The verdict is in about Monday's stunning market action. It was not a mass sell-off catalyzed by a fundamental development. To that end, interest rates went down (mostly because of the panicky selling in the stock market), earnings news continued to be good, and the ISM Non-Manufacturing PMI report printed its strongest reading since August 2005.
What transpired on Monday was technical, mechanical, and psychological in nature. From our vantage point, though, it flew in the face of what a "healthy correction" should be.
There was some semblance of a mini "flash crash" as the Dow Jones Industrial Average cascaded nearly 1600 points lower. It was the worst price action in a literal sense, but to the larger point, it was the worst thing for recent (re)entrants to the market who might have finally thought they could place their trust -- and money -- in the stock market again after missing out on huge gains over the years.
That trust was washed away by a wave of programmatic selling that showed the perils of a market that has been inundated with clever-sounding ETFs, some of which have blown up like bombs, and a "can't lose" mentality.
The spike in the CBOE Volatility Index, which jumped more than 100% in its largest single day move ever, served as a focal point of how complacent market participants had gotten with the idea that volatility was destined to remain subdued. It also reflected a panicky rush to hedge portfolios against further downside risk in the near term.
That move hasn't been completed yet either. The CBOE Volatility Index is up another 32% this morning to 49.21 as rumors swirl about a possible liquidation of ETFs that enabled participants to short volatility.
Additionally, speculation about margin calls has added to the sense that the broader market is not out of the selling woods yet.
The futures market has been all over the map, reflecting the pickup in trading volatility.
The S&P futures were down 23 points and trading 2.4% below fair value. The Nasdaq 100 futures were down 50 points and trading 1.9% below fair value. The Dow Jones Industrial Average futures were down 303 points and trading 2.8% below fair value.
Now, the S&P futures are up one point and are trading 1.6% below fair value. The Nasdaq 100 futures are up 15 points, and the Dow Jones Industrial Average futures are down 115 points.
Naturally, foreign markets got in line behind the U.S. market. Major indices in Asia dropped between 3.4% and 5.1% today while major European bourses are down between 2.0% and 3.0%.
What might sound crazy to some readers is that the blowout in the VIX Index, the flight to safety into bonds, and the elevated level of the TRIN (measures the number of advancers/decliners to the volume on advancers/decliners) hint at the notion that the stock market is experiencing some type of capitulation sell-off.
That doesn't necessarily mean the stock market is going to bottom today, but it suggests the stock market could be getting closer to an end that gives way to a rebound or a therapeutic period of sideways action.
All of the other news -- the better than expected earnings guidance from Micron (MU), the better than expected earnings results from General Motors (GM), Tapestry (TPR), Cummins (CMI), and Archer Daniels Midland (ADM) -- is just background material at the moment.
Separately, the Trade Balance Report for December showed a widening in the deficit to $53.1 billion (Briefing.com consensus -$52.3 billion) from a revised $50.4 billion (from -$50.5 billion) in November. The widening was a result of exports increasing $3.5 billion and imports increasing $6.2 billion.
The December trade deficit was the largest since October 2008 and it revealed increased trade deficits with the European Union and China. The key takeaway from the report, then, is that it is apt to feed concerns about protectionist trade policies being adopted in an attempt to narrow those trade deficits.
That thought will fester in the background along with other news.
The stock market, however, is the news -- and specifically the manner in which it trades today.
Monday's selling might not have been fundamentally based, yet that doesn't mean it didn't have a fundamental effect on investor psychology as it helped erase this year's gains in a flash.
The S&P 500, up 7.5% as of January 26, is down 0.9% in a year that has produced stunning gains and losses mostly on the back of technical, mechanical, and psychological dealings.