The Dow Loses 531 Points

On Friday, the S&P 500 plunged 3.19% for its worst loss in nearly four years. The index lost 64.84 points which is its eighth-largest point loss ever. This was the first 3% loss for the index since November 9, 2011. To give you an idea how much less volatile the market has become, in the four years prior to that, there were 46 drops of more than 3%.

In Friday’s newsletter, which I wrote before the opening bell, I said “While I don’t believe the overall market is in trouble, I would be wary of sectors like high-priced tech names. I’d also steer clear of many biotech stocks.” I still hold that view.

Make no mistake, the action on Friday was ugly. Large-cap tech stocks were especially hard hit. Investor favorites like Apple (AAPL), Netflix (NFLX), Gilead (GILD) and Starbucks (SBUX) were all down more than 5%.

The Nasdaq Composite, which has many tech stocks, was down 3.52%. The Nasdaq 100, which has the largest nonfinancial stocks on the Nasdaq, was down 4.28%. In the last three days, the Nasdaq 100 has lost 7.59%. That’s brutal.

Prior to this selloff, many observers noted the “stealth correction,” meaning that a growing number of stocks were already more than 20% below their 52-week highs. There are now 147 stocks in the S&P 500 that are more than 20% off their high.

The S&P 500 closed Friday at 1,970.82. That’s the lowest close since October 27, 2014. Interestingly, small-caps held up unusually well. In fact, this was one of their best out-performance days in years. The Russell 2000 dropped 1.34% which beat the S&P 500 by 185 basis points. That’s huge. The Small-Cap Value ETF (IWN) was only down 0.96%.

I recently wrote about how the market climbs slowly, but falls suddenly, and you can certainly see that effect in last week’s market. A little after 10 am the market was down just 0.55% but the selling quickly accelerated. Soon people were selling because other people were selling, and that led to still more selling.

Our Buy List lost 3.63% on Friday which was 44 basis points worse than the S&P 500. Almost all of the underperformance was due to Ross Stores (ROST). We knew Ross was going to be bad thanks to the weak guidance. The stock dropped 9.5% to close at exactly $50 on the nose. But the stock is still higher than it was seven weeks ago. Microsoft (MSFT) was one of the large-cap tech stocks that was dinged hard. MSFT lost 5.67% on Friday. I see that Ford Motor (F) fell to $13.86 per share. That’s a yield of 4.33%.

There was direct catalyst for Friday’s selloff. The closest was an unexpectedly poor purchasing managers index from China. This has come on the heels of other data suggesting rough economic news out of China. That could hurt a lot of major tech companies. Poor Apple is down to a market value of just $603 billion. The S&P 500 is now going for 15 times next year’s earnings, although some of next year’s estimate will probably come down some.

Let’s also remember that downdrafts like this are quite common. The S&P 500 dropped 7.4% between September 18 and October 15. It lost another 4.9% between December 5 and December 16. Since the bull market started in 2009, the S&P 500 has dropped more than 5% from its high 12 times. All 12 were reversed. Now we’re at #13.

Let me add that Friday’s selloff challenges the idea of a “safe haven.” The miners index (^XAU) dropped 2.94%. Investors didn’t seek safety in size, but sought safety in small stocks. West Texas crude fell to just $40.29 per barrel. The Volatility Index (^VIX) jumped 46% on Friday. I expect to see more volatility next week before things calm down.

Posted by Eddy Elfenbein on August 23rd, 2015 at 2:44 pm

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.