A Breakdown or Blip for Stocks?

Stocks sold off from recent highs as Treasury Yields continued to climb with the benchmark 10-Year Treasury Yield (US10YBY) touched 3.2% for the first time since mid 2011. The selloff in stocks was much sharper than earlier in the week. At session lows had the Dow Jones Industrial Average (.DJI) and S&P 500 (.INX) lower by -1.25%, while the NASDAQ Composite (.IXIC) decline was twice that.

Volatility, or the VIX (VIX) risk metric spiked to its highest level in over 6 weeks, as Investors and traders scrambled to access the potential for further downside. There some relief by at day’s end as losses were trimmed considerably in the last 90 minutes, but clearly Caution has a much higher premium than the last few minor market hiccups.

The S&P 500 has not had a decline of -1.0% or more since mid June. That still holds as the relief “bounce” during the last 90 minutes of trading allowed the S&P to close fractionally above the 2900 level with a loss on the day of -0.8%.

The DJIA broke its string of 3 consecutive all time highs, finishing -0.75% at 26,627.

The DJ Transportation Average was actually in the green for most of the morning. It closed -0.4% at 11,296. Worth noting that the DJTA sits right at its 50 day moving average, the second time in three days it has closed right at that near term support level.

NASDAQ Composite was the clear under-performer, closing -1.8% at 7880. This is the lowest close for NASDAQ since August 23, and the first time it has closed below its 50 day moving average in 5 months. Obviously NASDAQ is highly sensitive to the FANG family of high beta names in the Social Media and Digital Delivery space that have been hit with recurring Internet Security and Privacy breaches the last few months. This space should be in the “Watch Closely” column by all growth managers and market strategists, until they can right the ship.

The calendar may very well be favorable for how Big Dough Investors address this sell off.

Investors had a great third quarter (Q3). We’re only 4 days into Q4, and there is no rush to make a snap judgment on how deep the selling might go. Let the dust settle, absorb a few more data points and realize there is just shy of a Full Quarter to Deal with It. A much better scenario than a sharp sell off with 3 weeks left in a performance period leaving little time to adjust and repair.

I wouldn’t be surprised to see the Big Guys take some profits in advance of the Q3 earnings season, but I doubt that the secular bull market has run its’ course.

That Being Said…

There are multiple moving parts in both the economy and the market. Some positive and some cautionary, all converging as we begin the last quarter of the year.

There’s no doubt that rates are moving higher. It’s a near certainty the FED will raise the Fed Funds rate 3 more times by mid 2019.

There is also little doubt Q3 earnings will be strong starting a week from today. We will likely see EPS gains of 20% YoY and possibly a 3rd straight quarter of revenue gains in double digits.

Oil prices at 4 year highs cuts both ways. On the downside, with a few dollars out of consumers’ pockets, we buy the upside of a big boost for the overall economy from spending and hiring in the energy sector. I’m not buying into the $100 Oil scenario, but clearly the sanctions scheduled to take Iran off line in a month remain the central story for Oil pricing going into the year end.