The market has an uncanny way of lulling traders to sleep. Over the past month, the talk of a pullback was everywhere, but the market crept higher. On each slight bout of selling, pullback chatter ensued again, but the market crept higher. Negative news in Europe or Asia would send futures down 5 points overnight, but by the US close, the market had crept higher. Just an unrelenting creep higher.
So even though everyone seemingly expected a pullback, when the pullback finally came, most had given up on waiting around for it. When the pullback finally came, the VIX (^VIX) had its biggest one-day percentage gain since November 2011. The "expected" pullback was clearly no longer expected.
Of course, yesterday's move is only large because the starting point in the VIX was so low. To put the current VIX level into context, even after yesterday's big move, here is the one-year chart:
One-year daily chart of VIX, Courtesy of Bloomberg
Click to enlarge
Though it is actually near the highs of 2013, it is still quite low relative to the past year of price action, and well below the 200-day moving average around 17.
Typically, when the market sells off from a new high like it did yesterday, the initial VIX spike on the first pullback is a sale. In other words, most of the time after such a strong momentum driven rally, we'll see dip buyers step in on stocks on the first significant pullback, and the market will stabilize. In rare instances (like the flash crash sell-off in 2010), there are no dip buyers who step in, and the market goes straight down from recent highs.
I have no idea what the end result of the current case will be, but one major clue is in how the other major macro markets behave. So far, the commodity market has been messy, but the currency, credit, and bond markets have been more orderly. If that changes, then this routine pullback could turn into a nastier, deeper sell-off. For the moment, though, I'm treating this as a garden variety pullback off stretched highs.
- Asian equities followed the US into the red, with China the leader on the downside. The Shanghai Composite (SHA:000001) was down 3%, and the Hang Seng (INDEXHANGSENG:HSI) was down almost 2%. Both indices are now up less than 2.5% on the year.
- European services and manufacturing PMI both missed expectations, sending European markets lower on the open, down 1.75% now.
- SPX (^INX) futures were down 0.4%, the dollar is mostly stronger, Treasuries are higher, and commodities are lower again.
- Wal-Mart (WMT) reported better-than-expected results, but weak guidance, and the stock is unchanged in the pre-market.
- CPI and jobless claims data came in at 8:30 a.m. ET; existing home sales and Philly Fed came in at 10:00 a.m. ET.
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