Scariest First Day in the Stock Market in 84 Years; Worst First Week Ever
Why Did Stocks Drop Like a Rock and Gold Go Up?
January 11, 2016
According to market commentator Fulton Sheen, " In 2015 the Dow Jones Industrial Average lost 398 points, after being up in 2013 & 2014. On January 4, 2016 the Dow opened at 17,425 and five days later, closed at 16,346, down 1079 points, wiping out all of 2014's gains and 230 points of 2013's gains. This means that most people who have been in the US stock markets for the last two years have virtually earned nothing.
"You just had the worst week in the start of the year in market history," said Jeremy Klein, chief market strategist at FBN Securities. "Why would anyone want to buy?"
After the worst first day of trading in 84 years, the markets continued down this week to negative closes of 6% or more. The Dow Jones Industrial Average lost almost 1,100 points to close down 6.2% this week. The S&P 500 lost 6.0% and the NASDAQ lost 6.35%. The average of European markets was down 6.5%, and China was down 10%. Oil was also down - 11.2%. Not surprisingly, Gold was strongly up (over 4%), which is typical when the stock markets correct.
The losses were massive. The S&P 500 alone lost $1.05 Trillion just this week. That makes this the worst first week for the stock markets in US history, according to Dow Jones Data.
All of this reminds me of the maxim, "As the stock market goes in January, so goes the year." This saying has held true almost 75% of the time. January is important in determining what the market will do the rest of the year, and the first week of January usually sets the tone for the rest of the month. Everyone agrees that the stock market is at the very least overdue for a correction. But the trend of the stock market this week may well have set the stage for the crash that many of the most astute stock market observers have been predicting.
What is the difference between a correction and a crash? A correction is when the stock market drops 10% to 20% from its 52-week high. It is considered healthy for the market to correct periodically. It gives it a stable base from which to push off when it attempts to move up again. But the longer the market soars up without a correction, the more likely it is that when the time comes it will be a crash instead of a correction.
So what is a crash? A crash is what we saw in 1987 and in the Panic of 2008. In 2008 the markets only lost 32.2%. In other crashes the markets have dropped 40%, 50% or more. If the trajectory of the market established this week continues, we could well see a crash.
The three major indices have all been in correction territory this week. The S&P 500 fell more than 10% below its 52 week high intraday, although it closed slightly above it. The Dow Jones Industrials and the NASDAQ were not so fortunate. Both closed more than 10% below their yearly highs - a correction in anyone's book.
And the US VIX (Volatility Index), which is also known as the "Fear Index" was up dramatically most of the week. By measuring the level of volatility (wild swings in the market), experts can use the VIX to determine just how frightened investors are.
One of the major brokerage firms had these cheerful thoughts for people observing this week's market meltdown: "For investors with a solid long-term strategy and a well-built portfolio, pullbacks can offer an opportunity to add quality investments at lower prices." I would expect nothing less from a company that makes its money from people buying stocks. But perhaps they should look out for their investors and balance their happy talk with some warnings about what could be coming.
A more realistic (or honest) brokerage firm had this to say: "For whatever reason, our stock market, at least at this point, looks like it is involved in a 'selling stampede.' Such stampedes tend to last 17-25 days (about one month) with only one to three day pauses or rally attempts before they exhaust themselves, and we are only five days into this one. This is why, in our year-end letter, we said the key for investors' success in 2016 is to manage the risk and avoid the big losses."
Many commentators have tried to blame all of this on China's failing markets and economic woes: "Global Recession Led by China." "US Market Correction Driven by Crazy Actions from China." "China Trading Halted - Twice." "Communist Bank of China Devalues Their Currency Again."
It is true that the Chinese government prevented their people from selling stocks that were down. And they did turn off their "circuit breakers" (a mechanism that the US and other sophisticated markets use to halt trading when the markets drop a certain amount - usually 7%). But to blame all - or even most - of this on China is to be far too simplistic.
Anyone who has closely observed the market for decades as I have will tell you that there are times when the markets want to go up - or down. When I refer to the markets in this case, I am talking about the people who make the market decisions. Markets are made up of people who are emotional, who can be swayed by the actions of others, and who have preconceived ideas of where the market is heading. This includes individual investors and the "professionals" - who can be just as driven by emotions as the non-professionals.
I have seen this hundreds of times. Most investors and traders believed that the markets were ready for a fall. They were just waiting for an excuse to sell. This week China provided the excuse. It could just as easily have been a terrorist attack or more trouble in the Middle East. If the markets drop as much as I think they will, there will come a time when people are ready to buy. Any piece of good news will trigger that. It could be a positive jobs report or news that Saudi Arabia and Iran are friends again. The point is that - regardless of what the blow-dried talking heads on TV say - nothing makes markets go up or down. People, with all their quirks and fallibilities make markets rise or fall - particularly when they have a bias in one direction or the other.
George Soros is not one of my favorite people, but he understands markets. He said today, "When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008. Needless to say, investors need to be cautious." If you're still exposed to the stock markets - listen to the experts.
By the way, in case you're wondering why someone with a doctorate in theology is commenting on the stock market, I have always been a bi-vocational minister. I have pastored in several churches, and currently I oversee ministers in South Florida. But I have always worked a secular job, and for the majority of my work life I have been involved in investments. I started off as a stockbroker and financial planner. I worked my way up to Assistant Branch Manager and then Senior Branch Manager. I became an Investment Banker before I retired. But my most important qualification for writing this commentary is that I was a broker on Black Monday - Oct. 19, 1987 - when we had the worst one-day drop in the stock market since the Panic of 1929. I watched the major indices lose 22.6% in one day. There has been nothing like that since then, even in 2008.
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