foxex: Mercy!

Insight after the bell

By Caleb Silver, Editor in Chief

Thursday:

Perspective! How to process the last 24 hours of volatility
Fed bashing is not the answer, Mr. President
Chart of the Day: Nasty correction for Nasdaq

#1 Markets in a volatility chokehold. Perspective!
Is it safe to look yet? If you looked away for half a minute today, you may have missed a 200 point swing in the DJIA in either direction. The Nasdaq officially fell into a correction… the first of the major U.S. markets to do so. Remember - a correction is a ten percent decline from an index or security's most recent highs. It's not a crash… at least not yet.

It's Volatility with a capital V, and we are in the throes of it. Guess what? That's normal for October. It may have felt like we were thrown out of a moving car, but that's because the 3rd quarter was one of the least volatile quarters since 1963. It hurts.

Here's the losses across the major markets since start of trading yesterday:
DJIA: -5.25% or -1,388 points
S&P 500: -5.06% or -145 points
NASDAQ: -4.74% or -365 points
VIX: +57.76% or 9.26 points

Now, let's put it into perspective.
October is notoriously rocky - especially in election years.
Ryan Detrick of LPL Financial puts it into focus:

"It was the first year since 1963 that the index's usually volatile third quarter didn't have a single 1% change (up or down). The S&P 500 had gone 74 consecutive days without a 1% move—the 10th longest streak in history. The bottom line is: Equity markets were wound tight and some type of volatility was likely."

Here it is in a chart:

Why it Matters:

The historical perspective is always useful. It makes Wednesday's sell-off a little easier to swallow. Michael Batnick of Ritholtz Wealth Management cast an even bigger net over the 800-point sell-off we saw yesterday.

He notes that yesterday was the third-worst point decline for the Dow since 1915. But it was only the 284th-worst day in history, and a Black Monday type of event would have whacked nearly 6,000 points off the index.

This would have been a very different newsletter had that happened. Batnick's chart paints a more palatable picture… kind of like looking at a geological timeline of Earth… except shorter and our money is in those markets.

What's Next: Friday, thankfully. But we are only in the first trimester of October and we have a midterm election coming up in less than a month. That will add more volatility to the mix.

Ryan Detrick again on midterms and markets:

Stocks tend to do very well after midterm elections. The average 12-month gain from the lows in a midterm election year is over 30%, and since 1946 the S&P 500 has never been down 12 months following midterm elections. That means we may have just entered the best 9-month period for stocks in the entire 4-year presidential cycle.
Pullbacks are normal. Even though stocks tend to average a 7–8% gain each year, they also tend to have three to four pullbacks each year (5–10% drops) and at least one 10–20% correction.* We got both earlier this year but history tells us we may get more.

If you are a long-term investor you have to be able to handle the dips and the rips. That doesn't excuse you from diversifying your portfolio and making sure you aren't taking more risks than you can handle. It's been a great ride for stocks the past 9 years, and especially the past 2 years. If you need to take some profit off the table and put it somewhere a little more secure, it's your money. Protect it.

Read More:

The Biggest Market Sell-Offs in History

Wall St Extends Slide with Trade and Rates in Focus

#2 - Fed bashing is not the answer

President Trump won't stop blaming FOMC Chair Jerome Powell for the market madness. Remember that Trump appointed Powell, replacing Janet Yellen as Chair. In public, the President has called Powell and the Fed, "loco", "Out of control", and who knows what else was said behind closed doors. Trump objects to the Fed's raising interest rates because he thinks that is what is causing investors to dump stocks. It may be a factor, but the tariff war is what's actually keeping CEO's awake at night, not their borrowing costs - which are still relatively low.

Why it Matters: The Federal Reserve is independent. That's the way it was set up in 1913 when President Woodrow Wilson signed the Federal Reserve Act into law. It was and always has been a decentralized bank removed from the influence of the Executive office with the goal of keeping unemployment low and inflation at sustainable levels. It is not a lever to add fuel to the stock market so that a president, any president, can take credit for it.

What's Next: Trump says he won't fire Powell. Really??!! Trump says he won't fire Powell. Really??!! And even if he wants to, its not going to be as easy as saying 'You're fired.'

Read More:

Why Is The Federal Reserve Independent?

Can The Fed Really Cause A Stock Crash As Trump Claims?

Chart of the Day: Nasdaq enters correction territory as tech stocks continue sell-off

As markets continued to tumble and volatility remained sharply elevated on Thursday, worried investors may be wondering whether the stock market is in, or will soon be in, a correction. Depending on whom you ask, a correction could represent either a natural re-adjustment in price within an overall uptrend, or the beginnings of a doomsday scenario.

On Thursday, one of the three main large-cap indexes – the tech-heavy Nasdaq Composite – entered into correction territory, as tech stocks like Amazon, Netflix, and their FAANG brethren, remained under heavy pressure. For now, the S&P 500 and Dow have both been spared membership in the correction club, but that could soon change if small-cap stocks fulfill their traditional role as a leading indicator for the markets – the Russell 2000 index of small-cap stocks also entered into a correction on Thursday.

As shown on the chart below, Nasdaq's continued plunge on Thursday places the index right around the -10% mark from its late-August highs. In the process, the index also extended its breakdown well below both its key 200-day moving average and a rising trend line extending back to mid-2016. Friday will be critical for equity markets – if Nasdaq and key tech stocks are unable to bounce, they could help pull the other major indexes into correction territory with them.