Initially brushing off the previous day's weakness, stocks raced higher out of the starting gate yesterday morning, but the bears resumed control less than an hour later, sending the major indices sharply lower. Aided by continued strength in online retail giant Amazon.com, the Nasdaq Composite was trading 1.3% higher after the first thirty minutes of trading. However, an intraday slide of nearly 2%, which began in the late morning and persisted throughout the afternoon, left the tech-heavy index with a closing loss of 0.6%. The S&P 500 and Dow Jones Industrial Average followed similar intraday patterns and lost 1.2% and 1.1% respectively. Small and mid-cap stocks were in lockstep with their large-cap brethren, as the Russell 2000 fell 1.2% and the S&P Midcap 400 declined 1.1%. Each of the main stock market indexes closed near its lowest level of the day.
Total volume in the NYSE ticked 9% higher, while turnover in the Nasdaq was 4% lighter than the previous day's level. The mixed volume levels caused the S&P 500 to suffer another bearish "distribution day," as the Nasdaq averted the same negative label. A closer look at the intraday volume pattern of the NYSE also confirmed the bearishness. One hour after the open, when stocks were still trading near their best levels of the day, volume in the NYSE was tracking 16% lighter than the previous day's level. But the pace of trading heated up when stocks began selling off shortly thereafter. This is the opposite of bullish price action, in which volume would be heavier on the way up, and lighter on the way down. The higher volume loss in the NYSE tells us mutual funds, hedge funds, and other institutions were leading the selling.
In the October 22 issue of The Wagner Daily, we analyzed the sudden, late-day sell-off that hit the broad market the previous afternoon. The conclusion was it was sparked by a swift drop in the financial sector, particularly Wells Fargo and Bank of America. At the time, we said, "It's significant that yesterday's sell-off was led by the financial sector because it was financials that initially kicked off the March 2009 rally, then kept it going as well. Because they're so heavily weighted in the stock market, it could have negative implications for the longer-term health of the overall market If financials start reversing back down in a meaningful way." The following day (October 22), financials snapped back, but a wave of selling again plagued the sector yesterday. In fact, the extreme relative weakness in banking shares was apparently one of the factors that subsequently caused the market to fall apart late yesterday morning.
After the first fifteen minutes of trading, the KBW Bank Index ($BKX) was already trading 1.6% lower, even as the S&P 500 had moved to a 0.4% gain.
