Dow Collapses and This Eerie Chart Risks March Madness Again

Stocks took a beating in the pre-market session, almost heading towards 'limit-down' levels again. An eerie throwback to the March selloff?
Posted in: Markets
Published:
June 15, 2020 11:30 AM UTC
  • Dow Jones Industrial Average (DJIA) futures plummeted on Monday, falling almost 1,000 points at the lowest trough. The index opened sharply lower and was last down 500 points.
  • Volatility is heading back to March levels, possibly hinting at another huge market shock.
  • Morgan Stanley remains bullish, doubling down on the V-shaped recovery narrative.

Dow futures teased the lower-bound circuit breakers overnight, leading to a sharp decline at the start of New York trading. Volatility is soaring. Panic is rising. This feels a little bit like the March selloff all over again.

Strategist David Bloom at HSBC told Bloomberg this morning the fearful narrative from earlier in the year has come back with a vengeance.

Now we’re talking about second waves and U-shaped pickups so we’re back [to March]. It’s just risk-on, risk-off.

Nowhere is this more obvious than the notorious ‘fear index’ or volatility index (VIX). The VIX tracks expected volatility in the S&P 500. And right now it’s back at late February levels, right before the sharpest selloff in history. A warning sign?

The VIX is back at early-March levels. What happens next? Source: TradingView

Dow plunges more than 700 points

Dow futures took a brutal overnight plunge, falling almost 1,000 points before recovering slightly. The blue-chip index opened sharply lower at the start of New York trading, declining as much as 762 points.

The sharp Monday decline follows a painful week of selling, including the worst session since the March plunge.

The Dow Jones Industrial Average resumed its selloff Monday. The index is nursing a more than 500-point loss. | Chart: Yahoo Finance

The S&P 500 Index is down 2% through the morning session. The technology-focused Nasdaq Composite Index declined 0.7%.

Will stocks hit limit down again?

During the March selloff, we saw a number of ‘limit-down’ days on the futures market. Dow futures were paused for trading multiple times after falling 5% in the after-hours session. Notably, it often happened on a Monday after a wave of panicked weekend news.

Are we about to see the same? Well, we came close this morning. Dow futures tumbled more than 3% at 2am ET but have since bounced back. Safe for now.

When the markets open, stock indexes can be paused for 15 minutes if they fall 7%. They’re halted for another 15 minutes after a 13% fall. And trading is closed in the case of a 20% drop.

What’s causing this Dow Jones selloff?

As David Bloom at HSBC pointed out, last week’s Federal Reserve statement was probably the catalyst.

I think [Fed chairman] Powell knocked some sense into the market that was getting a bit euphoric.

Powell’s gloomy economic outlook pointed to a longer recovery than many investors were anticipating.

Panic also grew over the weekend with a string of negative headlines. Fears of a second-wave arose in the U.S. and China. Donald Trump is losing his grip on the 2020 election with Biden taking a huge leap in the polls. And up to a third of newly culled jobs could be permanent, according to latest estimates.

In another blow to the markets, Director of the United States National Economic Council Larry Kudlow confirmed that the White House will yank the $600 weekly unemployment boost in July. Traders were hoping for more fiscal stimulus, not less. While Kudlow hopes the move will incentivize job seeking, it may slash consumer confidence.

Morgan Stanley still betting on a V-shaped recovery

Despite the panic across the markets this morning, Morgan Stanley remains upbeat. Analyst Chetan Ahya doubled down on the bank’s cautiously optimistic stance in a note this weekend.

We have greater confidence in our call for a V-shaped recovery, given recent upside surprises in growth data and policy action.

Ahya said that central bank stimulus and improving economics suggest a V-shape is already playing out. Even a resurgence in hospitalizations is not a concern for them as flareups can be controlled by location, the note said. Only a full second lockdown would cause Morgan Stanley to shift to a bear case.

Johan Jooste at Global CIO Office agreed the market is pricing in a V-shape at these levels.

Yes, The US market is indeed priced for a V-shape, which is another way to say it’s priced for perfection.

Jooste, however, was more cautious and said the market was more driven by sentiment than hard data.

Samburaj Das edited this article for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor or find a factual, spelling, or grammar error, please contact us.

Last modified: June 17, 2020 9:16 AM UTC

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Ben Brown @_ben_brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.