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Wednesday, October 26, 2016

By Noel Randewich

(Reuters) — Investors rattled about China sent U.S. stock indices almost 4-percent lower on Monday in an unusually volatile session that confirmed the S&P 500 was formally in a correction, even after a dramatic rebound by Apple (AAPL.O).

The Dow Jones industrial average (DJI) briefly slumped more than 1,000 points, its most dramatic intraday trading range ever.

Monday’s drop followed an 8.5 percent slump in Chinese markets, which sparked a selloff in global stocks along with oil and other commodities.

Wall Street had stayed in s narrow range for much of 2015, but volatility jumped this month as investors became increasingly concerned about a potential stumble in China’s economy and after Beijing surprisingly devalued its currency.

Some investors unloaded stocks ahead of the close after looking to make money from volatile price swings earlier in the session.

“If things don’t settle down in China, we could have another ugly open tomorrow and you wouldn’t want to be caught holding positions you bought this morning,” said Randy Frederick, managing director of trading and derivatives for Charles Schwab in Austin.

Apple’s Chief Executive Tim Cook, in comments to CNBC, took the unusual step of reassuring shareholders about the iPhone maker’s business in China ahead of a dramatic 13-percent drop and rebound in its stock, which closed down just 2.47 percent at $103.15.

The Dow Jones industrial average (DJI) closed down 588.4 points, or 3.57 percent, at 15,871.35.

The S&P 500 (SPX) lost 77.68 points, or 3.94 percent, to 1,893.21, putting it formally in correction mode.

An index is considered to be in correction when it closes 10 percent below its 52-week high. The Dow was confirmed to be in a correction on Friday.

The Nasdaq Composite (IXIC) dropped 179.79 points, or 3.82 percent, to 4,526.25, also in correction.

The CBOE Volatility index (VIX), popularly known as the “fear index”, briefly jumped as much as 90 percent to 53.29, its highest since January 2009.

Preliminary data from BATS Global Markets show that there were 1,287 trading halts on U.S. stock exchanges due to excessive volatility or the tripping of circuit breakers, far more than usual.

The S&P 500 index showed 187 new 52-week lows and just two highs, while the Nasdaq recorded 613 new lows and eight highs.

“Emotions got the best of investors,” said Philip Blancato, chief executive at Ladenberg Thalmann Asset Management in New York.

“The conjecture that the Chinese economy can propel the U.S. economy into recession is ridiculous, when it’s twice the size of the Chinese economy and is consumer-based.”

All of the 10 major S&P 500 sectors were down, with energy (SPNY) losing 5.18 percent.

U.S. oil prices were down about 5 percent at 6-1/2-year lows, while London copper and aluminum futures hit their lowest since 2009.

Exxon (XOM.N) and Chevron (CVX.N) each fell more than 4.7 percent. U.S. oil and gas companies have already lost about $310 billion of market value this year.

The dollar index (DXY) was down 1.67 percent. It fell more than 2 percent earlier to a 7-month low as the probability of a September rate hike receded.

Traders now see a 24-percent chance that the Federal Reserve will increase rates in September, down from 30 percent late on Friday and 46 percent a week earlier, according to Tullett Prebon data.

Wall Street’s selloff shows investors are becoming increasingly nervous about paying high prices for stocks at a time of minimal earnings growth, tumbling energy prices, and uncertainty around a rate hike.

Alibaba (BABA.N) lost 3.49 percent to $65.80, below its IPO price of $68, making it the second high-profile tech company to fall below its IPO price in the past week after Twitter (TWTR.N) on Thursday.

Declining issues outnumbered advancers on the NYSE 3,064 to 131. On the Nasdaq, 2,632 issues fell and 281 advanced.

Volume was heavy, with about 13.9 billion shares traded on U.S. exchanges, well above the 7.0 billion average this month, according to BATS Global Markets.

