What Happens from Here?

So what do the markets do from here?  Nobody knows.  However, I did look back at historical time periods when the S&P 500 had similar moves to Monday.  In doing this I came upon a report by Ari Wald, Chief Technical Strategist from Oppenheimer.

Wald sees the market following the 2011 road map and expects a similar three-stage process: a high-intensity low like yesterday, followed by a relief rally, then another low point reached with lesser intensity. That low-intensity low would "be a sign that selling is abating, a base has sufficiently developed, and that the broad market is ready to inflect higher."

The chart below shows what Wald is referring to:

History doesn’t always repeat itself, but this would be a very normal pattern to watch for.

On a final note, I expect that volatility will continue into the Fall but more on that in my next note…

Some Perspective

At moments like these I think it makes sense to put things into perspective.  That does not discount the worry that comes along with violent downward moves. 

The violent downward moves are exacerbated by the large amount of program trading that exists in the market.  These programs can feed on each other and cause even more selling.

A couple of weeks ago I sent out a market update talking about the dramatic number of stocks that were down over 10% from their highs although the S&P 500 was hardly down.  The last week and what will come today will change that.  The level of the index will now more directly reflect the level of the stocks that compose it.

People will attribute this selloff to China, the emerging markets, commodities, a global economic slowdown and worry about whether or not the Federal Reserve is still providing a backstop to the market.  Regardless of the reason, all of which I am not sure have anything to do with the selloff, sometimes selling begets selling and panic can beget panic.

The US economy remains unchanged from 2 weeks ago.  The market has now more opportunity than it did 2 weeks ago.  It may go down further from here, but we will look for the opportunities that selloffs can create.

To help keep things in perspective here is a chart of the S&P 500 over the past year and also the S&P over the last 5 years.  Looking at the market in a longer term hopefully makes these down moves seem a little less painful.

S&P 500 Over the Last 5 Years

Market Volatility

You have probably been hearing a lot about China devaluing the Yuan and worries about the Fed raising interest rates in September as the cause of the recent market sell off.

In recent discussions with clients I have been referencing the chart above.  The chart shows that although the S&P 500 was recently only 3% below its high, there were 252 companies within that index that were greater than 10% below their own recent highs.  That number has only increased in August. 

My feeling is that the recent volatility in the market is a reflection of this.  The large names that were holding the index at higher levels (Apple to name one) have been losing value and the index may be on its way to more appropriately representing the value of the stocks that comprise it.

Please keep in mind that even with today’s sell off the market is only off 3.5% from its highs and this should not be a reason to panic.