Stocks suffered their worst one-day reversal since June 2016 on a points basis after the Dow Jones Industrial Average zoomed past the 26,000 threshold, bagging the quickest-ever 1,000 point gain from its last round number (hit just seven days ago). The gain was triple the pace seen from 24,000 to 25,000 as the post-tax cut rally hit peak euphoria.
But with options traders increasingly over their toes — positioned too aggressively — a combination of cryptocurrency carnage, a persistent bid in the CBOE Volatility Index and fears of a possible government shutdown later this week brought out the sellers resulting in the worst percentage reversal since Dec. 1.
Other negative catalysts on the horizon include the start of the Q4 2017 earnings report season and the Federal Reserve’s looming policy meeting.
In the end, the Dow Jones Industrial Average lost a fraction, the S&P 500 lost 0.4%, the Nasdaq Composite lost 0.5% and the Russell 2000 lost 1.2%. Gold gained, crude oil fell 41 cents, and the dollar was hit hard against the yen.
Decliners outpaced advancers by a 2-to-1 ratio. Mining and paper stocks led the decliners with losses of 1.4%, while water companies and REITs posted gains of 2% and 1.8% respectively. Eight of 11 sector groups finished in the red with materials and energy companies leading the way down with losses of 1.2%.
General Electric Company (NYSE:GE) was the most actively traded, down 3.5% after announcing a larger-than-expected charge of $6.2 billion from its legacy reinsurance business. Citigroup Inc (NYSE:C) gained 0.4% after reporting better-than-expected results for the fourth quarter.
The single biggest story of the day, outside of the price reversal (largest high-to-close move since March 2017) was the way the CBOE Volatility Index was correlated to stock prices at the open. This is a possible regime change, as stocks and the VIX traditionally trade in opposition to each other.
This marks a possible shift to late bubble behavior seen in 2000 and 2007 when stocks pushed into their final highs alongside volatility expectations. Given the trillions in explicit and implicit short volatility strategies at the moment according to Artemis Capital, panicked short covering and broken markets could result (with, for example, very thin trading volumes in many ETF-based short VIX vehicles).
This comes at a time when risk appetites have reached their highest level ever according to Goldman Sachs, as shown above. And buying demand is in a lull, with corporate buybacks in a blackout period because of earnings season.
Watch for a nasty pullback. One that has been delayed for years.
Check out Serge Berger’s Trade of the Day for Jan. 17.
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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