The collapse in oil prices over the weekend added uncertainty coming into this week.
And the stock market seems to be focused on what the collapse in bond yields (and crude oil) are implying about global growth outlook.
On this front, it was encouraging on Monday that copper prices stabilized and found support near their early-year lows.
Selling in stocks was intense all day, with circuit breakers being triggered (leading to a 15-minute halt in trading this morning) for first time since 1997.
By the end of the day, the S&P 500 Index posted its largest percentage point decline since 2008. The index closed at its lowest level since June and is now 19% below the all-time high reached just 13 trading sessions ago.
Today’s weakness was accompanied by an expansion in both downside momentum (nearly 30:1 downside volume on the NYSE) and the new low list.
Evidence of deteriorating broad market conditions could also be seen at the index level. The Broker/Dealer index, the Dow Transports and the Value Line Geometric Index are all near or below their December 2018 lows. European stocks were weak as well and indexes there are down nearly 20% on a year-to-date basis.
Evidence of expanding pessimism could be seen in the options market. The VIX fear index soared to its highest close since 2009 and the CBOE put/call ratio finished the day near the all-time high reached in December 2018.
Missing from Monday’s sell-off was a spike in the TRIN (a reading above 2 typically occurs as stocks reach near-term selling climaxes – it was well below 1 today).
We will also be watching the sentiment surveys this week for evidence of more pessimism than we have seen to date. Coming into this week, bulls and bears are evenly matched on the AAII survey of individual investors while among advisory services, bulls outnumbered bears by two-to-one. At a good low, we would expect to see at least as many bears as bulls among advisory services and AAII bears approaching 50%. This evidence of more widespread pessimism would support the market’s attempts to find a near-term bottom.
Given the intensity of the selling experienced over the past three weeks, rally attempts remain possible. Rather than just react to price moves, we want to see at least two days in which upside volume outpaces downside volume by better than 9-to-1.
Bottom line: After a 19% decline in the S&P 500, near-term rally attempts are possible. Given the intensity of the recent selling, we continue to look for multiple 9-to-1 up volume days to give us confidence that downside momentum has been broken. Until then, investors are encouraged to remain patient and keep their powder dry.
Twitter: @WillieDelwiche
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
