicates the Fed’s job. Most analysts may want a bit more think-time. Barclays Capital economists have already pushed out their expectations for the first Fed interest rate hike to March 2016 from September.
For now, housing figures, durable goods, and revised GDP likely feature in this week’s calendar (figure 3) as some traders rework the odds for a rate hike at the Fed’s few remaining meetings this year.