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Market Update

Stocks Plunge Again to Worst Daily Point Loss Ever Amid Late Selling Wave

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February 5, 2018

(Monday Market Close) Stocks suffered their worst one-day point loss in history Monday and are now down for the year, a complete reversal of January’s glowing start to 2018. The market’s psychology has changed, and today’s action felt like sort of a washout.

The ground is moving under the market, with the tone switching from everything seeming sunny to focus on what’s not so good. That said, this isn’t a time to panic. 

By Monday’s closing bell, the S&P 500 (SPX) was down 4% for the day and down 0.26% for the year. The Dow Jones Industrial Average ($DJI) plunged more than 1,100 points, easily surpassing what had been the worst day from a point perspective in its history, a 777-point decline back in September 2008. However, it’s suffered worse daily percentage losses many times. In fact, Monday wasn’t even in the top-20 all-time worse days for the $DJI, percentage-wise.

One question going into Monday was whether people would be there to buy the dip after stocks fell sharply on Friday. That appeared to be the case early on, as buyers showed up after stocks initially cratered. That ended in the afternoon, as a huge wave of selling swept through the market, taking the Dow Jones Industrial Average ($DJI) down more than 1,500 points as trading entered its final hour. That represented the biggest intraday point loss in history for the $DJI.

Perhaps more importantly, the losses pushed the S&P 500 Index (SPX) below key technical support levels at the 50-day moving average, and put the SPX into negative territory for the year. That’s an amazing change in just a few days, after the SPX finished January up 5.6%.

Also, the VIX, which just a few weeks ago had been ambling along below 10 and near historic lows, pushed above 30 late Monday. That’s a level last seen two years ago as markets bottomed in February 2016 amid a 10% pull back. VIX rallied again in mid-2016 after Brexit, but not to levels seen this week.

While the plunge over the last two sessions and the tremendous climb in volatility represented a huge turn-around, some buying interest appeared in the last half hour of Monday’s session. The 1,500-point loss in the $DJI quickly turned into an 800-point loss. Then a final late rush of new selling sent the index down another 300 points by the time the closing bell ended proceedings. Sometimes, as we’ve seen in the past, selling can beget more selling. Today’s computer-aided trading means stocks trip up sell-stops every time they go down below certain levels, and that contributes to further losses.

Initially, the sell-off appeared to be sparked by profit taking after January’s rally, worries about climbing bond yields, and concerns about possible inflation. There’s really been no change in the fundamentals that teamed up to get the slide started last week. From a technical perspective, however, things have changed quite a bit, exposing the market’s soft underbelly, so to speak.

Looking at sectors, it was financials and energy that really dragged the most Monday afternoon, with both falling more than 4%. Fears that consumer and commercial borrowing demand might slide as interest rates rise seemed to drive the losses in financials, while energy came under pressure from worries about possible reduced demand if the weak stock market translates into slower economic growth. Also, disappointing earnings last Friday from two major oil companies might play into the energy sector pressure.

It’s interesting to see that one of the main sparks behind this selling, the recent rise in 10-year Treasury yields, began to ease a bit in the last hour of Monday’s session. By then, the yield had fallen to 2.7%, down from highs above 2.88% earlier in the day. It looks like the declining stock market might be giving bonds a slight lift, perhaps as some investors look for what they might see as a safer place to put some money. This is a development that investors should consider watching further on Tuesday to see if it turns into more of a trend.

As we noted last week, this is one of those times in the market where an investor’s mettle can be tested. Panic isn’t an option, especially if you’re a long-term investor. Markets go down as well as up, as the last two days remind us.

SPX

FIGURE 1: THE STOCK INDEX AND THE VIX.

This intraday chart for Monday shows the S&P 500 Index (SPX) falling most of the day and then cratering late in the session as the VIX (purple line) moved up to two-year highs. The big swings in stocks and the jump in volatility seemed to play off each other during the session’s last hour. Data sources: Standard & Poor’s, 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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