U.S. stocks were hit hard Thursday following the biggest plunge in German exports since January 2009. All 10 S&P sectors ended in the red. The major reason for the sell-off appears to be reluctance by the European Central Bank (ECB) to embark on a program of easing unless the member countries decide to enforce discipline in their spending, which is an unlikely scenario.
The euro fell 0.4% against the U.S. dollar, closing at $1.27. Gold futures rose 1.5% to $1,223.20 an ounce. Oil stocks fell as Brent crude dipped under $90 a barrel for the first time in more than two years.
Weekly initial jobless claims fell to 287,000, which was less than expected. Wholesale inventories increased 0.7% in August versus an expected increase of 0.3%.
At Thursday’s close, the Dow Jones Industrial Average fell 335 points to 16,659, the S&P 500 lost 41 points at 1,928, and the Nasdaq dove 90 points to 4,378. The Russell 2000 was down 29 points at 1,068, making it the biggest loser of the day.
The NYSE traded a total of 4.3 billion shares, and the Nasdaq crossed 2.3 billion shares. On the Big Board, decliners outpaced advancers by over 7-to-1, and on the Nasdaq, decliners were ahead by 5.7-to-1. More important, down volume on the NYSE exceeded up volume by over 12-to-1.
The CBOE Volatility Index (VIX) closed at an eight-month high, indicating that high volatility will continue. The fear index has little predictive value as to market direction, but often hits a high at the bottom of a sell-off (see Sept. 30 Daily Market Outlook).
The S&P 500 fell sharply on higher-than-normal volume. The stochastic, a shorter-term indicator than MACD, is oversold and may be signaling that a bottom is being constructed.
The Dow industrials fell again in a dramatic test of their 200-day moving average, now at 16,592. But tests of the Dow’s 200-day are common, and thus far this year three prior tests have held.
Conclusion
Although prior market tests with extremely high volatility have been resolved in favor of the bulls, there is still no solid evidence that this latest sell-off has reached a bottom. But the VIX’s highest reading was at the February low, and our internal indicators are grossly oversold.
I now lean toward the bullish side for several reasons. The public is now very bearish, most letter writers are bearish, and there are no traditionally bearish formations on the charts (one writer sees a head-and-shoulders on the S&P 500 — I do not).
The reason for Thursday’s sell-off was a highly emotional response to Europe’s woes. We’ve seen this before, especially last year, and each time the trend turned up. And the U.S.’s trading partners are primarily Canada, China and Mexico.
For now, we should remain cautious, but long-term investors can consider high-quality growth stocks that are more than 25% off their highs. Traders should revert to the long side of the market but with very tight stop-losses.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
