foxex: Un-Bearable

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Monday's Headlines

1. Stocks Sink Further into Correction as Fears Rise

2. Chart of the Day: Small-Cap Russell 2000 Falls Into Bear market

Markets Close

Dow
23,592.98 -2.11%

S&P
2,545.94 -2.08%

Nasdaq
6,753.73 -2.27%

VIX
24.52 +13.36%

INV Anxiety Index
98.69 Neutral

US 10-Yr Yield
2.857 -1.18%

Stocks Sink Further into Correction as Fears Rise

If you are waiting for a bear market to arrive, it's already here. The Russell 2000 fell into the den earlier today amid a wave of selling that drowned the major market indexes in red. (James has the technical details below.) The DJIA, S&P 500, and Nasdaq are all well into correction territory, having fallen more than 10 percent from their previous highs. The days of market record after market record are so far in the rear view mirror that it's hard to believe they happened in 2018. With just nine trading days left in the year, hopes of a Santa Claus rally are fading faster than a snow cone in July.

We covered the massive outflows from stocks and ETFs last Friday, but it's worth noting that the money flowing out is not going to Treasuries. For the first time since 1969, both the S&P 500 and the 10-year Treasury are both negative for the year. The S&P 500 fell more than eight percent in 1969, in case you are wondering. Assets in money market funds, according to ICI, both retail and institutional, increased by $93 billion last week, and now stand at over $3 trillion. Talk about money sitting on the sidelines!

Why it Matters:

There is no shortage of fear factors for investors right now, and the list continues to grow. According to today's headlines, investors now have reason to fear that the Federal Reserve will raise rates again this Wednesday. Maybe... but a 0.25% increase in the overnight lending rate has been expected since the summer. The likelihood is still greater than 70 percent, according to FedWatch. Pundits and the President are trying to make it go away, but the Federal Reserve should not bend to either if it is doing its job.

The Fed's job is to create and implement monetary policy to keep unemployment low and inflation under control. That seems to be working even though markets are correcting. Corrections are necessary, healthy, and provide opportunities to buy in at lower levels. It's the fear of a recession that is getting a lot of attention right now, and that is very real. But don't forget — a declining stock market does not create a recession, and a recession doesn't always cause a decline in the markets. They do overlap and can influence one another. Liz Ann Sonders, Chief Market Strategist for Schwab, says we should think of the stock market as a leading economic indicator. Since stocks are essentially bets on the future profitability or cash flow of a company, that makes sense. Sonders put together the following chart, which lists the worst median returns for stocks in the six months leading into recessions. "Given the market's weakness over the past three months, trends heading into 2019 could provide a bit of a 'tell' regarding the length of runway between now and the next recession," Sonders writes.

What's Next:
The good news is that the probability of a recession is still under 20 percent, per the NY Fed. The bad news, is that if you believe one is coming, the S&P 500 has a long way to fall before it hits the median historical average. Re-balance and de-risk now if you can't stomach the potential losses.

The NY Fed calculates the chances of a recession based on the probability of an inverted yield curve, when the 10-year U.S. Treasury dips below the 3-month U.S. Treasury. While that inversion hasn't happened yet, it's trending in that direction and is usually followed by a recession and bear market.

Obviously the Fed meeting this week is top of mind for investors. Assume they will hike rates, but listen to the press conference with FOMC Chair Powell to see what he says about the pace of future hikes and the health of the economy. "Trade" was a big theme in the most recent Fed minutes from the last meeting. Let's see if it comes up again on Wednesday, or if Powell mentions the decline in stocks and Treasuries as data points behind the agency's decision. If he does, we'll know things look even worse from the Fed's point of view, and that the President has his attention.

In Other News:

Gold prices approach key resistance levels

Naturally! But it's not the same safe-harbor that it used to be.

What would a recession mean for ETFs?

Nothing good... I assure you.

Bitcoin hit its all-time high one year ago. What to expect from it in 2019

It then fell 75 percent through 2018. Don't expect a repeat of 2017.

The Malaysian Government sues Goldman Sachs

This story is far from over.

Chart of the Day: Small-Cap Russell 2000 Falls into Bear Market

Recent market plunges have been painful to watch, and Monday's is no exception. Any quick glance at a chart of a major benchmark index — the S&P 500, Dow, or Nasdaq — would prompt most bullish investors to avert their eyes.

But the story gets even worse for small caps (stocks with lower market values) as seen on the most popular small-cap index, the Russell 2000 (RUT). Though the Russell 2000 cannot be invested in directly, the most common way to trade it is through an ETF like IWM (iShares Russell 2000 Index Fund).

Since the current market slide began in early September, the Russell 2000 chart has been predominantly red (bearish) with only brief periods of respite in green (bullish). As of Monday, the Russell 2000 has officially fallen into bear market territory, which is generally defined as a fall of 20% or more from the most recent peak (August 31, in this case). To be more precise, from the August 31st closing high at $1740 to Monday's market close of $1378, the index has fallen a whopping 20.8%.

It should be noted that the Russell 2000 has led the other major indexes in declines during the past few months of heightened volatility. The Russell 2000 is considered by many to be a leading indicator of the entire market, and it has been fulfilling this role faithfully for the past three months.

The Russell 2000 first began its steep declines back in early September, while the S&P 500, Dow, and Nasdaq — all large-cap indexes — began to plunge a month later. Also, while the Russell 2000 is now in a bear market, more than 20% below its peak, the large-cap indexes are (only) deep in correction territory. The S&P 500 is down around 13%, the Dow 12%, and Nasdaq 16% as of Monday's close.

If the Russell 2000 is indeed a leading indicator for the overall markets, we could be seeing significantly more volatility and declines on the horizon for the other major indexes.