A bloodbath across financial markets yesterday, with technology stocks leading the sell-off.
The Nasdaq 100 plunged 6.4%, marking its worst trading session since the COVID-19 market crash on 16 March 2020.
The magnitude of the sell-off was extraordinary. More than USD 3 trillion in US equity market capitalization was wiped out in a single trading session, reportedly exceeding the previous record of USD 2.69 trillion during the COVID-19 crash.
A hedge fund with forced liquidation may have added to the selling pressure.
Markets:
Equities: Mostly deep red, only US Nasdaq Futures with a shy rebound
Bonds: Government bond yields stabilize after the renewed drop yesterday - US 2y yield 4.48%, US 10y yield 4.84%, Japan 10y yield 2.64% - France 10y yield 4.77%
Commodities: Oil prices are trading sideways, WTI around USD 90/barrel and Brent around USD 98/barrel;
Precious metals higher mixed, gold at USD 4’065/oz, silver at USD 52/ozCurrencies: US dollar clearly stronger - Japanese Yen weaker USDJPY 158 - Swiss franc mixed
Cryptos: stabilized after yesterday’s sell-off - Bitcoin around USD 76k
Volatility: The VIX index skyrocketed over 28 (+70%), now falling back slightly towards 26 - The window for relatively inexpensive portfolio hedging is no longer valid
My View: The long-awaited market reaction has finally arrived. As repeatedly highlighted in my Market Insights, investors have remained far too complacent about the growing risks. I explicitly warned that the post-midterm relief rally would be short-lived, and yesterday's market action confirmed that assessment.
President Trump now has an obvious opportunity to blame the Democrats for the market turmoil. However, the underlying risks have been building for months, long before the elections.
Yesterday's sell-off showed elements of the liquidation process I described in last weekend's Weekly Market Snapshot. Nevertheless, despite the extraordinary losses, selling still appeared relatively controlled to me, rather than outright panic.
The first warning signs of panic are emerging though: surging volatility, increasingly aggressive selling in technology stocks, potential forced liquidations and growing concerns about leveraged investors. However, genuine market panic typically involves indiscriminate selling across asset classes, disappearing liquidity and investors being forced to sell whatever they can, rather than what they want.
Having experienced the dot-com crash firsthand, I remember one important lesson: a major market crash rarely unfolds in a single day, and happens in waves. Sharp sell-offs are followed by rebounds, only for renewed selling pressure to push markets to fresh lows. The pattern: Sell-off → Rebound → Renewed Selling → Lower Lows.
My recent market assessments have proven remarkably accurate, including the short-lived post-midterm rally. I currently see a greater probability of further downside than of a sustainable recovery, although not necessarily at yesterday's extraordinary pace.
Another important risk is investor psychology. For weeks, speculative traders and retail investors have aggressively bought every dip. Many may now be running out of cash, while increasingly realizing that the familiar "buy the dip" strategy no longer works.
So far, most of them are still holding their positions. Looking at their portfolio melting down almost every day. This turns confidence into uncertainty, uncertainty into fear, and fear can eventually trigger panic. Combined with leverage and margin calls, this can develop into a self-reinforcing selling cycle, the wash-out we saw a little pattern of yesterday, I am still waiting for it.
The psychological game has begun, and the coming trading sessions could be decisive.
Don't catch a falling knife!
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