Blame the IMF.
EPA Investors were in selloff mode today after the International Monetary Fund cut its global economic growth forecast today. The S&P 500 fell 1.5% to 1,935.08 today, while the Dow Jones Industrial Average dropped 272.58 points, or 1.6%, to 16,719.33. The Nasdaq Composite declined 1.6% to 4,385.20 and the small-company Russell 2000 tumbled 1.7% at 1,076.31.
For a market already suffering from growth fears, the IMF did nobody any favors. It reduced its 2015 global-growth forecast to 3.8% today from 4% in July, and warned of the possibility that the euro area could fall into recession…again. It left its 2015 US growth forecast unchanged at 3.1%.
Gluskin Sheff’s David Rosenberg explains why the stock slump might not be over yet:
There have actually been no fewer than 13 mini-corrections since the bull market began in March 2009. On Average, the S&P 500 declines 8.7% over a 34 day span (the median is -7.2% over 28 days). The forward P/E multiple corrects down by 1.3 point and the trailing by 2.0 point – both the mean and the median are basically in agreement on this. High-Yield bonds spreads widen out an average of 83 basis points (median is 62 basis points). The 1o-year US treasury note yield in these risk-off phases fall 40 basis points (both average and median). Relative strength in the Small-Cap stocks is -300 points on average and -200 basis points on a median basis and equity market sentiment as per Market Vane bullishness has retreated nine percentage points by the time the capitulation low in the S&P 500 is turned in – this is the case whether you look at the history either on an average or median basis.
So far, the S&P 500, even with all the ups and downs since the mid-September peak, has corrected but 2%, even though it may feel worse than that given the volatility. The VIX has only jumped 20%, p less than half what one would like to see at an interim market trough. Both the trailing and forward P/E multiples have corrected by 30-40 basis points – again, a fraction of what we typically see when it comes time to start dipping more toes in the equity pool.
MKM Partners’ Jonathan Krinsky thinks the S&P 500 could be headed for 1,905:
We continue to harp on the market cap issue because we feel it is extremely important at the current juncture…There are many different ways to express this issue, but perhaps one that doesn't get enough attention is a simple ratio of the S&P 500 Equal Weight Index (SPW) vs. the regular market cap weighted SPX. This is the exact same index of course, just weighted differently.
This ratio has generally been in an uptrend for the last two years, during which time the S&P 500 hasn't so much as touched its 200-day moving average, or DMA. In the last few weeks however, this ratio not only broke its 200 DMA, but it has been making multi-month lows….weakness in this ratio has either coincided or preceded weakness in the S&P 500. This makes sense as it shows how money is moving up the market cap scale which is perceived as safer.
As we discussed in a note last week, there were some fairly oversold readings (% of stocks above 20 DMA) on the market which should have led to a relief rally, but we did not think that "THE" low was likely in. Based on the declining slope of the Russell 2k's 200 DMA, as well as the fact that the S&P 400 Mid-cap Index is now below its 200 DMA, we still feel that the August lows of 1905 on the SPX are in play. That would also roughly coincide with the rising 200 DMA (1903) which has not been tested in nearly two years. On an intra-day peak to trough basis that would still be less than a 6% correction off the all-time highs of 2019.
The upshot: The correction ain’t over yet.
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