Stocks had their worst day of 2017 on Tuesday, as the S&P 500 broke a 109-day streak without losing 1% in a day.
When all was said and done, the Dow lost 237 points, or 1.1%, the S&P 500 lost 29 points, or 1.2%, and the Nasdaq lost 107 points, or 1.8%. Meanwhile, the small-cap Russell 2000 was an even bigger loser, dropping 37 points, or 2.7%. U.S. Treasury yields at the long end of the curve also continued a recent rally, with the 10-year yield dropping to 2.41% after trading as high as 2.6% just a few weeks ago.
The S&P 500 is now down about 2% from its most recent peak. In most years, the index drops 10% or more from peak-to-trough during the year.
The big losers on Tuesday bank stocks, with the XLF ETF that tracks the sector dropping 2.9%. Bank stocks are now down roughly 5% in the last week.
The twin worries here for the banking sector were both a flattening yield curve and concerns over President Donald Trump’s difficulty to get a comprehensive tax reform package done given the issues the administration has had with its initial plan to repeal and replace Obamacare.
Outside of the news-based reasons that were driving sentiment on Wall Street on Tuesday, some analysts fingered more technical reasons as culprits of the decline.
In a note published Tuesday afternoon, Marko Kolanovic at JP Morgan said that options expiring last week would “lift the lid” from market volatility and likely lead to a decline in stock prices. And here we are.
“We maintain that the market is entering a vulnerable phase, where increased volatility can further contribute to equity outflows,” Kolanovic writes. “While we don’t want to minimize the impact of political developments, [Tuesday’s] move was primarily technical and should not be fitted into a political narrative (which in fact was neutral between developments in France and US).”
Analysts at Bespoke Investment Group noted on Tuesday that the S&P 500’s drop was likely to see the index close at non-overbought levels for the first time since early February.
A technical reading of the market, saying the stocks are overbought means the S&P is more than one standard deviation above its 50-day moving average. Or, more simply, that the stock market is significantly ahead of a recent positive trend.
Bespoke added that while conventional wisdom might say market’s resolve lower after breaking a streak of being overbought, the last seven instances of markets breaking this trend have seen stocks gain, on average, 1.6% over the following three months. There have been, however, three instances of markets dropping 5% or more after these trends break, most recently in the summer of 2014.
Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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