November 19, 2018

Stocks sank at the open this morning (Dow -385 pts; SPX -1.47%). The tech sector is down over 3% and a host of other sectors are down more than 1% (consumer discretionary, healthcare, industrials, communications). Only the utilities sectors is managing a small gain. The VIX Index is headed back up toward 20. But remember, it recently spiked to around 25. European markets closed down about .8% whereas most of Asia was up overnight. The dollar is down a bit today so the Bloomberg Commodity Index is rising modestly. WTI crude oil is up modestly to trade at $56.50/barrel. Bonds are not surprisingly catching a bid. That’s been the case since 11/8. In fact, the iShares 20+ Year Treasury ETF (TLT) is up 2% since then. The 10-year Treasury Note yield, now at 3.07%, has fallen from 3.24% in less than 2 weeks.

I think it’s time for some context around the stock market correction. Here are the facts: the S&P 500 index (SPX) fell 11.4% from 10/3 through 10/29. So this marks the second roughly 10% correction in 2018. From 10/29 to 11/7, the SPX then turned around and recovered about half of the selloff. Since then, however, stocks have resumed a down-trend. This pattern is very normal, suggesting the stock market is in a bottoming process. In fact, the exact same pattern showed up during the January/February correction. So where do we go from here? It appears the SPX wants to re-test the 10/29 low, which is roughly 3% below current levels. If that level doesn’t hold, the index will likely retest its February low. In other words, there will be some more pain before the correction is resolved. But we are clearly not in a panic free-fall.

The financial news media is absolutely infatuated with this stock market correction. This morning CNBC announced, “As we head into winter, the bear is alive, awake, and on the move.” Citing a report from Morgan Stanley’s Mike Wilson, CNBC anchor Scott Wapner said, “We’re trading like we’re in a bear market.” He also announced that buying the dip isn’t working this time…”for the first time since ’02.” Much of this talk is misleading and intentionally sensationalistic. But there is one point to be made here: some groups of stocks—FAANG, semiconductors, cloud software—are actually in their own little bear market. For example, Amazon (AMZN) is down 25% from its recent peak; Facebook (FB) is off 39%; Netflix (NFLX) is down 35%; Nvidia (NVDA) has fallen 47%; Micron (MU) is down 40%; Salesforce (CRM) is down 23%. So while the broad stock market isn’t anywhere close to a “bear” correction of 20%+, there are groups of stocks experiencing rolling bear markets. Valuation is one big reason. Some of these stocks just ran too far, too fast. Even after getting hammered, Amazon is still up 30% this year; Netflix is still up 40%; Salesforce is up 20%. Price/Earnings (P/E) ratios matter once again.

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