Stock market participants looking for a reprieve from the selling pressure didn't get any on Thursday. The major indices cascaded lower in unison, posting losses between 2.9% (Russell 2000) and 4.2% (Dow Jones Industrial Average).
Part of the problem was rooted in the expectation that the stock market would bounce back quickly from a jarring sell-off that got rolling last Friday. That didn't happen, and when it became even more apparent that it wouldn't, weak-handed holders of long positions checked out of those positions and exacerbated the selling pressure.
It was more that that, though. Weak-handed holders weren't the only sellers.
There was a general effort to de-risk, evidenced by the indiscriminate nature of Thursday's selling. Every sector was caught up in it, as was every pocket of the market from small caps, to mid caps, to large caps, to mega caps.
Presumably, there was some forced liquidation.
There is a lot to pick and choose from in terms of what was behind Thursday's selling interest, which culminated with the S&P 500 taking out Monday's intraday low of 2593.07. Its closing price of 2581.00 left the S&P 500 down 10.2% from its record high on January 26 -- just nine trading sessions ago. Similarly, the Dow Jones Industrial Average has dropped 10.4% from the record high it registered on January 26.
A 10% pullback from a prior high will be referred to by many as a "correction." A bear market label doesn't enter the vernacular until there is a 20% pullback.
Investor sentiment is understandably on shaky ground this morning.
Markets in Asia got slammed, with China's Shanghai Composite falling 4.1%. Major bourses in Europe are down, although their losses have been more modest in comparison, ranging from 0.8% to 1.2%.
The opening move for major indices in the U.S. is expected to be a positive one. The S&P 500 futures are up 14 points in a fast-moving futures trade and are trading 1.2% above fair value; however, they had been up as many as 23 points overnight.
Speaking of overnight, Congress voted to pass a budget plan that will boost spending by approximately $300 billion over the next two years, provide an additional $90 billion for disaster aid, and extend the debt ceiling until 2019.
That vote came to pass, though, after a midnight deadline, so there was technically a government shutdown for a little less than six hours when most people were asleep.
It's good for the stock and bond markets to know that the debt ceiling drama will be avoided, but even so, the deal doesn't change the markets' understanding that the budget deficit and national debt will be increasing as a result of the budget agreement.
The manner in which that understanding gets priced into the Treasury market will have some influence over the manner in which the stock market trades (and not just today), but if interest rates keep pressing higher, it is reasonable to assume that the path forward for stocks is apt to be less smooth than it has been in recent years.
In any case, don't be surprised if you hear the budget agreement being discussed as a basis for the positive start since it's a connect-the-dots kind of headline that matches the tenor of the market at this time. Of course, if things swing back the other way, it will just as easily be said that deficit concerns on the other side of the budget agreement are weighing on the market.
The stock market is desperately seeking some type of foundational basis to extinguish the brush fire of selling interest.
Positive earnings news and economic data haven't sufficed so far as a remedy.
Perhaps it will take reports like the ones indicating there were record outflows from U.S. stock funds in the week ended February 7, and that bearish sentiment among individual investors is back above its historical average, to settle things down. After all, it was excessive optimism and investor complacency that proved to be the spark that lit the recent conflagration.
Hearing that those perspectives have been properly adjusted, and seeing how they have been wrung out of stock prices, is a step toward putting out the fire.