Investing

Friday's Stock Market Panic, by the Numbers ... and Keeping It All Relative

Jon C. Ogg

Published: February 2, 2018 4:41 pm

Last Updated: January 12, 2020 3:47 am

Is volatility finally back? You bet your assets it is. The Dow Jones Industrials fell well over 600 points into the closing bell, and the major equity indexes followed suit. As a reminder, investors have been stating openly that they wanted a big pullback so they could buy more of their favorite stocks. The only problem is that most retail investors usually freeze during sell-offs because they are scary while they are happening.

24/7 Wall St. wanted to get into some of the major index readings and market movers. First, perhaps the words of Warren Buffett should be considered during a big sell-off: Be fearful when others are greedy, and be greedy when others are fearful.

Last weekend we told our daily email subscribers how surprising it was that the Dow Jones Industrial Average had already crossed 26,400 and the S&P 500 hit 2,855 as our official baseline targets for 2018. We warned when these were issued that our baseline targets felt too conservative, but it was still surprising. Then the market selling began shortly thereafter.

Friday’s sell-off took the CBOE Volatility Index (VIX) up 29% to 17.40. That appears to have challenged highs for a year or more.

One issue to consider is that Merrill Lynch issued a technical note late in the week saying that the recent price action and sentiment versus inflows was near-term bearish. The firm also warned that the stock market is not oversold yet, and it even sees the possibility for that 5% to 10% correction.

The 10-year Treasury yield jumped to 2.85% and the 30 year Treasury yield hit 3.10% on Friday. These levels now matter, even if they are not yet at our 2018 targets for higher yields. It’s important to not forget about the yield war that takes place between stocks and bonds during rotations.

The median yield on the Dow’s 30 stocks is only now about 2.0%, versus better than 2.1% at the start of the year. These Treasury yields are reaching the point that they almost have to compete against stocks for new money. The 10-year yield was at 2.40% at the end of 2017, so it’s up 45 basis points. The 30-year yield was up over 35 basis points from the end of 2017.

Bad earnings trumped good earnings on Friday. Apple fell 4% and Alphabet slid over 5% after earnings. Oil giants were pounded, with Exxon Mobil down 5.5% and Chevron down 5.7%. Big post-earnings and other news-related losers this week were Albermarle, Ford, Harley-Davidson, Hershey, MetLife, PayPal, Starbucks, UPS, Wynn and so on. Friday did have some big gainers on the day: Amazon, Mattel, Athenahealth, Sony, Sprint, Charter Communications, Edwards Lifesciences and Embraer.

West Texas Intermediate crude oil was a big disappointment this week, but in an asset sell-off everything is for sale. It was $66 at the end of the prior week, but it was closer to $65 late on Friday, versus about $60.50 at the end of 2017. Even gold was down almost $15 on Friday, and that shiny useless metal is supposed to be the “safe haven.”

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Stock market corrections feel very scary when they are happening. The problem about this correction is that the points lost feel big at 665 on the Dow, 145 on the Nasdaq and almost 60 on the S&P 500. The reality is that these translate to overall share losses of 2.5% on the Dow, 2.1% on the S&P 500 and more than 1.95% on the Nasdaq. After last year’s gains and after the big gains of January, that’s just not that big a deal.

Hopefully, bitcoin was avoided this week by sensible investors. After peaking at close to $20,000 in December, bitcoin was at $11,400 a week ago, and it was under $9,000 on Friday. Please see our chart reference tweeted out this week comparing bitcoin to the “IIX” Internet Index back ahead of, during and after the dot-com bubble from 1999.

Stay tuned. Next week is a new week.