Bears were caught by surprise when tariffs on Chinese imports were pushed back on Tuesday, but that set up an even bigger surprise for the bulls on Wednesday.
Technical traders were looking for some upside follow-through, but news of weak economic data out of Germany and China put pressure on the indexes, and then the market seized on the issue of an inversion in bonds to accelerate the selling.
The inversion in bonds is viewed by many as an indication that the economy is headed for a recession. The logic is that when lenders are willing to lend money at lower rates for the longer term then they must be worried about the future of the economy. There was much debate about how meaningful the inversion issue really is, but it was a very good excuse for a market that was already in poor shape and was looking for a good reason to sell off some more.
The inversion may not be predictive, but it helped the market do what it was inclined to do.
What is most important isn't the reason for the very aggressive selling, but that the selling continued all day and there weren't any major bounces. The S&P 500 finished near the lows of the day and breadth was putrid with about six stocks down for each one that was up. The number of stocks hitting new 12-month lows ballooned to over 650.
Market timers were debating whether the selling was intense enough to set up some sort of snap-back rally. The indexes, other than the small caps, have not yet closed below last week's lows, which is what many will be looking at before they will consider the market fully washed out.
Rather than worry about catching a bounce, it is better to focus more on controlling risk. The chances of substantial downside from here is quite high and it isn't worth taking too much risk in hopes of catching an oversold bounce.
As I've said, there will be plenty of good opportunities due to this correction action. We just need to make sure we protect capital and stay patient.
I will be out for a couple of days -- good luck and I'll see you on Monday