So the market is in a huff about weak corporate earnings. Sigh.
At times, the stock market looks downright baffling. Despite all the warnings from key companies that earnings were under pressure in the third quarter – notably, FedEx in recent weeks and Caterpillar on Monday – major indexes appeared to reflect the belief that the bad news was priced in, even with the S&P 500 flirting with multi-year highs.
On Tuesday, reality seems to be setting in. In mid-morning trading, the S&P 500 was down about 24 points or 1.7 per cent, to 1410. The selloff is broad – 97 per cent of stocks were down, which certainly classifies as a "risk-off" day – but the source of it appears to be specific.
DuPont Co. reported that its quarterly earnings slid 98 per cent from last year amid declining sales in all regions, and also cut its full-year forecast. Plus, the company provided yet another bellwether indicator to fear: titanium dioxide. The paint ingredient is seen as a key indicator of global industrial activity, and demand is down.
In other words, the market is apparently wilting not because of such vague terms as "consolidation", "profit taking" or "global jitters" – but because of rising concerns about profitability and economic growth.
The bigger question: Is this just another bout of weakness or the end of the bull market? There aren't any clear answers yet (of course), but it was interesting to see on Monday that a number observers remain cautiously upbeat about the market.
We'll be interested to see any updates from Cam Hui, who writes the Humble Student of the Markets blog. As of Monday morning – before the recent gyrations set in – he noted a number of factors that gave support to stocks: European stocks were still trading above their 50-day moving averages, which suggested that risk-taking was alive and well.
As well, widespread bearishness suggested that there is not a lot of optimism built into stocks right now. The recent reading from the American Association of Individual Investors pointed to cautiousness on the part of small investors. And the media has been dining out on the 25th anniversary of the Crash of 1987, raising alarms that, yes, it could happen again.
Meanwhile, the CBOE Volatility index, or VIX – the so-called fear index – sat at about 17 at the start of the week, below the level of 20 that Mr. Hui believes would mark a breakout point.
Things are changing fast, though. The VIX jumped nearly 17 per cent on Tuesday, putting it at 19.4 in midday activity – or close to that breakout point. In other words, investors are getting nervous.
David Berman