The Worst October Since 2008?

Fred Imbert, Ryan Browne and Eustance Huang of CNBC report, Dow plunges 300 points, S&P 500 dips into correction territory:
Stocks plunged Friday as the release of disappointing quarterly results from key tech companies overshadowed strong economic data.

The Dow Jones Industrial Average fell 340 points, with Home Depot lagging, and was about 1.5 percent away from entering correction levels. Meanwhile, the Nasdaq Composite dropped 2.3 percent.

The S&P 500 declined 1.8 percent and was briefly down more than 10 percent from its 52-week high, entering correction territory. The broad index hit a record high on Sept. 21.

Seven of the 11 S&P 500 sectors are also down at least 10 percent from their respective 52-week highs, including energy, materials and financials. Around 80 percent of the index's stocks are also in a correction. The average stock market correction results in a 13.8 percent drop and lasts five months, according to Gluskin Sheff Research.

Larry Benedict, CEO of The Opportunistic Trader, said traders "don't want to be long heading into the weekend." He added, "S&P now down on the year and people are more afraid to be long today than they were when market was 10 percent higher."

Amazon and Google parent company Alphabet fell 7.9 percent and 3.3 percent, respectively, after they released their latest quarterly results on Thursday. Earnings for both companies topped analyst estimates, but revenues fell short.

There were "high expectations" for this earnings season, King Lip, chief strategist at Baker Avenue Asset Management, told CNBC. "The earnings are not coming in as great as people had suspected," Lip said, adding that "for Amazon specifically, forward guidance was surprisingly light."

These declines were enough to offset a better-than-expected report on U.S. economic growth. The Commerce Department reported the U.S. economy grew at a 3.5 percent rate in the third quarter, above a 3.4 percent estimate. The government also said its personal consumption expenditures (PCE) index, a key measure of inflation, increased by 1.6 percent last quarter.

Stock have suffered in recent weeks as fears of rising inflation — and rising interest rates — trim corporate profit expectations. Since the PCE index is the Federal Reserve's preferred inflation gauge, any sign that the measure may be slowing could stall the central bank in its plan to continue to increase the overnight rate.

Consumer spending, which accounts for more than two-thirds of economic activity, surged by 4 percent in the third quarter, the fastest pace since the fourth quarter of 2014.

Friday's decline comes after equities rallied in the previous session. The major average are also set to post big losses for the week. The S&P 500 and Dow are down 2.2 percent and 1.8 percent this week, respectively, entering Friday's session.

These losses also add to a sharp drop seen throughout this month. Through Thursday's close, the Dow and S&P 500 were down 5.6 percent and 7.2 percent for October, respectively. The Nasdaq, meanwhile, had lost 9.1 percent.

"What's happened is we have a number of outside issues overshadowing what has been strong economic data and overall good earnings," said Michael Arone, chief investment strategist at State Street Global Advisors.

Several factors have conspired to knock markets down this month — some earnings disappointment, fear of rising interest rates, a brewing conflict between Italy and the European Union over budget spending, criticism of oil power Saudi Arabia after the killing of a dissident journalist and finally, worries that world growth is losing steam.
It's been another crazy volatile week on Wall Street with tech stocks leading the rout on Wednesday, before snapping back on Thursday, only to fall back hard Friday.

The week started off bad with Caterpillar (CAT) and 3M (MMM) disappointing on earnings and then got progressively worse when Texas Instruments (TXN) and Advanced Micro Devices (AMD) disappointed, and we ended with a surprise when Amazon (AMZN) disappointed on its revenues.

Why are stocks, including tech giants which were only going up, up, up all of a sudden getting slammed so hard?

Since the start of the month, I warned my readers the rise in rates spells trouble ahead and last week I stated the market may be topping out.

One of Warren Buffett's famous quotes is worth repeating here: "Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices."

