Daily Market Update – October 1, 2014 (Close)

For many, closing out the third quarter will be a welcome thing, as it turned out to be the worst quarter since December 2012.

It’s hard to fathom that bit of news as we haven’t had a sharp decline this past quarter and we’ve had so much news of hitting new market high after new market high.

How do you reconcile both of those?

Part of the illusion lies in realizing that sometimes a small number of stocks that are performing very well may account for the vast majority of the year’s advances, as is the case in the NASDAQ, courtesy of Apple, Facebook, Intel, Microsoft and Gilead.

The rest? Not so encouraging.

The morning didn’t look like the new quarter will necessarily herald the beginning of a reversal and when it was all aid and done the decline from the previous market high found itself having been increased by 100%.

The remainder of this week still has some potentially important stock moving news as tomorrow brings news from the ECB and then Friday has the monthly Employment Situation Report.

Any of those could be impactful, but they may be so in differing directions. It would be nice if they could line up in the same way as a few weeks ago when we had such disparate events as the Scottish referendum, the Alibaba IPO and an FOMC statement all working out as hoped.

With the market now about 3% below its all time high the one thing that becomes clear is that we are less and less tolerant of any looming threats. There was a time when we considered 10% rollbacks to be a normal kind of occurrence. For the past two years it has been more like 5% and we’ve been dragged kicking and screaming into those, possibly still sensitive to the declines seen in 2007 and 2008.

Now, we get very nervous even below the 2% value, maybe because our minds are more wired to focus on the absolute size of the drop rather than on the relative size of the drop. When the DJIA gets up to 17000 those triple digit moves aren’t as meaningful as they were at 12000, yet we make no adjustment in our minds.

I know that I don’t. I don’t set the threshold by increasing my recognition of a large move to 150 points. So today’s 200+ point decline seems even larger than it really should seem.

At the mid-week point, even before today’s plunge, I wasn’t likely to be thinking about adding too much to the existing portfolio. I don’t want to spend cash reserves down and instead will be hopeful of making it out of this week with both assignments and rollovers, although I would like to see more on the assignment side of the ledger.

While it’s hard to resist what appear to be bargains you could have easily said the same thing yesterday and the day
before and now you would be sitting on the wrong side of that bargain. As was said yesterday, the challenge is really distinguishing between value and “value traps.”

Meanwhile, volatility is ticking higher and as long as the market continues having large alternating movements, including those intra-day movements, the increase in volatility can be relatively easy to take and not come at too great of a cost. Today was not the right way to do it, though.

While this week continues the challenge that had been the third quarter, next week begins yet another earnings season and it may be a very critical one as the market’s most recent weakness hasn’t really had much of a foundation. Poor earnings could finally give the market a reason to seek a lower level, especially since many are expecting some improved reports from the retail sector.

On the other hand good earnings, especially exceeding expectations could become the fuel that’s been missing for a while, even as markets did reach new highs.After the declines of this week good earnings news could easily be a springboard for some meaningful moves higher, or at least back to where we started.

So this week is one to hopefully be escaped in preparation for next week, which may herald a quarter different from the last and different from today.