Assessing The Damage: U.S. Stocks Suffer Worst Day In Nearly 2 Years

Summary

  • The S&P 500 plunges to its worst day since June 2020, led by the Consumer Staples sector.
  • Bonds catch a bid amid a classic risk-off trading environment.
  • Where the market could head next as a re-test of the lows is underway.
Bear market is ahead

honglouwawa/iStock via Getty Images

It was a classic risk-off trading environment on Wednesday as U.S. stocks plunged 4%. The damage was worst in what was a relative area of safety – Consumer Staples (XLP). Target (TGT) shares dropped big as inventory issues and margin compression shocked investors. The Minnesota-based Consumer Discretionary (XLY) company followed up Walmart's (WMT) giant decline on Tuesday as the world’s biggest big-box retailer struggled with inventory management. Target collapsed 25% for its second-sharpest daily decline in its history. Only Black Monday 1987 was worse for the retailer, according to Charlie Bilello.

Remarkably, the Staples sector’s drop on Wednesday was worse than any other single day during the Great Financial Crisis.

Consumer Staples: Historic Single-Day Drop

XLP chart

Stockcharts.com

Wednesday’s price action was a bearish sector rotation – the notion that buyers and sellers move from one sector to another. It had been the Information Technology sector that faced the brunt of selling pressure over the last few weeks. Meanwhile, the Energy sector (XLE) held in there ok but ultimately fell in line with the overall market by the 4 p.m. closing bell. Remarkably to many traders and technicians, the CBOE Volatility Index is barely above 31. Many market participants would have implied volatility levels would far higher considering Wednesday’s market losses.

The Place to Hide: Treasuries

heat map ETFs

Finviz

Interestingly, there was “less bad” behavior among foreign stocks. The Vanguard FTSE All-World ex-US ETF (VEU) tumbled 2.3%. Another spot that exhibited relative strength was the high-dividend group. Vanguard High Dividend Yield ETF (VYM) was down big with a 3.3 retreat but fared better than the S&P 500.

Bonds finally provided some cushion. iShares Core U.S. Aggregate Bond ETF (AGG) was solidly in the green while iShares 20+ Year Treasury Bond ETF (TLT) surged more than 2% - one of its best days in the last year. Keep your eye on the fixed-income space. Should yields continue to hover below their highs, particularly on the U.S. 10-year Treasury rate which hit a high above 3.15% earlier this month, that could help traders better gauge the fair value of equities. High-yield junk bonds, however, touched yet another 52-week low, yet another sign of risk aversion.

Meanwhile, crypto once again fell with the broad stock market. Bitcoin dipped below $30,000 while Ethereum breached the $2,000 mark.

Crypto Craters

Crypto performances today

Stockcharts.com

The S&P 500 is back at an 18% drawdown while the Nasdaq 100 ETF (QQQ) is down a whopping 28% from its all-time high notched last November. The tech-heavy ETF is on pace for its seventh straight weekly loss – that would be the worst stretch since October 2008, according to Michael Batnick.

Global Stocks Down 18-27% From All-Time Highs

drawdowns

Finviz

After the bell, Cisco (CSCO) compounded the negative sentiment with a big guidance cut. Shares fell from the high-$40s to the low-$40s in the extended hours trading session.

Cisco Shares Tumble After Hours

CSCO after hours

Stockcharts.com

So where do we go from here? I see a couple of interesting items on the charts. First, SPY appears to be going for a retest of the low hit last week. A drop below that level would not only mark a 20% technical bear market but might also put the stock market susceptible to further losses – perhaps to the September-October 2020 range highs. That would be another 8% fall.

SPY Support to Watch

SPY technical levels

Stockcharts.com

This article was written by

CFA & CMT Charterholder | Freelance Financial Writer at SoFi & Ally | Investments | Markets | Personal Finance | RetirementI create written content used in various formats including blogs, emails, white papers, and social media for financial advisors and investment firms in a cost-efficient way. My passion is putting a narrative to financial data. Working with teams that include senior editors, investment strategists, marketing managers, data analysts, and executives, I contribute ideas to help make content relevant, accessible, and measurable. Having expertise in thematic investing, market events, client education, and compelling investment outlooks, I relate to everyday investors in a pithy way. I enjoy analyzing stock market sectors, ETFs, economic data, and broad market conditions, then producing snackable content for various audiences. Macro drivers of asset classes such as stocks, bonds, commodities, currencies, and crypto excite me. I truly enjoy communicating finance with an educational and creative style. I also believe in producing evidence-based narratives using empirical data to drive home points. Charts are one of the many tools I leverage to tell a story in a simple but engaging way. I focus on SEO and specific style guides when appropriate. My CFA and CMT backgrounds demonstrate prowess in investment management and my professional experience includes extensive public speaking and communication. Moreover, my extensive university teaching and professional trading experience provide useful skills. Past roles also include heavy use of Excel modeling and chart creation as well as PowerPoint.I am a contributor to The Dividend Freedom Tribe. I am a contributor to Topdown Charts.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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