Thursday's stock sell-off jeopardizes a 4-year uptrend
Stocks were slammed on Thursday as if clobbered with a lead pipe. The dull thud reverberated as investors -- who had settled into a comfortable, low-volatility slide all year long -- were suddenly jolted.
Sure, individual stocks have been falling, one by one, all year long: Heading into today's session, less than 50 percent of the stocks in the S&P 500 were even in uptrends. The major averages were held aloft by the fewest number of stocks in 15 years.
But now, these so-called momentum favorites are rolling over for various reasons, from the fear of cord-cutting with Disney (DIS) to a too-honest conference call from Twitter (TWTR) and worries over Chinese sales for Apple (AAPL). The result, as shown below, is the S&P 500 has sliced under its 200-day moving average. It's now at risk of violating the uptrend that's been in place since 2011 as the index -- which ended Thursday trading down 44 points, or 2.1 percent, to 2,036 -- leaves the trading range centered on the 2,100 level.
This, as you can imagine, is a big deal.
The S&P 500 hasn't suffered a typical 10 percent correction since 2012 -- the third-longest rally since 1940. Bank of America Merrill Lynch recently warned clients that the relationship between high-growth momentum stocks and value stocks had reached the highest since 2000. Market history since 1986 shows that when momentum breaks, these stocks suffer a loss of 25 percent on average.
Larger macroeconomic factors are in play as well, including the drag from China (market volatility, currency devaluation and weak economic data), corporate earnings (from the strong dollar's drag and falling energy prices) and fears of a possible interest rate hike from the Federal Reserve (which hasn't happened since 2006).
In additions to worries about global growth and emerging market troubles, Thursday's sell-off was driven in part by concerns over the Fed factor after an initially dovish reaction to the release of the central bank's July meeting minutes on Wednesday gave way to a more nuanced view. Sparing you the nitty gritty details, traders seem concerned the Fed could be mulling a rate hike at its Sept. 17 policy announcement despite a lack of progress on pushing inflation back to the central bank's 2 percent target.
The reason? This statement from the minutes: "Many participants indicated that their outlook for sustained economic growth and further improvement in labor markets was key in supporting their expectation that inflation would move up to the Committee's two percent objective."
Translation: Even if inflation remains soft, the Fed could pull the trigger on rate liftoff based on stable GDP growth and steady job gains.
As a result, investors are flocking to the safety of U.S. Treasury bonds and precious metals while dumping shares of the "FANG" stocks that had supported the market for so long: Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG).
The big question is whether the Fed will ignore the building financial market turmoil or be pressured into waiting, not unlike how the Fed delayed tapering the QE3 bond-buying program in September 2013 after the bond market "taper tantrum" of earlier that year.
After months in the doldrums, excitement sure has returned to Wall Street.
