Concerns over a slow-down in China turned to fear and anxiety last week. The aftershocks of China's recent devaluation of the yuan has transformed into a tsunami of selling for equity markets. Last week's widespread sell-off culminated into a painful spike lower on Thursday and Friday. It was the worst one-week decline for the U.S. market since 2011. Nothing was spared with every sector posting declines. Money was rushing into the safety of bonds, which drove the yield on the 10-year U.S. bond down to 2.05%. The yield on a German 10-year bond is down to 0.56%.

There was a lot of talk about a market correction. Typically a correction is a -10% (or more) pullback from the highs. Let's look at the damage from last week.

Index/Sector Last Week From its Highs Year to Date
S&P 500 Index -5.77% -7.5% -4.27%
NASDAQ Composite -6.78% -9.8% -0.6%
NASDAQ-100 -7.36% -10.3% -0.92%
Russell 2000 -4.6% -10.7% -3.98%
Dow Jones Industrials -5.8% -10.1% -7.65%
Semiconductors (SOX) -8.3% -22.5% -15.76%
Dow Jones Transports -5.3% -14.5% -13.8%
KBW Banking Index -6.7% -9.2% -1.7%
Biotech Index (BTK) -6.5% -15.0% +9.5%

Regular readers know I don't really follow the Dow Jones Industrial Average ($INDU) since it is only 30 stocks. However, on Friday, CNBC noted that the $INDU closed at its absolute low of the day two days in a row, which is the first time that has ever happened. It's also in correction territory (-10%) for the first time since 2011. The last time the $INDU fell more than -500 points was August 2011.

Volatility Index (VIX)

Another market record was made with the volatility index (a.k.a. the VIX). The VIX is also known as the fear gauge. When investors panic they buy more put options and that drives the VIX higher. Friday's market collapse produced a +46% surge in the VIX to 28.0. The VIX is up more than +100% in the month of August. According to CNBC the VIX has never doubled within a one-month time span before.

A long-time market maxim goes like this, "When the VIX is low it's time to go. When the VIX is high it's time to buy." Essentially when the VIX is low it represents investor complacency and warns of a potential top. When the VIX is high, which means above 20, it is supposed to signal a short-term market bottom and thus a potential entry point to buy. Unfortunately the whole VIX is low thing has not worked in years. We've seen it hover in the 10 to 12 range for months and months and is generally worthless. The only use seems to be the "VIX is high" part of the mantra. Often, but not always, when the VIX spikes to extremes it can signal the market is near a short-term bottom - emphasis on "near" a bottom and not necessarily "the" bottom.

Chart of the Volatility Index (VIX)

Worries about China have been pushing the commodity space lower for months. Combine that with a dollar that is up for the year and it's a one-two punch that has pushed the CRB commodity index to multi-year lows. Last week the CRB plunged -5.5% and closed at 13-year lows on Friday.

Chart of the CRB Index (CRB)

One commodity in particular has been a real anchor for the commodity index and that is crude oil. Two weeks ago we saw crude oil fall -3.8%. This past week oil dropped another -4.39%. Oil is now down -25% for the year and down about -60% from its 2014 highs. These are lows not seen since early 2009 during the worst of the bear market. WTI oil briefly traded below $40.00 a barrel on Friday and settled just above $40.00. As of Sunday night oil futures were trading near $39.80 a barrel. Last week's drop was the eighth weekly loss in a row - the longest losing streak since 1986.

This oil weakness is killing energy stocks. The oil index fell -8.7% last week and is down -18% year to date. The oil service stocks plunged -7.7% last week and they are down -22% for the year. Eventually oil is going to bounce but it will likely be a bear-market bounce. That means a very sharp, rip-your-face-off kind of rally that quickly fails.

Market Internals & Currency Declines

There is no way to sugar coat it. Last week was ugly. You might call it a perfect storm. That's what Andrew Frankel, co-president of Stuart Frankel & Co thinks. In a recent Reuters article Frankel said, "You're definitely witnessing a perfect storm in terms of China timing, people on vacation that affects liquidity, and you've got a lot of questions on the Fed and people are obviously focused on oil."

Normally trading volume in August is pretty low. A lot of market participants are on vacation before school starts in September (I know that some schools have already started). The fact is a lot of senior staff in Wall Street is out of town and that leaves a skeleton crew to man the trading desk. There was no shortage of volume on Friday.

This past Friday was an option expiration, which probably boosted volumes. According to BATS Global Markets, the average volume this month has been in the 6.75 billion shares a day range for all of the U.S. exchanges. Friday's selling frenzy saw volume surge to 10.6 billion shares traded. On the NYSE for every one stock that closed higher there were six stocks that declined. On the NASDAQ exchange there were 2.5 stocks in the red for every 1 stock that managed a gain. Friday's session was the first time in four years that the S&P 500 did not have any 52-week highs. The last time that happened was when the U.S. saw its credit rating downgraded.

