Stock Market: It's Time to Take a Deep Breath

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Global markets grew jittery in recent days as fears about growth in China took hold. "The larger the stimulus used by China to offset the trade war impact, the bigger will its deficit likely be," said Tao Wang, UBS's chief China economist, in a report on Tuesday. In addition to this, the ongoing Italian debt crisis and the rising price of oil are also causing concern in the markets.

I have been wondering when the next flash crash was going to happen, but yesterday's sell-off was more of a total bloodbath and the selling never let up all day. The VIX closed up 7.01 or 43.95% to 22.96, at the high tick of the day.

I am not an economist, but when the world's two largest economies are in a major trade war and stacking tariffs on each other's goods, there has to be a fallout. With Europe a weak link right now, it's fortunate that the markets didn't fall harder.

Yesterday, the Dow industrials experienced the largest October retreat since the financial crisis of 2008 and are now down 4.6% from an all-time high set on October 3rd. The S&P’s 2.69% drop marked its fifth consecutive session of declines, and the tech-heavy Nasdaq Composite plunged 4.1%, extending its loss percentage for the month to 7.8%, suffering its worst start to a fourth-quarter since 2008, when it fell 21%.

This morning, the market could see another rash of large margin selling. Many of the stock, futures, and options clearing firms were not able to put out the late-day margin calls, so they went out after the close. This indicates that customers were unable to wire more money in to hold the positions, which I think means more liquidation on the open. Also, some Vanguard customers had technical issues logging on to their accounts online and by phone. I am reminded of August 2015 when the Dow dropped 1,000 points on the open and no one could get VIX quotes. This type of stuff really spooks people and the markets.

Our View: Everyone is already very bearish, but that doesn't mean the markets can't fall further today. Yesterday, Netflix Inc. (NFLX -8.38%) dropped 8.4%, Inc. (AMZN -6.15%) declined 6.2% and Apple Inc. (AAPL -4.63%) was off 4.6%, accounting for $120 billion in lost market value. The Nasdaq has given back more than 50% of its gains on the year, and I do not think the tech selling is over.  

I want to see what happens overnight and get a look at the early price action. I do not doubt we can sell lower prices, but I think there could there be some type of PitBull Thursday / Friday bounce before next week's expiration. I have to admit that things do not look good.


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