Was Friday’s Rout The Beginning Of The Big One?
Friday was a rout. The majority of stocks were hit very hard. The ones that went up the most, went down the most. Semis gave back almost two weeks worth of return in one day. As is usually the case with parabolic moves, late comers were punished. Friday was not one of those “sell everything” days. Defensive sectors were up on the day. Staples, utilities, REITs and healthcare all saw gains.
Friday’s employment news was a blockbuster. The dormant jobs market is accelerating again which is great news. Markets did not like that because the current regime is that good news is bad news because a rate cut is not perceived to be coming anytime soon. When good news is bad news, stock market declines are usually short-lived. It’s when bad news is bad news that the largest declines occur.
The S&P 500 is below. Friday wiped out two weeks of gains. An all-time record amount of put option buying took place which seems odd so close to all-time highs. Put buying is leveraged way for investors to bet on a short-term outcome for a security, sector or index. Consensus is usually wrong.
Elsewhere on Friday, credit spreads, the difference between risky and safe bonds, did not blow out. That means the decline was really limited to stocks and bonds overall and not a “risk off” day. The 10-Year yield is below. While it did jump, it remains well below recent highs, not exactly shock and awe.
Finally, large declines on Fridays in a bull market have strong tendencies to rebound the following day and week. This is one of the highest percent plays all year. I would expect the same thing now.
On Friday we bought SSO. We sold PCY, EMB.
