Eye of the Storm: Markets Look to Q3 Earnings After Selloff

Stocks had their largest day to the downside since June, exactly one week after the Dow Jones Industrial Average (.DJI) celebrated a string of 3 consecutive all-time highs. This “correction” actually started mid day on October 3rd, sparked by comments from FED Chairman Jerome Powell on “how remarkably strong the economy was.”

Markets should give Chairman Powell a “pass” for not pre screening his comments through an English to “Fed Speak” translation service. Not being an academically programmed PhD economist, the FED Chair clearly thought he was giving the economy and the current state of fiscal policy his highest compliment.

Still relatively new in his role, Chairman Powell missed the translation that “remarkably strong” in FED Speak comes through as “we’re going to aggressively tighten at a faster rate and for longer than you think”. The bond market took immediate notice. The benchmark 10 year note, which had been meandering just above the 3% threshold for a week and a half, closed the day above 3.15% the highest yields seen in over 7 years. The following day it hit 3.2%, and spent the following 3 days between 3.2% and 3.25%.

Stocks reacted with less vigor. While the DJIA gave up two-thirds of its midday gains it still logged a 3rd straight all time high, while the S&P 500 (.INX) mass posting a fresh high by merely 5 points.

Finally, a full week later, equity markets succumbed to the relentless drumbeat of “impending inflation”, “higher rates choking off the economy”, “peak earnings”,  “burgeoning budget deficits”, “panic at Wall and Broad”.

Just to put it in perspective, the sell off yesterday doesn’t even rant on the Top 50 largest declines in the annals of financial history.  Much like hurricane Michael, which a week ago had the “possibility” being upgraded from a tropical storm to a hurricane, the ingredients for this selloff percolated behind the scenes for the better part of a week, rapidly developing into a storm that hit with accelerating force on Wednesday.

The biggest difference between Wednesday and the sell offs earlier in the week, that lost steam and self corrected by days end was that Oil was lower by close to $2 yesterday, sparking a sharp correction in energy stocks, which had provided support for an otherwise weak market earlier in the weak.

3 Key Data Points:

• Declining issues led Advancing issues by 10 to 1.  On Monday and Tuesday, this was fractionally less than 50/50.

• Down Volume was 90% of total volume.  If Down volume hits 90% of total volume 2 days in a row, many technical analysts will call the market oversold on at least a short term basis.

• The NYSE had 502 new 52 week lows.  Similar to UVOL/DVOL, the 52 week lows could give an oversold signal with a reading above 500 2 days in a row.

Early Thursday morning the 10-Year Treasury Yield (US10YBY) is below 3.2% for the first time in a week. The Treasury issued 3 year and 10 year notes yesterday, and we’ll get results from today’s 30 year bond auction at 1:00 PM today. Expect a relief rally in the bond market after completion of this 2 day auction. Likewise, a relief rally in stocks either this afternoon, tomorrow, or early next week as the focus turns to Q3 earnings.