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Bear market ahead? DJIA plunges 400 points, most sectors hit hard

Written By | Jan 30, 2018

WASHINGTON, January 30, 2018: It’s been a miserable Tuesday on Wall Street, causing at least some to worry that a brand new bear market is at hand. Nearly without warning, (we emphasize nearly), market averages have added considerably to Monday’s sudden drop, as the Dow Jones Industrial Average (DJIA) hit a YUGE air pocket Tuesday, declining some 400 points during the opening hour of trading.

As of 1:30 p.m. EDT, after attempting a brief recovery, this venerable average of major U.S. company stocks has returned to revisit the day’s lows, currently sitting at 26,039.28, off 400.20 points. That’s a whopping -1.51 percent drop for the day thus far.

The broader-based S&P 500 and the tech-heavy NASDAQ are doing a bit better today, but not much. The S&P 500 currently stands at 2820.68, down -32.85 for a 1.15 percent loss on the day, while the NASDAQ is down -78.62 for a 7387.62 handle, a 1.05 percent loss thus far.

The biggest villain in today’s Dow drop: High-fling UnitedHealth Group (symbol: UNH), off a painful $9.98 per share, with shares currently trading at $237 and change.

Other healthcare and pharmaceutical stocks were also hit hard, and the reason was not difficult to discern. Following up on rumors that first surfaced last fall, online retail behemoth (AMZN) announced today

“a partnership with Berkshire Hathaway and JPMorgan Chase to improve health care for employees of the three companies in the United States.”

While scant details on this “partnership” exist, when a mega-retailer joins with a mega-conglomerate with heavy insurance holdings like Berkshire Hathaway (BRK/B) and a monster U.S. bank like JP Morgan Chase (JPM) to attack a familiar and longstanding business sector (healthcare and healthcare insurance), the earth moves under that sector and many others.

Add this news to the rapid price decline in the bond market over the past several trading days along with the concurrent sharp rise in interest rates, factor in the big, 2-day decline in the previously hot oil sector; then factor in DJIA standout Apple’s (AAPL) iPhone connected swan dive over the last several days, and you get an across-the-boards rout. Investors are already experiencing the kind of bear market nervousness they thought they’d left behind.

To get some idea of the damage that’s being done to market averages today, check out the FinViz “heat map” illustration below:

bear market indicator?

FinViz heatmap from mid-day Tuesday, January 30, 2018. (Via FinViz website)

An unusually useful visual representation showing which sectors and stocks are getting bought and sold during a given market moment, a heat map chart uses varying shades of red and green (losing stocks and winning stocks respectively) to illustrate a daily trend.

Clearly, with shades of red dwarfing those few green sectors and stocks, the current heat map amply illustrates today’s ongoing stock market rout, amplifying bear market fears. Healthcare stocks, as we’ve already indicated, are being taken to the woodshed. Led by Apple (regarded now in many indexes as a “consumer goods” company) is getting hit along with the rest of tech and retail, and previously hot financial, material and energy sectors are taking a shellacking as well. It’s an across-the-boards massacre.

The only stocks seeing a bit of green this afternoon are primarily shunned “safe” stocks such as utilities and some telcos, and, of course, Amazon, aka “Bigfoot.” Utilities and telcos for their part have previously been hammered as they tend to trade in the same direction as bonds, whose direction has been decidedly down in January. They’re all getting a bit of support today because these stocks are all traditional places for investors to “hide” when things go south.

So, is the Trump bull market finally over, giving way to a bear market at last? Not likely. Stocks for the most part have gone straight up since the first of the year, excessively so. What’s going on now is that current market uncertainties, such as President Trump’s upcoming State of the Union Address, the current breakdown in NAFTA re-negotiations, the increase in interest rates and inflation, and the uncertainty revolving around the GOP-led Congress’s 4-page memo have given investors the excuse they need to indulge in a bit of healthy profit taking; and, perhaps, a bit of premature short-selling.

A sharp selloff like this one from previously “overbought” conditions will eventually lead – perhaps soon – to an “oversold” situation, which often kicks off an intense rally to the upside. We can see what’s going on a little better by looking at Stockchart’s current McClellan Oscillator chart ($NYMO) below:

bear market indicators

McClellan Oscillator reading ($NYMO), traditional, via (Subscription required).

The zero line on this chart is considered to be more or less normal market conditions. Whenever the main chart line exceeds roughly 60 points on the upside or 60 points on the downside, the market is encountering overbought or oversold conditions. Such conditions tend to lead, quite quickly, to sharp reversals in the oscillator until it settles down near the zero line once again, awaiting a journey to its next extreme reading.

As we can see from the traditional $NYMO chart above ($NYMOT), January trading action peaked early to the upside, at which point the oscillator charted early selling and profit taking. Declining buyer interest – rational during such a major move up – almost inevitably signaled a $NYMO reversal as we can see in the extreme right of this chart, which only reflects January 29 activity.

If Tuesday proceeds as it has thus far, we’ll likely see a sharp extension downward in today’s closing $NYMO chart, taking this indicator very close to the likelihood of an oversold bounce. After that, it’s anyone’s guess what happens next.

With the first hint of a genuine economic recovery since the Great Recession was at its worst, its difficult to say where the market’s post-GOP tax bill direction will take us next. After 8 long years of Barack Obama’s purposeful strangling of American businesses, long pent-up animal spirits in business and investing are hard to gauge.

If optimism continues to increase, the bull will be back after a brief trip to the showers. But if the economy, and/or the Trump administration stumbles badly, a big, bad bear market is likely to take hold.

Right now, it’s probably a bad idea to sell off chunks of our portfolios, as this market could whipsaw at a moments’ notice, leaving many investors regretting they’d dumped perfectly good positions.

If this brief bear market – if it is one – continues to pound stocks, however, short-selling, options strategies, and hedging via the regular short S&P 500 ETF (SH), or the double-short S&P 500 ETF (SDS) might be a way of temporarily holding down the fort.

Right now, after dumping small gold and defense industry positions to take profits, we’ve decided to sit tight until something moves us to start buying and selling again.


Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17