Recent Gains Wiped Out As Market Sells Off

Apr 10 2014, 4:34pm CDT | by

The NASDAQ composite closed down more than 3% Thursday at 4,054, its lowest close since early February when the market was still reeling from a January selloff. The S&P 500 closed down more than 2% Thursday and the Dow Jones Industrial Average was down 1.6%. After a rocky start to April, the market closed up on Tuesday and Wednesday but the early week gains were more than wiped out by Thursday’s selloff.

In a blog post earlier this week Randy Frederick, Managing Director of Trading and Derivatives at the Schwab Center for Financial Research, warned of a coming correction encouraging traders to consider profit taking and adding hedges. He wrote, “For the past month, economic indicators have been flashing clear and consistent warning signs that a correction—or at least a sizable pullback—is coming, yet the SPX broke out to new highs last week. Does this mean the pullback or correction has been avoided? Probably just for now.”

In a phone call Thursday afternoon Frederick said he has seen a correction coming for about five weeks as indicators in the options markets indicated that people were preparing for a pullback. With no obvious news or data point driving stocks into the red Thursday — in the morning weekly jobless claims beat expectations and Tuesday Alcoa kicked off earnings season stronger than Wall Street anticipated — Frederick feels the correction is probably here. “I would be very surprised if the indicators I watch turn in a more bullish direction.”

He noted that the markets haven’t had a classic correction — down 10% or more — in two years (and only that recently if we count a 9.9% drop in Spring 2012). Five years into the bull market Frederick argues it is time to remove some “exuberance” and “frothiness” from the market.

Few stocks were immune from the slaughterer with popular names like Facebook, Tesla Motors and Netflix down more than 5% a piece. A concentration of new tech stocks, biotech names and social IPOs buttressed the NASDAQ when momentum stocks were soaring, but crushed the 2,498 stock strong index Thursday. Healthcare was the worse performing sector of the day, with the biotech industry dragging it down.

The consumer discretionary sector was the second worst performer. So far this year the consumer discretionary sector has dropped more than 5% after it was the best performer last year. Utilities, last years’ worst performer is now at the top. Frederick says this is because they are defensive dividend payers, that are attracting folks who are looking to replace income loss when interest rates fell.

The day’s few winners included Rite Aid which was up 8.4% on better than anticipated earnings results, as well as AT&T and Hewlett-Packard which were each up less than 1%.


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