Today was yet another of a long line of examples of irrational Wall Street decision making.  After all, for months now investors have feared a September rate hike and found reassurance only from all the bad news from China and Europe in the hopes that would mean the Fed would hold rates steady.  So when yesterday that's exactly what happened, you would think the markets would be very happy.  And for a brief time they were, until they started to consider that the reason a rate hike was not imminent was because of all the bad news from China and Europe.  Now suddenly there's another wave of panic selling sending the Dow down a remarkable 290 points, all due to something they've known about for months.

We've been hearing a lot about irrational exuberance but frankly it seems irrational panic is a much bigger issue.  To put today's enormous sell off in perspective, much of it was likely due to an abundance of expiring options and futures contracts so, deducting those from the equation, the sell off wasn't nearly so dramatic.  Plus the sell off can still be justified at least a little on rational grounds.  After all, with the recent rallies the S&P is now still overvalued to the tune of 15.6 times earnings whereas normal is 14.7.  So though volume was very high at nearly 11 billion shares, let's take a breath, look instead at the big picture, and prepare for more normal trading next week.

Markets | Fri Sep 18, 2015 6:22pm EDT

Wall Street ends down after Fed stokes global economic fears

BY SINEAD CAREW

DJ:  16,384.58  -290.16     NAS:  4,827.23  -66.72        S&P:  1,958.03  -32.17

(Reuters)  Wall Street stocks closed lower on Friday in heavy trading as the Federal Reserve's decision to keep interest rates near zero fueled concerns about the potential impact of continuing weak global growth on U.S. corporate earnings.

Apart from the state of the world economy, the Fed cited financial market volatility and sluggish inflation at home in its decision on Thursday, while leaving the door open for a modest policy tightening later this year.

Friday's volatility was also likely exacerbated by so-called "quadruple-witching", when options on stocks and indexes, and futures on indexes and single-stocks all expire, prompting investors to buy or sell shares to cover expiring contracts.

The three major stock indexes each fell more than 1 percent, with all 30 Dow components in the red.

"People are taking this to be another data point of a potentially deflationary environment. Deflation is bad for corporate profits and that leads to lower share prices," said Stephen Massocca, Chief Investment Officer at Wedbush Equity Management LLC in San Francisco.

The Fed's decision suggested a global economic environment that is unlikely to foster the kind of earnings growth needed to support stocks at their current, above-average valuations.

Despite recent declines, the benchmark S&P 500 is still trading around 15.6 times forward 12-month earnings, above the 10-year median of 14.7 times, according to Thomson Reuters StarMine data.

"What they introduced yesterday was that they're worried about the effects on U.S. growth based on foreign economies," said Scott Colyer, chief executive officer of Advisors Asset Management in Monument, Colorado.

More than 10.9 billion shares changed hands on U.S. exchanges, compared with 8.1 billion average for the previous 20 sessions, according to Thomson Reuters data.

It was the most active trading day since August 24 when 14.2 billion shares changed hands as markets sold off on concerns about China's economic growth.

The Dow Jones industrial average .DJI closed down 289.95 points, or 1.74 percent, to 16,384.79, the S&P 500 .SPX lost 32.12 points, or 1.61 percent, to 1,958.08 and the NasdaqComposite .IXIC dropped 66.72 points, or 1.36 percent, to 4,827.23.

All 10 major S&P sectors ended lower, with the energy index's .SPNY 2.6-percent fall leading the decline on falling oil prices. Industrials .SPLRCI and materials .SPLRCM also dropped more than 2 percent. Financials .SPSY fell 1.9 percent as banks would have benefited from an interest rate increase.

For the week, the Dow shed 0.3 percent, the S&P fell 0.1 percent and the Nasdaq rose 0.1 percent.

Investors are now focusing on the next Fed meeting on Oct. 27-28, though a growing number of economists, including those at Morgan Stanley and Barclays, now wonder whether the Fed will raise rates at all this year.

The CBOE volatility index .VIX, known as the "fear gauge", jumped 5.4 percent to 22.28, above its long-term average of 20.

NYSE declining issues outnumbered advancers 2,139 to 929, for a 2.30-to-1 ratio; on theNasdaq, 1,856 issues fell and 1,026 advanced, for a 1.81-to-1 ratio.

The S&P 500 posted 4 new 52-week highs and 18 lows; the Nasdaq recorded 51 new highs and 65 lows.