The stock market just corrected. Did you miss it? The S&P 500 suffered its first six-day sell-off in three years with a plunge that pushed it into correction territory (-10% or more from its highs). It looks like the correction is already over - at least the bulls are hoping it's over. We will talk about market direction later. Right now motion-sick traders are probably just happy it is the weekend after last week's roller coaster ride in stocks.

The Monday, August 24th, plunge in stocks was fueled by China. Last weekend investors were expecting the Chinese government to intervene and/or launch new stimulus measures. When they did not intervene investors pounded the sell button. The Chinese Shanghai market collapsed with a -8.5% drop on Monday. This yanked the rug out from under global markets and stocks plunged around the world.

European markets lost -5% on Monday with the German DAX sinking into bear market territory (-20% or more from its highs). The U.S. market enter freefall on Monday morning. The Dow Industrials fell almost -1,100 points in the first few minutes of trading. The S&P 500 dropped -5% and the NASDAQ plunged -8.8% at its lows for the session on Monday. Markets managed to trim their losses by Monday's closing bell but the bounce failed on Tuesday, which really rattled investor confidence. Rumors were spreading that the Chinese government had abandoned support for their stock market.

Then on Tuesday night, with the markets closed, the Chinese government finally stepped in. The Chinese central bank added 140 billion yuan (about $21.8 billion) to the interbank money market to boost liquidity. They also cut their benchmark interest rate and deposit rate by 25 basis points each to 4.6% and 1.75%, respectively. The central bank also lowered reserve requirement ratios for banks by 50 basis points to 18.0%.

This Tuesday-night move by the People's Bank of China helped soothe fears overseas but it wasn't until Thursday that the Chinese market started to bounce. A big rebound in the Shanghai index on Thursday was attributed to intervention by the government. Meanwhile the U.S. market rebounded on Wednesday, snapping its six-day streak of losses. The Wednesday-Thursday rally in the S&P 500 was the biggest two-day surge since March 2009.

Extreme Volatility

Last week's action in the stock market could be summed up in one word - volatility. Monday's drop marked the worst three-day point loss for the Dow Jones Industrial Average ever! Monday's drop also sparked 1,278 circuit breakers, which temporarily halts trading in stocks when they move too fast. That is a record number of circuit breakers in one day. A normal day sees less than 10 breakers being activated.

Tuesday was a real disappointment for investors. The Dow Industrial's reversal from +400 points to -200 was the biggest intraday reversal since the 2008-2009 financial crisis. It was the biggest intraday reversal lower in the S&P 500 since October 2008.

Market legend Art Cashin was on the floor of the NYSE on Tuesday and noted that sell on close orders soared from $500 million (about normal) to $3.5 billion with just 12 minutes to go heading into the closing bell. He said bids just disappeared.

The Wall Street Journal noted that the Dow Industrials had six days in a row of 200-point moves. That has never happened before. The WSJ also noted that the S&P 500 saw six days in a row of 1% moves, which hasn't happened since spring of 2009. The sharp drop in the S&P 500 on Friday, August 21st, and Monday, August 24th, was the ninth time in the last 30 years that the index experienced back-to-back declines of 3% or more.

Then suddenly everything changed and panic selling turned into panic buying. Wednesday's rally in the market saw the major indices surge +4% or more. It was their best one-day gain since 2011. The Dow Industrials closed up 619 points. It was the first time the index had rallied more than 500 points since November 2008.

The research team at Bespoke Investment Group said the volatility was so bad that it was the worst in the last 75 years. The S&P 500 index closed more than four standard deviations below its simple 50-dma for three days in a row. That is only the second time in history it has ever happened. The previous time was May 15th, 1940. According to Bespoke the recent volatility was worse than the 1987 market crash. You can read more about it here.

The volatility index (the VIX) soared to levels not seen since the 2008-2009 financial crisis. The index hit 53 percent on Monday morning before closing at 40%. As of Friday's close the VIX is down to 26% but that is still elevated (above 20%). A lot of professional money managers expressed their concern last week that the correction is probably not over yet so traders are still buying more put options for protection (which helps drive the VIX higher).

chart of the Volatility index (VIX):

Investor Withdrawals

The stock market's sell-off fueled major outflows from mutual funds. The WSJ said "Investors pulled the most money in one day from stock exchange-traded funds and mutual funds on Tuesday since 2007, a clear sign of waning confidence."