There is no question the rise in rates has negatively impacted all risk assets this year, especially emerging market stocks (EEM) which are now at risk of falling below their 200-week moving average (click on image):

Such a precipitous decline below the 200-week signals a bear market for emerging markets and if the Fed continues raising rates and the US dollar (DXY) continues surging higher, it will all but ensure more weakness in these countries (click on image):

The trade war with China just adds gasoline to the fire but make no mistake, the downtrend in emerging markets was ignited by the Fed and the hike in rates which sent the US dollar surging and hit many emerging markets with dollar-denominated debt.

Interestingly, thus far, the weakness outside the US wasn't impacting US stocks but that all changed this month. The decline in US stocks doesn't portend well for the US economy as stocks are a leading indicator of the economy.

But let me show you three sectors I'm watching very closely in the stock market right now. First, have a look at the S&P Homebuilders EFT (XHB) which has fallen into bear market territory (click on image):

Housing is very sensitive to rates so no surprise here to see these stocks falling by the wayside.

Next, have a look at semiconductors (SMH) and biotech stocks (XBI), two tech sectors that got massacred this week (click on image):

Why am I showing you these two sectors? Because they helped lead the entire tech sector (XLK) higher and now the monster rally that took place over the last couple of years looks in trouble (click on image):

Of course, it doesn't help when a tech juggernaut like Amazon (AMZN) stumbles and falls close to 8% in one day but I'm not ready to stick a fork in Amazon yet (click on image):

In the past, when Amazon shares fell below the 50-week moving average, it was a big buying opportunity but it may not be as simple this time around because rates have risen, the global and US economy are slowing, and there is general weakness in tech as portfolio managers move to more stable and defensive names.

Still, Amazon's cloud business grew 46 percent in the third quarter and this tweet by Charlie Bilello is quite incredible and speaks for itself:

Find me one company growing its revenues over the long run like this. That's why I believe top funds will be buying this big dip in Amazon but nobody really knows if this is just a correction or something much worse.

One thing is for sure, we are late in the cycle, many investors got burned being in the wrong trade, chasing momentum stocks. Value investors have been feeling the pain all year as growth outperformed value but are now breathing a little easier (read Joel Greenblatt's comments here).

As I've stated many times, the biggest risk right now remains the Fed and what is going on outside the US. If the Fed hikes too much, it could trigger a major crisis in emerging markets, one that will send another disinflationary/ deflationary wave our way.

This is why I wasn't concerned about talk of a global bond rout, inflation cannot run amok with emerging markets flirting with a crisis and the US dollar surging, lowering import prices.

Barring a stock market crash, the Fed will hike again in December, bringing the total rate hikes to nine.

This is when things get interesting because either we're going to have another growth scare like February 2016, or we might be entering a long bear market and the Fed will have to rethink whether it will hike rates another three times next year.

Is there any positive news for stocks? Yes, the so-called buyback blackout period has challenged markets in October but this freeze on corporate share repurchases lifts for a hefty chunk of companies after this week, giving way to smoother sailing for equity markets, some analysts predict.

We shall see if buybacks boost stocks next week but my best advice for most people remains what I recommended back in July, namely, get and stay defensive in these markets and even though US long bonds (TLT) are not having a good year, they remain the ultimate diversifier and will save your portfolio from being decimated if a crisis occurs.

Please, whatever you do, don't listen to idiots who tell you only a fool would buy bonds now, they are totally clueless and are wrongly extrapolating recent weakness further into the future (click on image):

That's all from me, wish everyone a great weekend and I want to sincerely thank those of you who take the time to support this blog via your donations. You can donate or subscribe to this blog via PayPal on the right-hand side, under my picture. Thank you.

Below, discussing the current state of the markets with Nela Richardson, Edward Jones; Saira Malik, Nuveen; and CNBC’s Rick Santelli.

Also, CNBC's Mike Santoli and Paul Christopher of Wells Fargo Investment Institute discuss Friday's market selloff as stocks are on pace for the worst October since 2008.

Third, we're nearing the end of a brutal October, as volatility soars. CNBC's Dominic Chu discusses how markets are posting the worst October since the financial crisis.

Lastly, for all you Halloween fans, the official trailer to the latest edition of John Carpenter's classic thriller which scared the bejesus out of my generation forty years ago.