Have you ever heard of the saying “Be careful what you wished for?” It turns out that traders wished to see some growth in average hourly wages, some inflation over deflation and yields on long duration bonds to go up. They got their wish which started a violent market correction.
Market watchers remain at odds over what tripped the sell switch. Primarily, the conversation comes down to fundamental vs. technical. In the days since the correction began the markets have recouped more than half the downside since the low point.
Plenty of theories, I call mine “The Domino Effect”
Inflation fears was the first domino to fall hitting the fear of raising interest rates. The next domino to fall was money managers and institutional investors were caught with a lot of leveraged positions. The sharp fall triggered margin calls causing massive sell orders. This initiated sell orders from funds that use technical analysis better known as quantitative funds. The last domino to fall was retail investors (who haven’t seen a correction in over two years) did some panic selling.
The Dow suffered two drops of 1,000 points. The fall seems big but the actual percentage was not extraordinary. There have been larger percentage drops in the past. In my 35 years of investing, I have experienced some worse percentage downward moves.
|Rank||Date||Close||Net change||% change|
|8||October 26, 1987||1,793.93||−156.83||−8.04|
|9||October 15, 2008||8,577.91||−733.08||−7.87|
Is the correction over?
The market fundamentals haven’t really changed. U.S. corporate earnings are getting better and the Trump tax cuts should boost economic growth. Plus there is systematic economic growth happening in both developed and emerging markets.
I am not an expert on technical analysis and I don’t believe in buying or selling based on lines on chart. However, pension funds, hedge funds and quantitative funds use technical indicators to manage a large amount of investors’ money.
Analysis from Kensho, a quantitative analytics tool used by hedge funds, looked at seven occasions of similarly sharp drops in the S&P 500 beginning in 1987. The study found that following such a drop, stocks tended to fall further, with a median decline of 2.29 percent one week later and a drop of 1.68 percent two weeks later.
This is the ABCD bullish chart:
This is the year to date chart of the S&P 500:
In my humble opinion, corrections tend to last more than nine days. I put some money to work last week and plan on dollar cost averaging on some more positions. If you are new to my blog, consider reading: Dollar-cost averaging using an option strategy