Global markets are still reacting to China's devaluation, which a few pundits are starting to see as a desperate move to boost their exports and economic growth. Other countries have started devaluing their currencies to stay competitive. Vietnam just devalued their currency (dong) for the third time in 2015. Kazakhstan decided to remove the peg on their currency (tenge) and it fell -22%. Other countries that saw big declines in their currency last week include: Russia, Belarus, several African nations, Mexico, Turkey, and Columbia. The MSCI Emerging Market index was hammered lower with a -5.7% decline last week. It was the biggest weekly drop since May 2012.

Economic Data

Economic data in the U.S. continues to be mixed. The regional Philadelphia Fed survey improved from 5.7 to 8.3, which was better than expected. Yet the New York Empire State manufacturing survey plunged from +3.9 to -14.9, which was way, way below expectations. The new order component dropped from -3.7 to -15.7. The shipment component fell from +8.2 down to -13.8.

The latest round of data on the residential housing market was bullish. The NAHB housing market index, which is a confidence survey among builder, improved from 60 to 61, which hasn't been this high since November 2005. Existing home sales rose for the third month in a row and hit their highest levels since 2007.

The monthly housing starts saw their June reading revised higher from 1.174 million to an annual rate of 1.204 million. July's reading was 1.206 million. The single-family home component surged +12.8% to 782,000. This is the strongest pace for single-family home starts since December 2007. Unfortunately the building permits data slipped from June's 1.337 million pace down to 1.119 million in July.

The monthly Consumer Price Index (CPI) rose +0.1%, which suggest there is no inflation in the U.S. That's bad news for the Federal Reserve that wants to see inflation reach 2.0%. Speaking of the Fed the FOMC minutes from the last meeting fueled a lot of uncertainty around the Fed's next rate hike. According to the minutes, members of the committee did not have any conviction on raising rates. They express worries about the labor market, lack of inflation, and economic struggles overseas, especially in China.

Overseas Economic Data

Last week was all about China (again). The latest reading on the Caixin manufacturing PMI fell from 47.8 to 47.1 in August. The Caixin was previously named the HSBC flash China PMI. Unfortunately, the August reading is a 77-month low. Numbers below 50.0 suggest economic contraction. Another disappointing data point was car sales. China is the largest auto market in the world now. Auto sales in China are expected to decline for the first time in 17 years.

Investors and analysts are keeping a very close eye on the Chinese Shanghai index. Last week was a roller coaster ride for Shanghai investors. Check out last week's moves for the Shanghai index:

Monday +0.7%
Tuesday -6.2%
Wednesday +1.2% (but it was down -5% intraday)
Thursday -3.4%
Friday -4.2%

The Shanghai index lost -11.2% for the week and is down -32% from its June 2015 highs. That means the Chinese market is now in a bear market (more than -20% from its highs).

Looking across the East China Sea to Japan we see that Japanese exports rose +7.6% from a year ago, which is bullish. Their manufacturing PMI for August rose from 51.2 to 51.9, although this actually missed estimates. Unfortunately Japan's GDP fell into negative territory for the first time in three quarters with their Q2 GDP estimate coming in at -0.4%. That's down from +1.1% growth. The Japanese NIKKEI index ended the week at 3 1/2 month lows.

Europe did not have a good week either. All the major averages posted losses for the week and Friday was the worst one-day drop in four years. The Eurozone's preliminary manufacturing PMI for August was unchanged at 52.4. Germany's manufacturing PMI for August improved from 51.8 to 53.2. Numbers above 50.0 suggest economic growth. This economic news was lost in the shuffle as stocks reacted to overseas seas declines. The Stoxx Europe 600 index, which tracks 600 companies across 18 EU members, and includes small cap, medium, and large cap stocks, fell -3.3% on Friday and is down -6.5% for the week. The Stoxx 600 is in correction territory with a -13% drop from its April highs.

There is a new wrinkle with the situation in Greece. The country has finalized its third financial bailout in the last five years. They have actually started receiving bailout money from the new $85 billion bailout, that should last the next three years. Greek Prime Minister Alexis Tsipras announced he has resigned on Thursday. That means the country will be forced to have snap elections again. These new elections are scheduled for September 20th. This appears to be a calculated move by Tsipras who would like to be re-elected with a new mandate from the people.

Major Indices:

The S&P 500 index lost -5.77% for the week. It's now down -4.27% year to date. Friday's drop snapped a 213 trading session record. What record you ask? According to the Wall Street Journal, the S&P 500 went 213 session without falling more than -5% from its highs. It was the longest streak in 11 years. Back in 2004 the S&P 500 managed to go 219 sessions.

Friday's -3.18% plunge sliced through potential support at 2,040 and the 2,000 level. It even closed just below the December 2014 lows near 1,972. CNBC's Steve Grasso, who is also Director of Institutional Sales at Stuart Frankel & Co. Inc. believes that if the S&P 500 does not hold the 1,970 level then the next support level should be 1,920. A drop to 1,920 would be a -10% correction for the S&P 500. That's as good a place as any to look for support. Now that the S&P 500 has broken down the 2,000 level and 2,040 are new resistance levels.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite fell -6.78% for the week. It was the worst weekly drop in more than five years. That erased its gains for the year. It's very close to a -10% correction as well. The big cap NASDAQ-100 index is already in correction territory, down -10.3% from its highs.

