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Things Could be About to Get Very Interesting

Wednesday’s broad market sell-off drove the Dow Jones Industrial Average down 2.2% The S&P 500 declined 2.5%, and the Nasdaq was slammed with a 3.4% loss. The reason appeared to be fear of a global economic slowdown caused by China’s woes.

All three major indices are now considered by many technicians to be in a correction phase. The word “correction” has many meanings, but to most analysts it means a 10%-plus decline from the high. The S&P 500 and Nasdaq have both exceeded this threshold, while the Dow is teetering on it.

A sharp drop in consumer discretionary stocks, the best-performing sector of 2015, fell 3.4%. Major losers within the group included BorgWarner Inc. (BWA), off 9.5%, and Netflix, Inc. (NFLX), down 8.6%.

Oil prices were volatile following a strong opening. Crude fell after a report from the EIA showing inventories of oil and refined products were at record highs. This reversal came despite legislation taking effect that lifted a 40-year-old ban on exporting crude from the United States.

The nicknamed FANG stocks — Facebook Inc (FB),, Inc. (AMZN), Netflix, Inc. (NFLX) and Google, now going by Alphabet Inc (GOOGL, GOOG) — were some of the biggest winners among major equities last year. But they were hammered Wednesday with FB falling 4%, AMZN down 5.8%, NFLX off 8.6% and GOOGL losing 3.5%.

The U.S. dollar rose against a basket of currencies. The Canadian dollar was hit hard, falling to its lowest level against the greenback in 13 years.

Gold rose 0.2%, to $1,087.50 an ounce. The yield on the benchmark 10-year Treasury note fell to 2.08% from 2.12% on Tuesday.

At Wednesday’s close, the Dow Jones Industrial Average fell 365 points to 16,151, the S&P 500 lost 48 points at 1,890, the Nasdaq fell 160 points to 4,526, and the Russell 2000 was off 35 points at 1,010.

The NYSE Composite’s primary exchange traded over 1 billion shares with total volume of over 5 billion. The Nasdaq crossed 2.5 billion shares. On the Big Board, decliners outpaced advancers by 7.5-to-1, and on the Nasdaq, decliners led by 6.1-to-1. More importantly, declining volume reached 9.1-to-1. Block trades on the NYSE fell to 6,159 from 6,406 on Tuesday.

Dow Jones Industrial Average Chart
Click to Enlarge

Chart Key

Despite a rally on Tuesday from a level near the October lows, the Dow executed a shallow outside reversal, setting a new three-month low.


In order to declare an official Dow Theory bear market, the Dow Jones Industrial Average must close below the Aug. 25 closing low at 15,666. If that happens, the industrials will have established a new downtrend with a lower high in December and a new lower low. The Dow Jones Transportation Average has already established a lower low.

But will the industrials make the move lower?

The index must close below the support line at 16,000 before making an attack on the August closing low. My intuition is that institutional buyers are already smacking their chops over some very oversold stocks. If that is true, look for a big move before the end of the week in the FANG stocks.

MACD is very oversold but could become even more oversold. And the Volatility S&P 500 (VIX) is at a mere 25.22, meaning that put option hedges are not very high.

Hold your breath and your cash, but be prepared to buy. This could get very interesting for those with courage.

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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