Market Overview

Winter's Stock Knockdown May Give Way To A Spring Thaw

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The questions raised by last week's stock market sell-off are simple: How long and how deep?

The short answers are: The sell-off may get deeper, but it won't last forever. Stocks opened higher on Monday, creating hope of a short end to the selling. But the early gains were gone by noon. Maybe the sell-off will be short-lived. "Maybe" is the key word.  

Spring, however, may make investors happier.

The sell-off was nasty, especially on Friday when the Dow Jones industrials fell 318 points, or two percent, to 15,879, the biggest one-day loss for the blue chips since June 20. Its two-day loss of 494 points was its biggest since October 2011 during the federal budget crisis.

The Standard & Poor's 500 Index and the Nasdaq Composite Index dropped 2.1 percent and 2.2 percent, respectively. For the month, the Dow is down 4.2 percent, with the S&P 500 down 2.1 percent and the Nasdaq down 1.2 percent.

If you are fan of the Stock Trader's Almanac and its January Barometer, you know these are not good numbers, suggesting a flat year for the U.S. stock market at the very least.

The catalysts -- and you always need one for a sell-off -- were:

  • Worries about emerging markets -- because of tumbling currencies in Asia, Turkey and Latin America.
  • Worries that China's growth is slowing dramatically; which would wound emerging economies like Brazil, India and South Africa.
  • Worries the Federal Reserve's tapering would raise interest rates too far and too fast. Fact is, however, interest rates have been falling this month.
  • Fears of disappointing U.S. corporate earnings and an economy that hasn’t looked especially vibrant of late.

In and of themselves, the losses themselves aren't huge, but the market looks now to have put in a near-term peak on Dec. 31, when the Dow and S&P closed at new records. The Nasdaq hit a 14-year high on Jan. 22 and is still 18 percent its March 2000 peak.

Related: What Will January Tell Us About Stocks This Year?

So far, 28 of the 30 Dow stocks are lower in January; Boeing Co. (NYSE: BA) and Merck & Co. (NYSE: MRK) are the only winners. Twelve of the 30 Dow stocks are off by more than 5 percent; the biggest loser is General Electric Co. (NYSE: GE), down about 11 percent as of Friday.

In addition, more than 370 stocks in the stocks in the S&P 500 are lower this month. Best Buy Co. (NYSE: BBY) is the biggest loser, down 37.3%. Sixty-four stocks in the Nasdaq-100 Index are down for the month, with Bed Bath & Beyond (NASDAQ: BBBY) the laggard, down 19.6 percent. Mighty Apple (NASDAQ: AAPL), which reports its big fiscal-first-quarter results after the close, is down 2.7 percent.

There were technical breakdowns in the sell-off. The Dow and S&P 500 dropped under 16,000 and 1,800, respectively, for the first time since Dec. 17. The Nasdaq's Friday close of 4,128 was its worst since Dec. 20. The Dow and S&P 500 are now trading under their simple 50-day moving averages. The 50-day average is a key barometer of investor confidence.

So, things look really lousy, right? Well, Yes and no.

The 14-day relative strength indexes for the Dow, S&P and Nasdaq are all under 40, which suggests two things: market weakness (of course) but also a market that's getting close to being oversold.

Still, last week's sell-off was a shock. It will take a little time for traders, corporate executives and consumers around the world to understand what really is going on.

That's why Monday's decent open has the potential to be disappoint, with a deeper pullback. For more than a year, pundits have been saying an 8 percent to 10 percent pullback is in the cards. There are, of course, the permabulls, who see a 50 percent collapse.

The S&P 500's biggest pullback in 2013 was only 5.76 percent, between May 21 and June 24 -- when Federal Reserve Chairman Ben Bernanke first started to talk about the central bank's reducing its bond buying from $85 billion a month. Interest rates pushed higher, with the 10-year Treasury yield piercing 3 percent. Bond and stock prices fell.  That is, until the Fed managed to convince markets that tapering its bond purchases did not immediately translate into higher interest rates.

An 8-percent-to-10 percent pullback is fairly normal. In 2012, the S&P 500 fell 10 percent in the spring. The index declined 8 percent after President Barack Obama was reelected. And, despite all that, the S&P finished the year up 13.4 percent.

The market pullback in the summer and early fall of 2011 was deeper, nearly 19 percent. And it took the Fed to bring some order to the mess in Washington, vowing to make sure the financial system had plenty of liquidity.

The week's earnings and economic events may not provide the fuel for a big rebound. Caterpillar (NYSE: CAT) reported better-than-expected earnings for the fourth quarter, even if sales were sluggish. There's Apple's earnings ahead and the Fed meeting, starting Tuesday. Most analysts see the Fed continuing to reduce its bond buying.

Results from truck-maker Paccar (NASDAQ: PCAR), toymaker Mattel (NASDAQ: MAT) and lumber-and-paper maker Weyerhaeuser (NYSE: WY) on Friday may offer a glimpse of what's ahead.

A real rebound will start perhaps in late February and early March, when it becomes clear that the Fed is serious about raising interest rates slowly. The currency problems will ease as well. China's economic condition will be clearer.

Most importantly, what's been a brutal winter will start to give way to spring. Economic activity has been slammed this month by blizzards, sub-zero temperatures, traffic disruptions and the like. The economic data for January won't be very good, adding to the disappointments with holiday spending.

But the crummy January data (and maybe February, weather depending) will be a temporary condition. It's likely there's a lot of pent-up demand, and when the weather improves, that demand will have to be satisfied. 

Posted-In: Ben BernankeNews Economics Federal Reserve Pre-Market Outlook Intraday Update After-Hours Center Markets Best of Benzinga

 

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