The NASDAQ composite's plunge past 4,800 is significant. The 4,800 level should have offered some support and the NASDAQ sliced right through it. It's hard to say where the next support level is. It could be 4,600. It's probably keep an eye on the 4,500-4,600 area as likely support. Now broken support at 4,800 and 4,900 is overhead resistance.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index lost -4.6% for the week. However, the $RUT's performance on Friday is noteworthy with a -1.3% decline versus a -3% drop in the large cap indices. The $RUT managed to hold support near the 1,150 level. Now there is no guarantee this 1150 region will hold up on Monday but it will be really interesting if it does.

If the 1,150 level fails the next support area could be the 1,080-1,100 region.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index

Economic Data & Event Calendar

The week ahead is relatively quiet for economic data. The U.S. Q2 GDP estimate will make headlines but it's unlikely to change too much. Currently analysts are expecting a rise from the first estimate of +2.3% to almost +3.0%, which seems a little too optimistic.

The Federal Reserve's annual conference in Jackson Hole, Wymoning begins this week. It lasts three days and concludes on Saturday the 29th. Fed Chairman Janet Yellen is not expected to be there.

- Monday, August 24 -
...nothing significant...

- Tuesday, August 25 -
Case-Shiller 20-city home price index
New Home Sales
Consumer Confidence survey

- Wednesday, August 26 -
Durable Goods Orders

- Thursday, August 27 -
U.S. Q2 GDP estimate
Pending Home Sales
Jackson Hole, Wy. Federal Reserve conference

- Friday, August 28 -
Personal Income & Spending
University of Michigan Consumer Sentiment (August)
Jackson Hole, Wy. Federal Reserve conference

Additional dates to be aware of:

Sept. 7th - U.S. Markets closed for Labor Day holiday
Sept. 17th - FOMC meeting, policy update, economic forecasts
Sept. 17th - Fed Chairman Yellen press conference

Looking Ahead:

The Federal Reserve's FOMC meeting in September is the next major event on the horizon. Two weeks ago just about everyone thought the Fed would raise rates in September. Today those expectations have plunged. The slow-down in China is serious business and the global economy seems to be getting worse. Meanwhile there is virtually no inflation in the U.S. and the U.S. economic is expected to slowdown in the third quarter with the Atlanta fed forecasting +1.3% growth (that's actually up from its estimates the prior week). Today estimates for the Fed to raise rates in September have fallen into the 24% to 35% range. December odds are at 60%.

Market Corrections

Let's talk about market corrections. If you didn't hear enough about them on Friday we will probably get an earful in the coming week. As you know a bear market is a -20% drop from the highs. A correction is a decline from -10% to -19%. Of the 500 S&P companies, 330 of them (66%) are down -10% or more, according to CNBC on Friday. Another source said 39% are in a correction and 31% are in a bear market, which would suggest 70% of the S&P 500 is down -10% or more. Apple (AAPL), arguably the most influential stock in the U.S. market, hit bear market territory on Friday with a drop to -20.4% from its closing high. AAPL is not alone. About 40% of the S&P technology index is in bear market territory.

Market technician Carter Worth talked about market corrections on CNBC's futures now show. According to Mr. Worth, the S&P 500 index has seen a correction of -5% or more 212 times since 1927. The median drawdown was -8.25% while the average pullback was -12.5%. Currently the S&P 500 is only down -7.6% so according to Carter the S&P 500 still has farther to fall.

The S&P 500 has gone an astonishing 1,426 calendar days since its last -10% pullback. It got really close in October 2014 with a -9.8% decline before bouncing. It's worth noting that the market sees a -5% pullback about once every 3 1/2 months. Yet there have only been about 27 corrections of -10% or more since the end of WWII (1945). The average pullback for these 27 corrections was -13.3% and they tended to bottom out around three months.

An Aging Bull Market

History is no guarantee of future results but it can be a helpful frame of reference. Currently the U.S. is still in a bull market. It's actually the fourth longest bull market in the last 85 years. The average bull market lasts about 165 weeks. The current bull market for the S&P 500 is about 336 weeks old (almost 6 1/2 years). I'm not saying the bull market is dead but it's definitely been due for a correction.

From the bear-market low of March 9th, 2009:

The S&P 500 index hit an all-time high of 2,130 on May 21st (+215%).

The NASDAQ composite surged to an all-time high of 5,218 on July 20th (+311%).

The small cap Russell 2000 index hit an all-time high of 1,295 on June 23rd (+277%).

The Dow Jones Industrial Average peaked at 18,312 on May 19th (+180%).

My outlook for the week ahead is cautious. I expect another spike down on Monday morning but traders will eventually step in and buy it.

~ James

"The one fact pertaining to all conditions is that they will change." ~ Charles Dow, 1900