Equities plunge back into the old normal

The ensuing plunge in global equity markets enters a worrying phase after disappointing US economic data further destabilised the notion that the US economy remained immune from the economic troubles of Europe and China, raising serious questions about the end of QE. The Dow Jones Industrials Index is falling 445 pts, or 2.0%, while the S&P50 is currently down 50 pts or 2.7%, the biggest percentage daily decline since September 11, 2011.

US catalysts & tipping points

The October Empire State index, released by the Federal Reserve Bank of NY plunged to 6.2 from 27.5 in September, well below the consensus forecasts of 20.2, reaching its lowest level since April. The decline was the biggest since November 2010 when the index fell to -7.94 from +14.73 in October. While the report is known for its volatility, it was deemed among the proverbial tipping points crushing sentiment, and forcing US indices into the damage of their European counterpart. US retail sales contracted 0.3% in September, larger than the expected decline of 0.1%. Finally, another negative reading on the producer prices index did no favour in relieving worries about an upcoming disniflationary trap.

News that a second health-care worker in Texas tested positive for Ebola after caring for the deceased Ebola patient, magnified the escalation fears about the spread are said to have contributed to a 20% decline in shares of US airlines since the September high, which crept into the broader indices.

January declines & single month corrosion

We have mentioned earlier in the year that global equities have sustained high-profile corrections in a given month during years starting with a negative January performance. This is not the same as the so-called “January Effect” analysis, which postulates that a decline in January implies a negative year, this analysis does not necessarily infer a decline in the full year, but instead implies one or two months of sharp declines.

In January 2014, all major US equity indices finished in the red, with the S&P500 and Dow Jones Industrials Index falling more than 3.5%. The last time indices finished lower in January was in 2010. Here is what happened and when.

2010 – The last time stocks fell in January (-3.5% due to Volcker PropTrading speech) – the Eurozone crisis kicked off and the May Flash Crash hit, partly due to GS DoJ investigation.

2008 & 2009 – Negative January for the Dow (-4.6% and -8.8% respectively), coinciding with the subprime crisis & global equity crash.

2000 – The bust of the technology bubble was kicked off by a 7% decline in January.

1998 – Another year of spectacular losses when the Asian currency crises coincided with damage in Russia and Brazil, a classic case of emerging markets collapse.

1990 – The year of the US Savings & Loans crisis and Saddam Hussein’s invasion of Kuwait started off with a 6% January fall before leading to a 17% decline in Aug-Nov.

The charts below speak for themselves. Aside from the prominent fact that US indices are inches away from posting their first 10% decline in over three years, the key levels suggest the 100-week MA in the Dow as 15,555, which would be a 12% decline from the high and a “proper” break of the 4-year channel. This would imply prolonged losses in the S&P50 below 1800 and on to the 100-week MA at 1,740, denoting a 13% decline.

To under market patterns, never ignore history, no matter how high we’ve been in July, August or September.