+++ (BBG) Bad Day Turns Terrible as Dow Suffers Worst Point Plunge Ever

(Bloomberg) — Even before the opening bell, Monday looked
like a bad day for the U.S. stock market.
But not even pessimists were prepared for the white-
knuckled ride that for 15 harrowing minutes sent the Dow Jones
Industrial Average tumbling almost 1,600 at its lowest point —
its biggest intraday point decline in history.
Coming after a 666-point rout on Friday that shook investor
confidence, Monday’s plunge left many investors wondering just
where the pain would end. With the back-to-back declines, the
5.8 percent gain in January has been more than wiped out. And
futures trading on Tuesday signaled the selloff isn’t over, with
S&P 500 Index contracts sinking as much as 3 percent before
recovering to be 1.2 percent lower as of 5:32 a.m. in London.
“There’s certainly concern,” said Paul Nolte, a portfolio
manager at Kingsview Asset Management in Chicago. “It’s should
we get out? What do we do here? They’re afraid of a crash.
Certainly to see the market down as much as they are is
disconcerting especially with the nice run that we’ve had even
into this year. They don’t want to give up the gains.”
Despite the magnitude of Monday’s decline — the Dow closed
down 1,175 points, or 4.6 percent, paring about one-third of its
biggest plunge — few traders saw panic in the market. Rather,
the move appeared to reflect a growing sense that a strong
economy might stoke inflation and push interest rates higher
even faster than people have been expecting.
“We had gone too far too fast in the month of January and a
little brush fire like this is not a bad thing,” said Philip
Blancato, CEO of Ladenburg Thalmann Asset Management in New
York. “Today was a classic risk-off day when so much of the
selling is going to be program trades based on technicals. It
cleans up some of the people who are on the fence. You got the
irrational exuberance out of the market.”
Adding to the angst were concerns that computer-driven
trading strategies — some geared to the low market volatility
of late — might have abruptly accelerated the decline. A few
analysts used the term “flash crash” to describe the events, a
loose term that denotes everything from exchange malfunction to
harmonized selling by quant funds.
“Millions of quant orders went in one direction, and it
overwhelmed a lot of these breakers. That’s it,” said Dennis
Debusschere, head of portfolio strategy at Evercore ISI, said by
phone from New York. “It was very quant, very systematic.”
A group that may be suffering the most is anyone who is
shorting volatility, a trade that amid two years of market
tranquility has been a route to some of the easiest money on
Wall Street. As markets buckled, the Cboe Volatility Index
surged 124 percent to 38.8. It closed at 37.32, still up 115.6
percent.
That said, today’s selloff isn’t completely unprecedented,
particularly in comparison to the period during and after the
financial crisis. For four days in August 2011 the Dow
alternated up and down days of 4 percent and 5 percent, and it
tumbled as much as 6.6 percent on Aug. 24, 2015. Those days were
quickly forgotten as the bull market picked up steam.
“I don’t sense a whole lot of panic,” Doug Ramsey, chief
investment officer at Leuthold Group LLC, said by phone. “Just
10 days ago momentum was at the highest level in the S&P history
and it would be very unusual it the stocks made a final bull
high when the momentum was that strong. I’m not sure this is the
end of the adjustment, but the odds are in favor of the market
stabilizing here in the short-term and trying to push to a
higher high.”