Stock Selloff: How Serious Is This Correction?

John Person breaks down the recent market selloff and its significance moving forward.

Yes, the stock market had a minor meltdown. The question is how significant can this turn into? If the market generates enough margin calls then we can expect one or two more down days. The breadth and the volatility ($VXX) will be enormously helpful in determining the extent of this correction. I will need to monitor the conditions and examine the end of day readings.

Lots of things can change hands between now and then. The E-mini S&Ps already have well over a 100-point range from Thursday’s highs to Friday’s low.

Currently our Algo trading models liquidated the Long ($SPXL) with a sizable gain, and the SPDR S&P 500 ETF Trust (SPY) model went short and the inverse NASDAQ 100 ETF went long Friday, trailing stops are activated.  

But on to a more important topic. Friday in the live trade room we had questions about the volatility ETN (VXX) readings. The question was why was the VXX not as high as the market decline in SPY was reading? The logical answer is in the last few days the VXX was rising with the rise in SPY and professional traders are expecting a sell-off.  This phenomenon last occurred in 2018. In fact, last week I told our trade room members my managed fund partner, Ben and I were discussing this and the research showed the last time this occurred was in February 2018 where we underwent a 10% correction and 30 days later the market popped right back up. But it had a 10% correction! If we see a 10% correction this time the SPY would be back between 315 and 320. That’s where it was on July 31.

So, the question of why is the VXX not as high? The answer could be that the crazy stock rise in momentum stocks: Microsoft (MSFT), Apple (AAPL), Tesla (TSLA), Amazon (AMZN) Wayfair Inc. (W) and Zoom Video Communications (ZM) exhausted itself and money might not be going out of the market entirely rather rotating into Utilities, Energy, Staples and some industrial material stocks.

We know volume was massively absent from the market since Aug. 11. So, it does not appear that new money flowed into the market in the last few trading days to support the stock values in Tesla, Apple and others. Perhaps institutional traders simply rotated out of value stocks to join the momentum bandwagon, and now they may take some profits and may go right back in these undervalued sectors. If that’s the case, then we will get the selloff in the cap weighted stock Indexes, but money will remain in the market. Only some will have done well and most may be wiped out having bought into the recent rally in those momentum names. Time will tell. But looking at my radar screen, seeing the interactions of what’s going down in value today and what stocks are “holding up” shows me that money is simply rotating around. At least this is my explanation. It does seem logical as to why the VXX went higher as the S&P 500 rallied in the last few trading days.

Now that the major averages have declined, how does this information benefit us? If by end of this week or the latest by Tuesdays  close, we have buy set ups- in value and growth sectors such as Financials , banks and financial service stocks or staples, Utilities, Energy, airlines or industrials, we will have the right set-ups and timing for higher dividend yielding stocks to ride through both the elections and through years end.

Stay tuned, be disciplined and be patient.