The stock market had one of those terrible, horrible, no good, very bad days on Wednesday. They happen, and they hurt, and they create lots of questions, the two most prominent always being: why and what now?
The answer to 'why' is open for interpretation and the answer to 'what now' is open for debate.
The reason(s) why we think the market did what it did include the following:
- There was a technical breakdown, highlighted by the S&P 500 falling below its 50-day moving average at the open and triggering stop-loss orders that exacerbated the selling pressure.
- The information technology sector, and particularly the semiconductor stocks, continued to be sold and the lack of any buy-the-dip defense in this widely-owned sector weighed further on investor sentiment.
- There was an unwinding of crowded trades in highly-valued, and heavily-weighted, momentum stocks that pressured the major indices.
- Selling pressure invited more selling pressure as it became apparent that the stock market wasn't recovering. In other words, the group think that carried the indices to record highs not that long ago reversed and precipitated sharp losses in the major indices.
- The market worried about downward revisions to earnings growth estimates as it contemplated the emergence of rising interest rates, tariff impacts, and higher costs.
In brief, there was a collective de-risking as market participants cut their exposure to stocks, unsettled by the technical deterioration of the major indices, the fundamental challenge being presented by rising interest rates, and the psychological test being presented with the sobering price action.
So, what now? That is the question, isn't it?
Currently, the futures for the major indices are pointing to modest losses at the open, which is a stark improvement from overnight when they were signalling much larger losses.
To wit, the S&P futures were down as many as 34 points and were 1.5% below fair value. Now they are down just two points and are trading 0.4% below fair value. The Nasdaq 100 futures are down five points and the Dow Jones Industrial Average futures are down 71 points, which leaves them approximately 0.5% below fair value.
The rebound action has been partly driven by an expectation that stocks would stage a quick reversal from an early sell-off, driven by the belief that they had gotten too oversold on a short-term basis. The other change agent was the Consumer Price Index (CPI) for September, which was weaker than expected.
Total CPI and core CPI, which excludes food and energy, increased 0.1%. Both were expected to increase 0.2%, according to the Briefing.com consensus estimate.
Those monthly increases left total CPI up 2.3% year-over-year, versus 2.7% in August, and core CPI up 2.2%, unchanged from August.
The key takeaway from the report is that it helped temper concerns about rising inflation for the time being, yet with total CPI and core CPI running above the Fed's longer-run inflation target of 2.0%, it still left little reason to think the Fed is going to back away from a rate hike in December.
The latter point notwithstanding, the palatable monthly readings were received well by the Treasury market and that has been a helpful influence for the futures market.
The 10-yr note yield is down seven basis points to 3.16%.
Separately, initial claims for the week ending October 6 increased by 7,000 to 214,000 (Briefing.com consensus 205,000) while continuing claims for the week ending September 29 increased by 4,000 to 1.66 million.
The key takeaway from that report is that it remains reflective of a tight labor market, which will catch the Fed's eye as a contributing factor for why it can validate the continuation of gradual rate hikes.
Perhaps that thinking comes back to bother both the Treasury market and the stock market.
Time will tell, but for now, the opening indication can be regarded as a tentative one that is going to keep market participants in tape-watching mode as they aim to see what's next as today's session unfolds.