On Friday stocks were hit hard when investors sold both stocks and bonds as fear spread that central banks would shortly begin to tighten credit and raise interest rates. The first indication of a policy change occurred on Thursday, when the European Central Bank (ECB) decided to leave rates unchanged and to stop its policy of purchasing bonds.
The ECB’s lack of action was followed by Federal Reserve Bank of Boston’s President Eric Rosengren who, in a speech, indicated that a case can be made for “continuing to pursue a gradual normalization of monetary policy.”
The Fed’s next policy meeting is on Sept. 20-21.
In additional to a sharp sell-off in stocks, the U.S Treasury’s 10-year note jumped to 1.67%, its highest yield since June 23. And bond futures markets implied that there was a 24% likelihood of a rate hike by the Fed in September, up from 18%.
The likelihood of a rate increase in December rose to 55% from 51% on Thursday. Also, on Friday German 10-year bonds turned from a negative to a positive yield.
At the close, the Dow Jones Industrial Average fell 395 points to 18,085, the S&P 500 lost 53 to end at 2,128, the Nasdaq closed at 5,126, down 134 points, and the Russell 2000 plunged 39 points to 1,219.
The NYSE’s primary exchange traded 1.1 billion shares, with total volume of 4.2 billion shares. The Nasdaq crossed 2.2 billion shares. On the Big Board, decliners outpaced advancers by 17-to-1, and on Nasdaq decliners led by 6-to-1. Blocks on the NYSE increased to 6,037 from 5,407 on Thursday.
For the week: The DJIA lost 2.2%, the S&P 500 fell 2.4%, Nasdaq lost 2.4%, and the Russell 2000 fell 2.8%.
As noted on the chart, a 40% jump in the “Fear Index” (VIX) is the biggest one-day jump in the index since the Brexit in late June. The Brexit jump was proven, so far, to not be based on reality.
The “500” failed to hold its 50-day moving average at 2,164 and its support line at 2,155. And, the lower opening on Friday resulted in a gap from 2,177 to 2,169. The next support line is at 2,100 and then the 200-day moving average at 2,057.
The Dow Jones Transportation Average is considered by many economists to be predictive of future economic conditions. Thus a flat transportation average = a flat economy. A one-day scare signifies little, and so note the accumulation of buying during the last three weeks.
Conclusion: Friday’s sell-off appears to be a short-term event, just as the Brexit sell-off in late June was. Sell-offs in bull markets are part of the need for large traders to accumulate cash in order to move to their next “oversold” sector. In other words, it is part of massive group rotation.
Sell-offs in a bull market, which is currently confirmed, offer excellent buying opportunities for those savvy enough to recognize them. I like to evaluate stocks that don’t participate in a correction, like our Trade Of The Day, in order to determine where the next buying will surface. In this case, I believe that the financial sector will offer excellent buying opportunities.
Watch where the support line resides, since the bulls are grazing there.
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.