Market Selloff: It Could Get A Lot Uglier

The rout in U.S. stock markets deepened Wednesday and the only thing for certain is that it could get a lot uglier.

How far can the price of oil fall and what’s really causing the plunge? How bad is the data out of China and can those numbers really be trusted? Will market sentiment and momentum continue downward despite mostly steady if unspectacular data out of the U.S.?

“I think the stock price plunge is reflective of the uncertainty surrounding oil: how far will it fall and is it truly an oversupply issue,” said Sam Stovall, U.S. equity strategist at S&P Capital IQ. “The worry is that it is masking the underlying weakness of the ‘official’ numbers out of China.”

In other words, until some of these questions are answered skittish investors will undoubtedly continue their flight out of stocks.

On Wednesday the energy sector led markets downward, tumbling almost 4% as crude oil fell below $27 a barrel for the first time in 12 years. More than half of the energy stocks (24 out of 40) in the S&P 500 are touching their lowest points in at least a year

The Dow Jones Industrial average, down more than 400 points on Wednesday, has fallen nearly 1800 points so far in 2016. The S&P 500, down 38 points on Wednesday, is at its lowest level since October 2014.

Meanwhile, U.S. corporate earnings so far haven’t blown away expectations, but they haven’t been awful either. And economic data so far in 2016 has been mixed. Housing data released Wednesday took a turn for the worse, revealing that U.S. housing starts and permits fell in December following big gains a month earlier. And consumer prices as measured by the Consumer Price Index fell unexpectedly in December primarily due to the free fall in energy prices. Yet despite the drop last month, the CPI increased 0.7% in the 12 months through December, the biggest increase in a year, data that suggest inflation is headed toward the Federal Reserve's 2% target.

Then there’s the strong labor market, which Fed policy makers cited as justification for raising interest rates in December for the first time in nearly a decade.

Speaking of the Fed and interest rates, it remains a distinct possibility that that the correction now underway in stocks is merely what many analysts had predicted as the markets soared higher for much of the past five years, fueled by the Fed’s easy money stimulus policies.

In any event, the sentiment is now sharply pessimistic and any excuse to sell is good enough.

“Clearly the momentum behind our 2016 trade remains lower. Earnings thus far have not provided a buffer to off-set the stampede for the exits. US economic data, though largely positive, has also not been sufficiently robust enough to change investor outlook. Global themes continue to re-enforce a sense of foreboding,” said independent market analyst Peter C. Kenny. Kenny noted that the Nasdaq, which closed at 4506 after the selloff last August (also prompted by concerns out of China), has now fallen below that level.

“If markets are unable to find a justification to hold these levels, and there doesn't seem to be a case for that at the moment, look for the next leg lower to be efficient and painful,” he concluded.