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Selling continues — What you need to know in markets on Friday

Myles Udland
Markets Reporter

Stocks are selling off again.

On Thursday, each of the major averages lost ground with tech stocks suffering the biggest losses, falling more than 2% while the benchmark S&P 500 dropped 1.4% and the Dow fell 1.2%.

A midday decline in stocks was in part attributed to the decision by Treasury Secretary Steven Mnuchin to withdraw from an investment conference in Saudi Arabia following the apparent killing of Saudi journalist Jamal Khashoggi.

An acceleration in selling later in the afternoon on little news, however, proved that the market’s downward momentum which really took hold last week remains the driving force for stocks. The market has now been down in 9 of the last 11 trading sessions.

“After the oversold bounce we saw over the prior four trading days, the bears showed that they remain firmly in charge today by pushing the market lower once again on no significant news of note,” said analysts at Bespoke Investment Group“Until the S&P 500 re-captures its 50-day moving average at a minimum, it’s hard to fight the tape and try to step in with aggressive buying here.”

For those watching the technicals at home, Thursday’s close of 2,768.78 on the S&P 500 almost exactly matched the index’s 200-day moving average, a level that has been a battleground over the last several trading days. Watch this space. 

Traders work on the floor of the New York Stock Exchange (NYSE) in New York. (Reuters)

Aside from investors eyeing the broad market action on Friday, the busy week of earnings will come to a close with notable reports coming from Procter & Gamble (PG), Honeywell (HON), Kansas City Southern (KSU), and Schlumberger (SLB), all due to report before the market open.

And on the economic data side, the monthly reading on existing home sales will be the highlight.

Stocks and elections

We’re less than three weeks away from election night.

And traders are bracing for it.

On Thursday, we highlighted work out of Barclays which indicates that traders are pricing in a 1.6% move in the stock market on election day. This is similar to the market positioning we saw ahead of the presidential election.

What’s unique about the market’s current setup — with options pricing indicating a potential big swing on the election results — is that it is a midterm election. And ahead of midterm elections, stocks aren’t usually bracing for volatility.

The midterm elections are often seen as a referendum on the president, and this year due to the heightened political polarization in the United States, the SPX variance term structure is behaving in a similar manner to the 2016 presidential election,” Barclays said. 

“The similarity to the variance term structure in the run up to 2016 presidential election highlights investors are perhaps pricing risks arising from the other two, less likely, scenarios: Blue Tsunami (Democrats taking both House and Senate) and Red Wall (Republicans keeping both House and Senate).”

Demystifying this somewhat, what Barclays is getting at is that investors have seen the market swings after Trump’s election and Brexit and seen what being flat-footed ahead of big political events can mean. And the results aren’t good. And so amid a polarized political environment when the outcomes in elections seem less certain, investors are more prepared for big market swings. Or at least trying to be.

The market, as we’ve written many times, is ultimately made up of humans. Yes, trading is done with computers, and strict models go into portfolio construction, and so on. But human emotions and intuitions about politics and the “real world” that exists outside the computer models of professional money management are always going to impact markets.

And a market bracing for another potentially disruptive result in the midterm elections next month is just another reminder that investors are always, in the end, just other people like you and me.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland