The Dow Jones Industrial Average fell 1.8% Friday and suffered its worst weekly decline since 2011. The 3.8% weekly loss was attributed primarily to a sharp drop in the price of oil and its impact on global economies.
The benchmark crude price has fallen 46% from a June high of $107.73 to $57.81 a barrel. This has investors worried that the global economy is headed for a recession. And The Wall Street Journal points out that the slide in oil “exacerbates worries about deflation in Europe and Japan, where policy makers are grappling with low inflation amid sluggish growth.”
A rush to safety sent the yield on the U.S. Treasury 10-year note down 3.4% Friday to 2.1%. Investors not only sold U.S. equities, but the Stoxx Europe 600 fell 2.6%. The currencies of Russia and Norway were both hit hard this week since both are big oil producers.
There was some positive news last week. Consumer sentiment hit a nearly eight-year high. The Thomson Reuters/University of Michigan survey rose to 93.8 in December from 88.8 in November, which was above the consensus forecast of 89.5.
Retail sales rose more than expected, climbing 0.7% in November, the largest increase in eight months. While the overall market got slammed, SPDR S&P Retail ETF (XRT) gained 0.6% on Friday.
The Labor Department reported that inflation fell slightly more than expected. The producer-price index declined 0.2% in November while a 0.1% drop was anticipated.
At Friday’s close, the Dow Jones Industrial Average fell 316 points to 17,281, the S&P 500 lost 33 points at 2,002, the Nasdaq fell 55 points to 4,654, and the Russell 2000 was off 15 points at 1,152.
The NYSE’s primary market traded 961 million shares with total volume of 4.1 billion. The Nasdaq crossed a total of 1.89 billion shares.
For the week, the Dow fell 3.8%, the S&P 500 was off 3.5%, the Nasdaq fell 2.7%, and the Russell 2000 was down 2.5%.
There have been several spikes this year in the VIX, but only one other that popped above 20 with the velocity of last week’s move. That occurred in October when the S&P 500 plunged under its 200-day moving average.
A run up like last week’s sometimes occurs as a result of investors buying puts to hedge current positions. Therefore, one reason it popped may be that institutions have big gains and don’t wish to take them, but want to hedge against a possible loss before year-end. Or it could be more than that, perhaps an oversupply of crude oil.
On Friday, the S&P 500 plunged under its support line at 2,019 and closed just above its important 50-day moving average at 2,001. A Fibonacci retracement from the October low (1,821) to the November high (2,079) looks like this: 50% = 1,949, 60% = 1,923, 61.8% =1,906.
The Nasdaq closed on its low of the day, which is never a positive sign, and threatens to break the support line on which it now rests. If the line gives way, the next support is at the September high of 4,610 and the 50-day moving average at 4,577.
Looking at the pullback from a Fibonacci view: 50% = 4,465, 60% = 4,395, 61.8% = 4,383.
Conclusion
Last week’s sell-off took the S&P 500 down 3.7% from an all-time high made just over a week ago. Thus far, this is a minor pullback, so does it really matter?
Well, the Dow declined for three consecutive days followed by a meek day up and a sharp sell-off — not exactly a pattern of bottom-building.
Long-term investors should hold regardless of short-term trends since the bull is still on the field. However, for short-term traders, a meaningful signal has been flashed. It is time to sell into rally days and get liquid.
The month of December usually ends on a plus; however, this one has had a very bad start. My guess is that the decline in crude will put off a Santa Claus rally until mid-January.
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.
