The market sold off sharply Thursday, one day after the Fed suggested it was prepared to decrease the pace of purchases within its controversial QE program. The S&P flashed a sell-signal yesterday afternoon around the 1640 area following the announcement, foreshadowing a potential move lower in today's session. Today, we saw a mass exodus from stocks as the indices posted their biggest daily losses of the year. The S&P was the weakest index, dropping 2.50%, while the Dow and Nasdaq fell 2.34% and 2.28%, respectively.
This morning we walked in to the S&P futures down 13-15 handles and opening around the 50-day moving average. As we stated in my Morning Note, though, I was not in any hurry to buy this dip. In technical analysis, the double bottom is a commonly referred-to pattern, but there is a reason that triple bottoms aren't mentioned much -- because they don't happen very often. The S&P accelerated lower after the open, and the result was obviously a day to take serious notice. The next stop for the index could be the 100-day moving average, at which point we will measure composure of the market once again.
In addition to fears about what the Fed's removal of the punch bowl could do to the market, concerns are growing about the potential for a full-fledged credit crisis in China. In fact, I think the China-related fears could have had more to do with today's sell-off than the Fed announcement, which was pretty much in-line with expectations. Over the past week Chinese lending rates have spiked, there have been failed bond auctions and even a default by a large financial insitution. Chinese policy makers have decided to pump the brakes on one of the greatest credit expansions in history, and it will be very important to see how credit markets cope with rapidly drying liquidity.
*DISCLOSURES: Scott Redler has no positions