How does someone describe the chaos that a 1000-point stock sell-off causes and the enormous debris left to clean up after the worst intraday decline on record? Thankfully the freefall was partially reversed and the Dow Jones Industrial Average (DJI) rebounded, taking back a significant part of the decline.
But questions remain as to how stocks could plummet 500 points in just five minutes, bypassing measures that were supposed to prevent such a disaster. Some are blaming a computer glitch and others human error, but whatever or whoever caused it is not so important as how to restore confidence in a public that was just beginning to invest in stocks again.
The day started with a sharp decline resulting from the Greek financial crisis and televised riots in Athens. And as the situation intensified in Europe. There were some who expected the European Central Bank (ECB) to step in and buy European government bonds in an attempt to block a contagion that could enmesh all of the European economies. But when the ECB president finally spoke and only directed his remarks to potential inflation, the wheels came off the cart. Markets around the globe reacted with an avalanche of selling.
In the United States, stocks closed up almost 650 Dow points from the day’s low, but the index was still off almost 350 points. Volatility, as measured by the CBOE Volatility Index (VIX), rocketed more than 15 points to over 40 before closing at 34.15, the highest it’s been since April 2009. And volume on the NYSE hit the highest level of the year.
The U.S. dollar rallied versus the euro, closing at $1.267, and the 10-year Treasury note climbed over a point, taking the yield down to 3.40 — another first for the year.
At the close, the Dow had fallen 348 points to 10,520, the S&P 500 (SPX) lost 38 at 1,128, and the Nasdaq (NASD) was down 83 points to close at 2,320.
The NYSE traded 2.6 billion shares with decliners over advancers by more than 10-to-1. The Nasdaq traded 1.3 billion shares, and decliners were ahead by 7-to-1.
June crude oil fell $2.86 to $77.11 a barrel, down for the third day in a row for the sharpest sell off of crude since December 2008. The Energy Select Sector SPDR (XLE) fell $1.98, closing at $56.05.
Gold for June delivery rose $22.30 to $1,197.30 an ounce, and the PHLX Gold/Silver Sector Index (XAU) gained $1.73, closing at $174.59.
What the Markets Are Saying
Was it just yesterday that I said, “the current support zone for the S&P is 1,153 to 1,170,” and that, “the goal of this correction is nothing less than a test of the January/February low at 1,044”? Things can change quickly at Broad and Wall, but yesterday’s fall takes the recent record for shock and awe.
The question that technicians will be called upon to answer is, how does this chaotic day impact the future direction of the markets? For an answer I think that is necessary to examine the October crash of 1987, which took the S&P 500 from 307 to 216, a drop of more than 29%.
Oct. 19, 1987, is commonly referred to as “Black Monday,” but the crash actually started five days before on Oct. 14. The S&P 500 fell 2.95% that day, followed by 5.15% on Friday, Oct 16, and on Monday, it fell 20.4%. The following four months were spent in a volatile trading zone marked by the Oct. 19 low of 225 and 260, which was 61.8% (there’s that fella Fibonacci again) of the last day’s decline.
Our crash actually started with the Tuesday, May 4 decline of 2.4%, followed by yesterday’s decline of 3.24%. But with an intraday decline of 8.5% for a total fall of 11.35% (from the close of May 3 to the intraday low of May 6).
Briefly, we have not experienced anything close to the Black Monday sell-off in terms of percent decline. But there are a couple of preliminary similarities between Black Monday and yesterday.
1. Black Monday was preceded by 3 days of selling — ours by two.
2. Black Monday started from a compound head-and-shoulders top, ours started from a simple diamond top (a type of head-and-shoulders).
3. Black Monday was partially the result of a failure of computer systems, and so was ours.
4. Black Monday was the culmination of a long run of profits, and ours was too.
5. Black Monday was caused in part by program trading, portfolio insurance and derivatives … hmm.
Have we reached a bottom?
Yesterday’s “glitch” cleaned out an enormous amount of stop-loss orders and, thus, many potential sellers are now out of the game. And, programmed buying saved the market from plummeting through the February low at S&P 1044.50, halting at the intraday low of 1065.79. As a result, we now know that institutional “buy programs” are installed at near the February low.
So, the answer is not clear.
We will most likely get a dead cat bounce today, and then a test next week of the February low and the power of the still existing programmed buyers. But even if the lows hold, and that is very problematic, like the crash of ’87 it will probably take months, and perhaps even until late this year, to repair the damage of a few days in May.
Today’s Trading Landscape
Earnings to be reported before the opening include: AerCap, Arena Pharmaceuticals, Beacon Roofing Supply, Buckeye Partners, CF Industries, Cimarex, Constellation Energy, Crosstex Energy, CryptoLogic, Ebix, Edison, Fuel-Tech, Huntsman, IAMGOLD, Matrix Service Co., Mediacom Communications, Mirant, Pepco Holdings, PG&E, Southern Union, TETRA Technologies and Warner Chilcott.
Economic reports due: employment situation (the consensus expects 200,000 for non-farm payrolls and 9.6% for the unemployment rate) and consumer credit.
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