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Traders work on the floor of the New York Stock Exchange
Image: Traders work on the floor of the New York Stock Exchange. REUTERS/Brendan McDermid

January and February See Tumbling Stock Market – Here’s What’s Happening

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Image: Traders work on the floor of the New York Stock Exchange. REUTERS/Brendan McDermid

U.S. stocks have been plunging with massive sellout frenzies during January and the start of February.

Indexes have fallen by the largest amount that has been seen in six and a half years.

American Stocks are Hurting

This week hadn’t even started yet and it was already clear that the U.S. stock market would be off to another rough span. That aid, Monday turned out to be even more of a disaster for American stocks than had been expected.

At one point, within a tiny span of only 15 minutes, the Dow Jones Industrial Average took a free fall of nearly 1,600. That represented the largest intraday point decline that had occurred in the history of the Dow Jones.

When Will it End?

Monday’s rollercoaster ride that ended way down left many investors wondering whether or not it was over and, if it wasn’t, how much further would they be falling. Declines have been steady, already eliminating the 5.8 percent gains experienced in January.

Tuesday’s futures trading suggests that the selloff is expected to continue, as the S&P Index contracts, having dropped by as much as 3 percent before experiencing a recovery. By the close, its total fall was 1.2 percent.

Unsurprisingly, this has left investors shaken and worried. Watching the market fall as much as it has been disquieting, particularly within such a small amount of time and following a very positive end to last year and beginning to this one.

Even with Monday’s dramatic drop, the Dow was down 1,175 points at closing, about 4.6 percent. This shaved about a third off the largest plummet it saw that day. This didn’t cause traders to panic as much as to interpret it as an indication that the economy’s strength might drive inflation and send interest rates upward faster than predicted.

“We had gone too far too fast in the month of January and a little brush fire like this is not a bad thing,” said Thalmann Asset Management CEO, Philip Blancato. “Today was a classic risk-off day when so much of the selling is going to be program trades based on technicals. It cleans up some of the people who are on the fence. You got the irrational exuberance out of the market.”

Computer-Driven Trading Strategies

Sending trading stress higher were computer-driven trading strategies, many of which were designed to align with the recent low volatility levels. As a result, they may have contributed further to the decline’s acceleration.

Some analysts referred to a “flash crash,” to describe the way the stock values fell through the floor. That term suggests anything from quant fund harmonized selling to exchange malfunction.

“Millions of quant orders went in one direction, and it overwhelmed a lot of these breakers. That’s it,” explained Evercore ISI head of portfolio strategy, Dennis Debusschere,” in a phone interview with Bloomberg. “It was very quant, very systematic.”

It’s Happened Before

As large and startling as the selloff was, it is not entirely unprecedented. This is particularly true when it comes to the period of time following the financial crisis. In August 2011, there were four days in which the Dow experienced alternating up and down days ranging from 4 to 5 percent. On August 24, 2015, it dropped by 6.6 percent. When the bull market accelerated, it became easy to let those days slip our minds.

“I don’t sense a whole lot of panic,” said Leuthold Group LLC chief investment officer Doug Ramsey, as reported by Bloomberg. “Just 10 days ago momentum was at the highest level in the S&P history and it would be very unusual it the stocks made a final bull high when the momentum was that strong. I’m not sure this is the end of the adjustment, but the odds are in favor of the market stabilizing here in the short-term and trying to push to a higher high.”

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.