Correction Continues As Oil Plunges By Most In Five Months

Hi Everyone,

The stock market finished significantly lower, as stocks erased Friday late-day bounce, continuing the overbought pullback. The Dow was down 632, or 2.3%, to 27,501, the Nasdaq lost 465, or 4.1%, to 10,848, while the S&P 500 fell by 95, or 2.8%, to 3,332. Decliners outnumbered advancing issues by an almost 4-to-1 ratio on the NYSE, where volume was still light.

Traders said that today’s price action was clearly bearish even as some of the most COVID-sensitive industries showed encouraging strength. As one trader explained, “Today’s broad-based selloff wreaked havoc across the leaders of the post-crash rally, but while more short-term pain could be ahead for bulls, airlines and travel- and lodging-related issues performed well, signaling a healthy ‘rotation’ into the hardest-hit industries.”

The key sectors all lost ground today, and on a negative note, at least from a short-term perspective, cyclical issues failed to maintain their pre-Labor-Day relative strength. Several other risk measures confirmed the correction, and Friday’s failed bounce contributed to the bearish price action as well. The Volatility Index (VIX) also remains above 30, near its multi-month high, so despite the bullish long-term trend, caution is still warranted here.

The energy sector had an ugly day as the price of crude oil fell by the most since the chaotic days during the early stage of the lockdowns. The crucial commodity hit its lowest level since mid-June amid the global trade worries, the continued fears of a rough fourth quarter in Europe, and the dollar’s surge. Shares in the sector were struggling across the board, but airlines enjoyed tailwinds thanks to oil’s plunge, with domestic-focused companies performing particularly well in the bearish environment. The new eleven-week low in the number of new U.S. COVID cases also boosting the sector.

Tesla (TSLA, -21.1%) was hit hard again this morning due to the surprising news that the stock won’t be included in the S&P 500 during the upcoming revision of the index, despite the fact that the company met all the official requirements. A large part of the stock’s recent gain was fueled by speculation regarding its likely inclusion in the benchmark, so it’s no surprise that bulls exited the market in droves, easing the valuation pressure as well. As for the company that made it to the S&P 500, Teradyne (TER, -3.9%), Etsy (ETSY, -1.3%), and Catalent (CTLT, -1.1%) held up relatively well today, and the fact that ETFs and other index-tracking entities will be forced to acquire their shares, they could continue to outperform in the coming weeks.

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do.”

Mark Twain

As always, have a great evening and stay tuned!!!

Joseph Esposito

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