Falling market tide ‘brings all boats down’

Traders work on the floor of the New York Stock Exchange.

lucas jackson | Reuters

A strong sell-off in the market last week had investors looking for a place to hide; unfortunately there were none.

As of Friday’s close, the Dow Jones and Nasdaq entered correction territory, down about 10% from their 52-week highs. Similarly, the average stock of the Russell 1000 Index was down 5% for the week, on average.

Meanwhile, ahead of Monday’s market open, U.S. stock index futures sold off sharply, with the Dow briefly dipping more than 800 points.

The main source of concern, according to market watchers, is the wide dispersion of losses.

“This pullback can be described as an ‘ebb tide pulls all boats down,'” Bespoke Investment Group wrote in a note to clients last week.

Over the past month, the fell 5% while other major benchmarks such as the Nasdaq 100 and the Dow Industrials plunged 7.5% or more.

The worst underperformers, according to Bespoke, were stocks with the highest valuations, lowest dividend yields and highest short yields, although stocks with low valuations and high dividend yields n were not spared either.

“Momentum, by definition, tends to work very well until it breaks,” Bank of America equity strategist Savita Subramanian warned last week, noting that dating back to 1986, peaks in momentum stocks were followed by larger losses over the following 12 months.

Well, that momentum seems to have been broken.

Two of the best performing stocks this year, Netflix and Amazon, for example, saw their shares fall 20% and 15% respectively from their recent highs.

Within the S&P 500, about 30% of the index constituents are in bearish territory, represented by a drop of more than 20%. According to FactSet, 40% of S&P stocks are in correction territory, down 10% from their highs.

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Among the reasons for the widespread decline in equities, market watchers point to subdued economic growth, a strong dollar, a slump in commodity prices and uncertainty over a potential rate hike by the Fed.

“The current stock market outlook remains cautious given the jitters, volatility and headwinds that have overwhelmed markets and investor psychology,” said Peter Kenny, chief market strategist at Clearpool.

“The near-term outlook could change, but any attempt to recover, even from these relatively depressed levels, will likely fail to take shape,” he added, describing the lack of a “tradable bottom”.

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From a technical standpoint, Jim Paulsen, chief investment strategist at Wells Capital Management, points out that the S&P 500 has pulled back from its 1972 support level, leaving the index vulnerable to a “free fall”.

The next stop, according to Paulsen, is the 1862 level, implying another 5.5% decline from here.

S&P 500, 1 year