Authored by Nicholas Colas via,

Yesterday’s market action broke just about every rule that might signal that the worst is past, based on what we outlined previously. Specifically:

  • We didn’t get an outsized selloff at the open. Thanks to a tepid CPI print, bonds rallied modestly and the S&P actually ticked higher in the first half hour of trading.
  • Instead of rallying after 10am, US stocks began to sell off. This will remind readers who were in the market during the Financial Crisis of the dreaded “margin clerk selloff” that typically occurred mid morning during 2008. Today looked a lot like that.
  • Neither Boeing (10% of the Dow) or large cap Tech (25% of the S&P) could muster a positive day. Yes, Tech outperformed the rest of the market but that is cold comfort at best.

Therefore, we don’t think US equities have seen their near term lows. The typical market response to a down 4% day (like Wednesday) is a modest up day in the next session (+1.7% on average). This signals that investors think prices reflect some near term opportunity. That’s what happened in early February of this year, for example, and markets found their footing. The fact that today did not follow the traditional day-after pattern worries us.

And while we are not superstitious by nature, we get a little worried about Friday-Monday trading whenever volatility picks up. 

Case in point: a large sell program hit US stocks around 230pm today. This drove the S&P 500 down 20 points in a matter of 15 minutes. If you have similar action today, and investors have all weekend to stew over their losses, that sets up for a larger selloff on Monday morning.

On the glass half-full side of things, three points:

  • Emerging markets outperformed US stocks today, down 1.0% versus the S&P’s 2.1% decline. News reports that Presidents Trump and Xi will meet at the next G20 meeting in late November helped here. Also, the “VIX of” Emerging Markets sits at levels not seen since April, so the chance for a bounce here is good.
  • EAFE (developed Europe, Asia, Far East) stocks likewise outperformed the S&P today, down 1.4%, and both this geography and EM have done mildly better than US stocks over the last week. The S&P is down 6.0% over the last 5 trading sessions; EM is off 4.5% and EAFE is 4.8% lower. If non-US markets are starting to bottom, that could bode well for next week.
  • Earnings season kicks off on Friday with Citi, JP Morgan, Wells Fargo and PNC reporting. Analysts’ expectations for Financial sector results are wonky: 3% revenue growth but 34% earnings growth. Still, positive color on the US economy from bank CEOs may help calm investors’ frayed nerves.

Our bottom line: the next two days are too fraught with uncertainty to consider increasing portfolio risk. During volatile periods, we stick to a rules-based approach to determine investable bottoms. And yesterday broke too many rules.

We’re not out of the woods yet.

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