The market was essentially a rudderless ship yesterday, a situation that’s been brewing for weeks as Big tech leadership began to wane.  For a while, funds rotated out of tech into other areas in the equity market.  This week, it has rotated out of tech stocks straight to the sidelines, as higher yields means you can get paid to wait in cash.

Consequentially, yesterday’s point decline ranks as the third largest ever, although the percentage decline is nowhere near historic.  Now four of the five biggest declining sessions of 2018 have been reactions to high yields and assumptions about the Federal Reserve.

 

Biggest One-Day Dow Losses 2018
Feb 5	-1.175
Feb 8	-1,032
Oct 10	-831
Mar 22	-724
Feb 2	-666

There was a sense of panic in the session, although the bulk of selling was mechanical tied to preset algorithms and things like key support points.  The biggest dam to break was the 50-day moving average of the Dow, which held early in the session, but once it failed, the index tumbled into a freefall.

Now all eyes are on the 200-day moving averages, which must hold, or orderly selling will become panic selling.

Key Moving Averages (simple)	Dow Jones Industrial	NASDAQ Composite	S&P 500
200- day Moving Ave	25,138	7,498	2,765

 

The S&P tech sector was hammered, down 4.85%, and the biggest losers yesterday are still the biggest winners this year, including Advanced Micro -8% on the session but +165% for the year.

The headline, however, is many investors have finally given up the ghost and blinked on names that have been the cornerstone of their portfolios and overall market rally.

S&P 500 Index	-3.29%
Communication Services (XLC)	-3.95%
Consumer Discretionary (XLY)	-3.37%
Consumer Staples (XLP)	-1.20%
Energy (XLE)	-3.14%
Financials (XLF)	-3.10%
Health Care (XLV)	-2.36%
Industrials (XLI)	-3.22%
Materials (XLB)	-2.62%
Real Estate (XLRE)	-1.58%
Technology (XLK)	-4.85%
Utilities (XLU)	-0.55%

The NASDAQ, which closed below its 200-day moving average, needs to close above 7,354.

I think tech rebounds and does so with a vengeance, although the composition of leadership will change.  

Industrials under Pressure

I’m more concerned with industrials after the sector got hit on pretty good results from Fastenal, and after the close, Flour (FLR) warned.  Revenues will be $4.6 billion, but Wall Street consensus was $4.95 billion- the stock was down 13% in afterhours trading.

Coupled with the warnings from PPG, and materials and industrials look like the first victims of higher prices.

China Consumer

While some are going to blame trade tariffs on the selling, the real weakness associated with China is the slumping Chinese economy.  Warnings about weaker demand from wealthy Chinese consumers sent shares of Louis Vuitton, Moncler and Tiffany tumbling.

We are going to see more news associated with tariffs already in place.  In the grand scheme of things, it shouldn’t be earth shattering, but companies without pricing power will deflect and make it their focal point (not unlike blaming it on the weather).

Investor Confidence

I hadn’t noticed that individual investors had become super bullish over the past two weeks as major indices were hitting all-time high milestones.  I can only hope they remain bullish and look to focus on opportunities during this sell off.

Today’s Session

The market will open lower, but we should see price discovery, which we will watch very closely.  It’s not a question about some stocks being oversold, it’s all about when they find terra firma, which is impossible if the entire market is imploding as panic increases. 

The February sell-off lasted a month, but then tariff news also pressured the market (see table above), and there were also big up sessions in that mix.   The volatility is shaking out weaker hands, even those that didn’t know they were weaker hands.

China’s Abyss

Markets are down all over the world, led by China, which continues to plunge.  The Shanghai stock composite was down 5.2% over night and now off 50% from its high back in June 2015.

Depth of Selling

Although the headlines are focused on the big sell off this week, and maybe overall weakness since major indices hit record highs, this has been a bifurcated market all year. 

Understanding the language.  A lot of stocks are in “correction” mode, which means they have pulled back more than 10% from their highest point this year.  On that note, 66 percent of the names in the S&P 500 have that distinction and 80% of technology names.

More worrisome for me is how many stocks have been losers this year.

S&P 500

• 242 stocks lower
• 69 down 10% plus
• 59 down 20% plus

There is lots of commentary about President Trump calling Jay Powell “loco.”  I thought Powell’s comments at Jackson Hole were spot on and reassuring that he wouldn’t wreck the economy or rally.  Even the communique from the last FOMC gathering suggested a sober approach to rate hikes.  But Powell and his colleague talk too much and it’s getting confusing.

By suggesting rate policy has a “long way to go” to be neutral suggests to many there would be more rate hikes than the so-called dot plot mapped out.  Then comments about overshooting brought to mind the fact the Fed always overshoots.

Yesterday, NY Fed President John C. Williams gave a speech about moving toward “normal” policy, which sounds like rates well above the pace of inflation (which would be significantly higher than THE 3.25% I came away with after the FOMC gathering).

I don’t think the Fed will mess this up, but understand why folks, including the Commander in Chief, are concerned.

Bottom line is investors should be prepared to make a lot of money going into the end of the year.

Comments

Early cover selling by Funds hopefully will give way to an afternoon rebound. If the S&P closes above 2792 today we may be OK for the coming week based on the latest numbers from Housing, Inflation and Yields. I'm no expert but I've moved more to cash in the last 4 weeks and if we finish strong in late November/December I will take more off the table. Comparables will get harder next year and from all the economic indicators I see we are beginning to weaken here in the US and the rest of the World is not going to be any help. garro on 10/11/2018 9:39:24 AM

I'm personally looking at it as a buying opportunity. Brian Bigelow on 10/11/2018 10:27:30 AM

"Be careful when others are greedy and greedy when others are fearful." Warren Buffett. As soon as we bottom and start to move up will be a great time to jump in! I am watching the cips and certain areas of technology for the signs the coast is clear... :) Ray Weldon on 10/11/2018 11:51:11 AM

Yep....we are too. Charles Payne on 10/11/2018 12:06:56 PM

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