It is really getting ugly as stocks at one time declined by their greatest one day amount in over three years. Conversely early yesterday morning the thirty year treasury staged the largest gain since 2009 when the global economies and face of American economy was imploding on a daily basis.
Large capitalized stocks were crushed around 3%, quickly catching up to their small capitalized brethren, issues that were decimated since July. However by the close, the Russell 2000 was up 1.1% and the S & P down 0.85%.
Was yesterday the capitulation? In my view the current selloff lacks the fear and the angst of selloff’s past. Yes it has been difficult, perhaps the result of complacency where the averages have not had a 10% decline in almost three years.
Perhaps the sector that has been a complete catastrophe since mid-September is the smaller energy companies. The Russell 2000 energy sub index is down about 39% since the end of August, the result of plunging crude.
However I will argue valuations should soon support these issues. There are a number of companies that have low cost production, companies that also have a large natural gas exposure.
As noted the other day there is a disconnect between oil and natural gas prices where natural gas prices in some markets is at their highest level in over a decade.
In my view, buyers will reemerge and because of the large unexpected and dramatic selloff, consolidation could occur.
Speaking of oil prices, crude which has plunged about 23% since July, ended nominally unchanged after initially falling another $2 to around $80/barrel. Are the sellers finally exhausted?
Conversely, as noted above the 30 year treasury gapped almost six points higher in early trade, a surge that is consistent with some type of climatic event or major externality. Are the buyers finally exhausted as the 30-year ended higher by only 18/32? Wow! Talk about incredible volatility.
In my view, the possible trade in the coming six months is go long oil and short the 30-year, the inverse of the trade of the preceding six months.
What will happen today? Will the volatility begin to subside given the averages have had the proverbial 10% correction and possible capitulation? Jobless claims, capacity utilization/industrial production, NAHB survey and several high profile earnings are released.
Last night the foreign markets were down but off their lowest levels. London was down 1.78%, Paris down 2.28% and Frankfurt down 1.56%. Japan was down 2.22% and Hang Sang down 1.03%.
The Dow should open considerably lower but futures have been all over the place this morning and at one time were actually positive. Today can be interesting and volatile. The 10-year is up 28/32 to yield 2.04%.
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