Market commentary: US Stock market - the plunge, the rebound and the fear of a new correction

After a rather volatile week that witnessed a steady decline in stocks and corporate bond prices, along with sizable swings in the currency market, on Monday, investors were met by one of the worst trading day on records since the 2000 and 2008 financial crashes. 

Although many market participants spent the weekend adjusting their investment strategies following the sharp decline in the European and US equity markets, which burned through billions in market capitalization by dropping several percentage points over the last two days of last week, I bet few investors were actually ready for an US market opening as ugly as the one seen yesterday.

While the European markets traded heavily in the red throughout the entire session, with most of the major indexes dipping over 5% before slightly recovering in the last part of the trading day, it was the US that took traders by surprise. US equity futures pointed to a very weak opening, however, a wave of panic sell orders pushed the DJIA to open over 1,000 points lower, while several small and large stocks plunged as much as 15% in matter of minutes.

In early trading, popular names led the major indexes down: Facebook opened below $75 a shares, 13% lower than Friday’s closing; Apple plunged to $94.25 a shares, around 11% down from its previous closing price; Starbucks dropped over 17%, opening at $43.73 per share and AT&T, usually considered a low volatility name, lost 5.5% within minutes from the beginning of trading.

The unwinding of long positions, following the execution of stop loss orders triggered by the plunging prices created a snow ball effect on the market, adding selling pressure onto already abnormally volatile equities, spreading a panic selloff started last week.

The steep drops across the board made good stocks become too cheap to be avoided and, as stop loss orders were pushing prices down, some of the money buy orders suddenly found themselves being executed on the open market, fueling an immediate rebound that pushed equity indexes to pair a large share of their initial loses within the first half hour of trading.

Stocks that open over 10% lower turned flat by end of the US morning session, closing just a few percentage point down on the day. Apple paired all its losses before closing 2.5% lower, Gilead Science, the largest biotech stock on the market, turned positive before closing 4.44% down, while the S&P 500, which opened 4.46% lower in New York, paired most of the initial losses by mid-day, before dropping another 77.68 points closing 3.94% lower.

The wild ride of the equity markets on Monday, that pushed the S&P 500 into correction territory, costed the Dow Jones Industrial Average 3.57% and caused the European markets to experience their worst trading day since 2008; this contributed to prompt the Chinese Central Bank to act, overnight, in support of the country’s currency by injecting the equivalent of $23.4 billion in new money.

The latest intervention, while still to prove its efficiency, has lifted the confidence of trader, which following 3 straight days of heavy losses, returned to the equity markets as buyers, fueling a rally in European markets which today are posting gains exceeding 3% across the board.

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.