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News Analysis: Wall Street tumbles on valuation, seasonality, overseas concerns

English.news.cn   2014-08-01 15:42:09

NEW YORK, July 31 (Xinhua) -- What former Federal Reserve chairman Alan Greenspan saw in his crystal ball appears to have come true sooner rather than later. The ex-Fed-chief said Wednesday in an interview with Bloomberg Television that the U.S. stock market is due for a "significant correction" at some point after rallying for a long time.

Wall Street was hit hard across the board on Thursday, falling about 2 percent. For July, the three major stock indices ended in negative territory. Both the S&P 500 and the Dow Jones Industrial Average suffered their first monthly decline since January.

Market analysts noted that a combination of factors resulted in the selloff. Some said it is attributable to overseas concerns, including European deflationary pressure, Argentinian debt default and lingering geopolitical turmoil in Ukraine and the Middle East. But others argued that sentiment, seasonality and momentum concerns were the real reasons behind the disruption of the market's record run.

DOW TURNS NEGATIVE FOR 2014

The U.S. stock market lost ground on the heels of sharp declines in European stocks due to deflation concerns in the single currency bloc.

Official data showed Thursday that euro area inflation dropped to 0.4 percent in July, the slowest since 2009, igniting market worries that the European economy is still not healthy enough to support a price rise.

Geopolitical tensions continue to simmer in the background. G7 leaders have threatened more sanctions against Russia for its role in eastern Ukraine.

The straw that broke the camel's back is the Argentinian debt default. The third largest economy in Latin America defaulted following the failure of last-ditch talks with holdout creditors Wednesday. Standard & Poor's Ratings Services downgraded the country's long- and short-term foreign currency sovereign credit rating to "selective default" from "CCC-/C."

The CBOE Volatility Index, often referred to as Wall Street's "fear gauge," spiked 27.16 percent to end at 16.95 Thursday.

By the closing bell, the Dow had dived 317.06 points, or 1.88 percent, to 16,563.30, its biggest one-day drop since early February. The blue-chip index's performance for this year turned negative after the plunge. Just two weeks ago, the Dow was trading in record-high territory.

The S&P 500 slid 39.40 points, or 2 percent, to 1,930.67, its steepest single-day slide since April. All ten sectors of the benchmark index declined, with energy, telecom and financials leading the losses.

The Nasdaq Composite Index sank 93.13 points, or 2.09 percent, to 4,369.77.

However, Thursday's selloff still looks a bit overreacted as the U.S. stock market has shown impressive resilience over such external concerns in the past.

What's making the drop more difficult to explain is that the closely-watched key economic data this week has generally surprised Wall Street.

The U.S. economy grew at an annual rate of 4.0 percent in the second quarter, rebounding from a 2.1-percent contraction from January to March. The U.S. private sector added more than 200,000 jobs for a fourth straight month in July, and the four-week moving average of U.S. initial jobless claims last week fell to an eight-year low.

SENTIMENT, SEASONALITY, MOMENTUM CONCERNS

"Geopolitical fears are always a concern. But that's not something you can blame for a selloff like this," said Mark Newton, chief technical analyst and partner at Greywolf Execution Partners Inc. Thursday.

"A lot of this started about a month ago. So it's not specific to today in general," Newton told Xinhua. "Today was the real break... the price confirmation of a lot of negatives we've seen for the last couple of months."

"Sentiment, seasonality, momentum concerns, fewer stocks hitting new highs and the sector rotation recently have been the main things to pinpoint that there are real problems with the rally," he said.

Investor sentiment recently has become fairly bullish, assuming the worst was over after the market survived "sell in May and go away," and then the "June swoon."

From a seasonal perspective, "bearish seasonality comes into July where small caps typically underperform massively in midterm election year," Newton said.

He pointed out that the U.S. stock market is "very extended."

"You've got the third longest bull market rally ever without a 20-percent correction," he said, nor had there been a 10-percent pullback since October 2011. "We've been running on borrowed time to some extent."

The bull market is now in its sixth year. The S&P 500 has almost tripled from its March 2009 low at the nadir of the financial crisis.

Just a week ago, the broader index was staging a record rally. But in Newton's view, it's "sort of a mirage."

Greenspan told Bloomberg Television Wednesday that "the stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction."

Janet Yellen, the incumbent Fed chief, also pointed out in her July congressional testimony that "valuation metrics in some sectors appear substantially stretched, particularly for smaller firms in the social media and biotech industries, despite notable downturn in equity prices for such firms early in the year."

Newton believes the U.S. stock market will probably have a 5-to-10 percent correction between now and September. "We're seasonally in a time when it (a correction) should happen."

However, the broader trends are still very much intact on the S&P 500, he noted. "We really wouldn't do any technical damage at all. This is just a short-term move right now... I think the bigger move down probably will be put off until next year."

Editor: yanting
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