According to analysts at Credit Suisse, the withdrawals started way before the sell-off in August. Their research found that Americans have been pulling money out of both stock mutual funds and bond funds since July. Normally when investors pull money out of stock funds there is influx of money into bonds. However, investors have been yanking money out of both stocks and bonds. That doesn't bode well since it suggest investors do not want exposure to any kind of risk.

Of course the recent market turmoil didn't help. Bank of America Merrill Lynch observed that investors withdrew $19 billion from funds on Tuesday last week. It was the second largest one-day withdrawal since 2007. Withdrawals for the week were almost $26 billion, the largest number of record (going back to 2002).

Economic Data

Most of last week's economic data was completely overshadowed by the market's volatility. That's too bad since most of it was generally bullish. The Case-Shiller 20-city home price index rose +5.0% in June. New home sales rose +5.4% in July to an annual pace of 507,000. Pending home sales were only up +0.5%.

The Conference Board's Consumer Confidence Index improved from 91.0 to 101.5 in August. Yet the University of Michigan's Consumer Sentiment survey actually retreated from July's 93.1 down to 91.9 in August. July saw personal income rise +0.4% while personal spending increased +0.3%.

Durable goods orders rose +2.0% in July after June's reading was revised higher from +3.4% to +4.0%. Excluding the more volatile transportation component the core-durable goods number rose +0.6% in July.

The biggest report for the week was the U.S. Q2 GDP estimate. The Commerce Department released their second estimate on Thursday. Analysts were expecting a range in the +2.3% to +3.6%. According to the government the U.S. grew at +3.7%, which is a big improvement from its first estimate of +2.3%. This number would support the Federal Reserve raising rates in September.

Overseas Economic Data

Economic data overseas was also lost amid the whirlwind of market volatility. Japan reported their household spending in July rose +0.6% for the month and up +2.2% from a year ago. Japan's retail sales came in better than expected with a +1.6% rise in July.

The focus was on China, specifically the Chinese stock market. After huge declines in the first half of the week the Chinese market finally started to bounce on Thursday and Friday. Reports that the government was intervening in the market helped fuel a +5.3% rally on Thursday and a +4.8% gain on Friday in the Shanghai composite. Yet in spite of these big bounce the Shanghai index still lost -7.8% for the week. At its June highs the Shanghai index was up +67% for the year. Today the Shanghai is now negative for the year.

Looking towards Europe we did see some improving GDP numbers. Germany said their Q2 GDP rose +0.4% for the quarter and +1.6% from a year ago. The United Kingdom reported Q2 GDP of +0.7%, which is a +2.6% improvement from a year ago. The Eurozone business and consumer survey for August inched higher from 104.0 to 104.2, which was better than expected.

Unfortunately analysts are lowering their global growth forecasts. Moody's just downgraded their forecast for the global economy to +2.8% in 2015. Citigroup reduced their global growth 2016 forecast from +3.3% to +3.1%, which was the third downgrade this year. Just about everyone is warning that China's growth is slower than the official estimates and that this will encumber the global economy.




Major Indices:

The S&P 500 index managed a +0.9% gain for the week, which is pretty amazing considering the carnage during its six-day slide. Year to date the S&P 500 is down -3.4%. With only one more session to go in August the index is poised to lose -5.8% for the month.

I want to warn readers that the violent breakdown in the S&P 500 has done a lot of technical damage. Stocks went from very oversold to overbought in just a couple of days. You can see on the daily chart that the bounce has not yet reached the 50% retracement of the drop. Coincidentally the 50% retracement level lines up with round-number resistance at the 2,000 mark.

The 2,000 to 2,130 area has a ton of resistance for the S&P 500 now. You could break it up into two chunks. The 2,000 to 2,050 area and the 2,050-2,130 area. Combine this overhead resistance with where we are on the calendar and I am not optimistic about the next several weeks since September has a history of disappointing market returns and the first half of October tends to be rough as well.

15-minute chart of the S&P 500 index:

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The volatility in the NASDAQ composite has been extreme. The index saw a five-day drop from about 5,100 down to 4,300 (-15.6%). The bounce off Monday's low near 4,300 to 4,828 is a +12% move. This index has gone from oversold to overbought very quickly.

For the week the NASDAQ managed a +2.6% gain, which boosts its year to date gain up to +1.95%.

Unfortunately, I'm worried the 200-dma near prior support in the 4,900 region will be heavy resistance.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The bounce in the small cap Russell 2000 index has underperformed its large-cap rivals. Last week the $RUT ended with a +0.5% gain. Year to date it's down -3.47%. The index did find support near the 1,100 area. However, now it faces resistance near prior support around 1,180 and the 1,200 region.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

It's a new month and that means lots of economic news. We'll get both the ISM manufacturing and ISM services indices. We'll see PMI data out of China and Europe. Plus we'll have the normal monthly employment numbers from ADP and then the U.S. government. Of course investors will be interested to hear what ECB President Mario Draghi might have to say about Europe.

