Wall Street tumbles to sharply lower close as abrupt sell-off snaps rally

Everything was going along pretty well at break-even until about exactly 2:30 p.m. when then the entire market fell through the floor, breaking one of history’s most impressive rallies and depriving the S&P of claiming the distinction of its official bull market, which it had reached earlier in the session before the big nosedive. Of course, it could be easily argued that this tremendous rally could not last forever and it was time to take some profits.  Another good theory is that investors were simply hedging their bets that Thursday and Friday’s inflation reports might not come in as hoped for.  

But the best theory is that it was about 2:30 p.m. when the markets realized that a tremendous number of put options had been purchased during the day which would provide protection in case of a lapse. Perhaps investors were thinking, “What do they know that we don’t?”  As today’s expert put it, “Investor sentiment is high and the market has gone from bearish to bullish in almost record time. So the markets are asking ‘Now what?’” This all could certainly turn around on a dime if Thursday and Friday’s GDP and PCE reports are indeed positive, which is likely given all the other data. And nobody’s talking about an end to the traditional Santa Claus rally.  Volume was above average at 12.8 billion.   

Wall Street tumbles to sharply lower close as abrupt sell-off snaps rally

By Stephen Culp

Wed December 20, 2023 4:30 PM

DJ: 37,557.92  +251.90       NAS: 15,003.22  +98.03       S&P: 4,768.37  +27.81     12/19

DJ: 37,082.00  -475.92        NAS: 14,777.94  -225.28      S&P: 4,698.35  -70.02      12/20

NEW YORK, Dec 20 (Reuters) - U.S. stocks closed lower on Wednesday after an abrupt mid-afternoon nosedive ended Wall Street's impressive rally, which had been driven by falling interest rates and the Federal Reserve's dovish turn.  All three major U.S. stock indexes began to veer lower around 2:30 p.m. EST, and ended the session 1.3% to 1.5% below Tuesday's close.  Stocks were "near all time highs, they hit resistance," Jay Hatfield, portfolio manager at InfraCap in New York, noting the downturn was "surprisingly vociferous, things went from hot to cold real fast."

"It’s surprising how aggressive the sell-off is, but it makes sense considering how far we’ve come," Hatfield added.  Some traders said the selloff could have been aggravated by large purchases of near-term put options on the S&P 500, including put contracts that would guard against a drop below the 4,755 level on the index by the end of the session.  Put options convey the right to sell shares at a fixed price in the future and at times options-linked hedging activity can heighten volatility.

During the session, the S&P 500 got within 0.5% of its all-time closing high. Reaching a new closing high would have confirmed the benchmark index had been in a bull market since closing at the bear market floor in October 2022.  The index is now more than 2.0% below its record closing high. 

"We've had this aggressive rally in December and investor sentiment is high, it went from bearish to bullish in almost record time," said Thomas Martin, Senior Portfolio Manager at GLOBALT in Atlanta. "So the markets are asking 'now what?'"

At the conclusion of its policy meeting last Wednesday, the Federal Open Market Committee signaled that it had reached the end of its tightening cycle and opened the door to rate cuts in the coming year.  Chicago Fed President Austan Goolsbee late Tuesday reiterated that the rate at which inflation cools to the Fed's annual 2% target will drive policy on rate reduction.  At last glance, financial markets were pricing in a 71.1% likelihood of that first cut arriving as soon as March, according to CME's FedWatch tool.

On the economic front, bigger than expected jump in U.S. consumer confidence and a surprise increase in existing home sales helped turn the major indexes green.  The Commerce Department is expected to wrap up the week with its third and final take on third-quarter GDP on Thursday, to be followed on Friday by its wide-ranging Personal Consumption Expenditures (PCE) report, which will cover income growth, consumer spending and, crucially, inflation.

The Dow Jones Industrial Average (.DJI) fell 475.92 points, or 1.27%, to 37,082, the S&P 500 (.SPX) lost 70.02 points, or 1.47%, to 4,698.35 and the Nasdaq Composite (.IXIC) dropped 225.28 points, or 1.5%, to 14,777.94.  All 11 major sectors in the S&P 500 closed in the red, with consumer staples (.SPLRCS) suffering the steepest percentage decline after packaged food company General Mills(GIS.N) cut its sales forecast. 

FedEx (FDX.N) slid 12.1% after the package deliver missed quarterly profit estimates and cut its full-year revenue forecast.  FedEx rival United Parcel Service (UPS.N) dipped 2.9%.  Alphabet gained 1.2% after the company announced it was restructuring Google's ad sales unit.  Management consulting firm Aon (AON.N) tumbled6.0% following its announcement that it would buy privately held insurance broker NFP in a $13.4 billion deal. 

Declining issues outnumbered advancing ones on the NYSE by a 2.64-to-1 ratio; on Nasdaq, a 2.26-to-1 ratio favored decliners.  The S&P 500 posted 36 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 210 new highs and 89 new lows.

Volume on U.S. exchanges was 12.84 billion shares, compared with the 12.15 billion average for the full session over the last 20 trading days.