The Bull is Wounded, but Is It Fatal?

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Stocks took a dramatic dive on Monday’s opening. A more than 1,000-point free-fall in the Dow Jones Industrial Average in the first minutes of trading was followed by a series of volatile gyrations.

At one point, it looked like the major indices would stage a rally that would lead to a positive finish. But stocks sagged as the closing was in sight, and the Dow ended off 3.6%. The S&P 500 fell 3.9%, and the Nasdaq was down 3.8%.

The Dow’s intraday swing was the largest on record. The intense selling was the result of an 8.5% sell-off in the Shanghai Composite. And the stampede to sell stocks led to massive buying of the 10-year Treasury note. Its yield fell to 2.01%, down from 2.05% on Friday.

Based on Fed funds futures, the likelihood of a rate hike in September has fallen to just 24%, according to data from the CME Group, down from almost 50% just two weeks ago.

Oil prices continued to fall. West Texas Intermediate (WTI) fell 5.5%, closing at $38.24 a barrel. Gold fell again despite its status as a countertrend investment. It was reported that the metal declined because of investors’ need to raise cash to meet margin calls in stock accounts. The December contract lost 0.5% to settle at $1,153.60 an ounce.

At Monday’s close, the Dow Jones Industrial Average was off 588 points at 15,871, the S&P 500 was down 78 points at 1,893, the Nasdaq fell 180 points to 4,526, and the Russell 2000 lost 45 points at 1,112.

The NYSE Composite’s major exchange traded over 1.6 billion shares, more than double the average volume this year. Total volume on the exchange exceeded 6.6 billion shares. The Nasdaq crossed 3.5 billion shares. On the Big Board, decliners outpaced advancers by 19-to-1, and on the Nasdaq, decliners led by 9-to-1. Declining volume on the NYSE exceeded advancing volume by over 32-to-1.

VIX Chart
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The Volatility S&P 500 (VIX) surged 90% intraday to a high of 53.29, the highest level since March 2009, before closing up 45% at 40.74.

This “fear index” is usually associated with an oversold market when it accelerates from lower levels. On Wednesday, the index was in the mid-teens.

Dow Jones Industrial Average Chart
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Chart Key The Dow Jones Industrial Average completed a rounding top when it sliced through the January low at about 17,170, rendering a target of approximately 15,800. Monday’s decline to a close at 15,871 puts the index within the target range since highly volatile days like Monday’s cause a loss of some precision.

Dow Jones Transportation Average Chart
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Like the industrials, the Dow Jones Transportation Average closed below the October low, but by just over 125 points. Again, on highly volatile days precision suffers, so we will call Monday a draw pending further stability or renewed selling.

Conclusion

In the Aug. 6 Daily Market Outlook, I answered the following question, “What would it take under Dow Theory to confirm a new bear market?”

I often receive that question. It would take a lower low by both indices in order to confirm the bear’s roar. And those numbers are clear from our two Dow charts. Simply put, both indices must close below the October closing low in order to turn the market into a long-term downtrend.

Due to the nature of the market’s decline, I am not ready to declare a Dow Theory breakdown since volatility works on behalf of buyers as well as sellers. With a very overdone VIX, volume skyrocketing due to margin calls, and just two new highs versus more than 1,200 new lows, according to CNBC, the market appears ready to rally.

If the rally fails, then the bear is loose. Until then, we will consider the bull to be merely wounded. We don’t have enough information to determine if that wound is fatal.

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.


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