The big event is probably Friday's jobs report. The Federal Reserve is always watching the labor market. If the August jobs report is healthy it could be one more factor in the Fed's favor to raise rates at their September meeting.

- Monday, August 31 -
China manufacturing PMI data
Chicago PMI

- Tuesday, September 01 -
Eurozone manufacturing PMI data
ISM index
Auto and truck sales

- Wednesday, September 02 -
ADP Employment Change Report
Factory Orders
Federal Reserve Beige Book

- Thursday, September 03 -
ECB interest rate decision
ECB President Mario Draghi press conference
ISM Services index

- Friday, September 04 -
Nonfarm payrolls (jobs) report
Unemployment rate

Additional dates to be aware of:

Sept. 7th - U.S. Markets closed for Labor Day holiday
Sept. 9th - Apple Inc. (AAPL) holding a special event
Sept. 17th - FOMC meeting, policy update, economic forecasts
Sept. 17th - Fed Chairman Yellen press conference

Looking Ahead:

As we look ahead investors will be focused on three things. First is market volatility. However, we can't predict how big or how fast the market will move, especially since markets have been hostage to wild swings in the Chinese market lately. Let's pretend for a moment that the market's crazy moves cool off for a while (although that could be wishful thinking on my part).

The next issue or event investors will focus on is the upcoming FOMC meeting scheduled for September 16-17. Third, the movement in oil could be a market catalyst. However, oil has bounced and just snapped an eight-week losing streak, and considering the proximity of the Fed meeting the Fed's decision will likely be the main focus for the next two weeks. The Federal Reserve has not raised rates since 2006 and they have kept rates near zero since 2008. When they do decide to raise rates it will mark a major change in policy.

The three-day Fed-sponsored conference in Jackson Hole, Wyoming, this past weekend didn't really shed any light on the Fed's upcoming decision. Comments from Fed officials have been ambivalent. Last Wednesday New York Fed President William Dudley caught the market's attention when he said that reasons for the Fed to raise rates in September "seems less compelling to me than it was a few weeks ago." Then on Friday Fed Vice President Stanley Fischer suggested that a September rate hike has not been ruled out.

Meanwhile Wall Street analysts have been downgrading their forecasts for a rate hike this year. Barclays just pushed their estimate for the Fed's next hike from September to March 2016. A recent Reuters article said, "Between low inflation, market turmoil, continued job growth, a strong second-quarter GDP reading and the impact from China's devaluation of its currency, the decision is no slam dunk."

Fortune.com just ran an article this weekend discussing five reasons why the Federal Reserve will not raise rates this year. According to the author the main reasons to delay are: recent stock market volatility, the widespread global economic slowdown, China's impact on the global economy, the strong U.S. dollar, and very low inflation. You can read more details here.

The Fed's decision at their September meeting could influence the market's direction for the rest of the year. It might be interesting to see what the Fed members are already thinking. If that sounds like your cup of tea then check out this article over at Marketwatch.com. They have a brief summary from all the Fed governors that reflect their opinion on raising rates. Check it out here.

The analysts at JPMorgan warned that the stock market could remain volatile over the next few weeks. However, they do not expect stocks to fall into a bear market and suggested the recent weakness was a buying opportunity. Goldman Sachs was also optimistic and still expect a rally to 2,100 by yearend. Believe it or not but yearend is only four months away. It could be a bumpy ride though.

September is historically one of the worst months of the year for stocks. According to the research team at Stock Trader's Almanac it's actually the worst. Since 1950 September delivers the worst performance for the Dow Industrials and S&P 500. The same holds true for the NASDAQ composite going back to 1971.

The combination of the Fed's potential market-moving meeting in mid September and September's history for weakness could keep investors on the sidelines. We should also consider the technical picture for the market. "V" shaped bottoms are not that common. Market corrections tend to take 60 to 90 days to play out. The good news is the market correction will provide a set up to launch positions for the next six to twelve months. The bad news is our next entry point may not be until the second half of September or even October. As long-term LEAPS traders we just need to be patient.

Please note that next weekend the LEAPStrader newsletter will be published on Tuesday, September 8th due to the Labor Day holiday weekend.

Enjoy your holiday next week and trade carefully!

~ James