(Additional reporting by Tanya Agrawal; Editing by Nick Zieminski and Chizu Nomiyama)

Photo: Traders work on the floor of the New York Stock Exchange August 24, 2015. REUTERS/Brendan McDermid

  • Dominick Vila

    The reasons for the ongoing drops in the DOW Index are influenced by:
    1. A long overdue market correction. Corrections usually happen every 12 to 18 months. It took four years for one to happen this time. This correction is due to several factors, one of them is the decision by investors in speculative stocks to cash in.
    2. The economic woes in China, which caused growth to drop from a 8% to 10% annual rate down to 5%; the devaluation of China’s currency, which coupled with the strength of the U.S. dollar results in China’s products and services being cheaper, and ours more expensive, all contribute to high degree of anxiety about the sustainability of economic growth and the strength of the global economy.
    3. Wall Street is worried about potential interest rate increases by the Fed. Even if interest rates increase by only half a percentage point, many investors will interpret that as a sign of things to come.
    4. The economic slowdown in China produced an oil glut that has brought the price of crude to around $40 a barrel. Add to that the probability of Iran selling large amounts of oil to Asian and European countries, and it is not too hard to understand why investors are worried about low gas prices impacting oil exploration, drilling, and refining.
    5. Last, but not least, the infantile and irresponsible rhetoric we hear from candidates to the U.S. presidency is introducing a level of uncertainty and concern among foreign investors in the U.S. market never seen before.
    The market will recover within the next few weeks, especially if the Fed announces that they don’t plan to raise interest rates for the remainder of this year, if the U.S. economy continues to grow, if job growth and consumer spending remain steady, and if companies continue to post healthy profits. No need to panic. This is an integral part of stock market investment. It has happened before, and it is bound to happen many more times.

    • Whittier5

      Those “investors” you refer to interpreting a Fed rate increase, should be qualified as large institutional investors. The 99+%, who are investing a dab every payday, would simply continue investing for the long haul regardless.

      I think our market may heal itself much faster. But, China is another story. They have the Mother of All Housing Bubbles to deal with. Miles of new condo towers – completely empty – in every major city. No buyers in sight.

      Our “housing bubble” pre-2008, wrongly blamed as the cause of the Great W Deepression, was a pimple by comparison.

      • Dominick Vila

        Another problem affecting the Chinese economy involves the fact that Chinese investors are depositing their dollar holdings overseas, and that some are investing heavily abroad, rather than in their country.
        Problems associated with China’s currency become evident when we see what many of their trading partners are doing. Argentina, for example, a country that exports 50% of their products to China, is asking China to pay in dollars.
        In addition to over building, and long term poor planning, the Chinese economy has been growing too fast to manage. The transition of a communist nation, even if it is communist in name only, to capitalism is never easy.

  • charleo1

    The main reason for the market’s correction, was stocks were overpriced. Well, duh. But there’s also another more structural, and pervasive reason that stocks were overpriced in the first place. And that has much to do with the way we pamper the investor class. We protect them from paying anywhere near their fair share of taxes. We allow them to hold the profits of their foreign investments off shore. Put them in tax havens, “invest them,” in stock buy backs, buy out competition, pay exorbitant salaries to top executive staff, and average out profits over a number of years. So pretty much whatever they admit their final profits amounted to, they finally owe. One hedge funder was quoted as saying this onerous tax structure amounted to gov. tyranny on a scale approaching the Nazi’s holocaust! Maybe he forgot about the subsidies, incentives, and of course, charities, like private art galleries. I mention art, first because it is such a wonderful, stable investment, if one can afford the master works. And it’s all tax deductible, if it’s donated to one’s own museum. And, here’s the beautiful part. If you’re a billionaire investor, it need not be open to the public riffraff. Even as a gov. loan is being taken out in our name to cover the shortfall, should we need to bailout the wonderful, “job creators,” on some of their more power drunk, “investments.” So the market needs a correction, and down goes our retirement accounts. The good news for the investor class, is less, and less of their money is involved with such highly regulated stuff. And let’s not forget, it’s not really their money anyway.

    • Whittier5

      You omitted mention of all of the Fed’s Money thrown at the same Big Banks and Brokerages that crashed the World Economy in 2008, that those Banks are using to Gamble with Again in the Market.

      • charleo1

        I couldn’t possibly name everything, I’m sure. A good read by the way,
        is David Cay Johnston’s “Free Lunch.” How the rich enrich themselves
        at gov. expense, and stick you with the bill.

  • Whittier5

    The Sky is NOT falling. This correction in the US Market is 3 years overdue.
    Just sit tight and turn off Cable financial News.