Further Downside, More Profit-Taking on the Eve of Q3 Earnings

Stocks traded in a wide range Thursday, while in negative territory all day. Oil added to its correction from Wednesday inspiring further profit taking in energy stocks. The technology sector held up better than the broad market, contra to yesterday. Notably, Alphabet Inc (GOOG), Facebook Inc. (FB) and Microsoft Corporation (MSFT) finished green along with a few names in the semiconductor space.

Volumes were brisk as the largest investors moved to reallocate assets in response to higher interest rates and the likelihood of a slowing in the rate of earnings growth following imminent Q3 reporting season. With bond yields offering the highest returns in 7 years, diversified funds may be increasing their fixed income exposure, particularly after stellar equity performance in Q3. As market averages doubled their losses between 2:30 and 3:00 PM there was exceptionally downside volume in broad market equity ETFS accompanied by a sharp spike in the upside volume of bond surrogate ETFs.

This was clearly a result of an asset allocation shift from stocks to bonds at macro level by 1 or more large institutional manager.

Additionally, relative price action among stock sectors clearly indicates a lowering of exposure in high beta names with stretched valuations in favor of names and sectors that have trailed market performance most of the year.

Where yesterday the market action reflected wholesale liquidation across all sectors, today was emblematic of a Valuation Correction. Market Breadth data after the close reinforces the sector price action that jumped off the screen at us during the day. Breadth was decidedly negative, but not quite the total indiscriminate selling from Wednesday:

Declining issues led advancers by just less than 4 to 1. Yesterday issues were 8 to 1 negative.

Down volume was 5x Up volume. Yesterday Dvol was 10x Uvol.

The New York Stock Exchange (NYSE) had 526 new 52 week lows following 502 new lows yesterday. While this does give us 2 days in a row with 500+ new lows, it’s very likely that a high percentage of today’s new lows ore the same stocks that made new lows yesterday. Given that the two indicators above showed improvement, it’s hard to be convinced the selling has been totally exhausted.