Question: Is The Panic Selloff Over?

Question: Is The Panic Selloff Over?

Answer: The panic is, but the selloff may not be

Getty Images

There are 2 sure-fire ways to recognize if rapidly falling prices in the equity markets is an orderly correction or a panic selloff. The first is, when you are selling are you in a panic? The second is more market-based; are there any signs of a flight to quality. As of yesterday, the Dow had fallen 10.4% from the all-time high to the recent low, the S&P 500 10.2% and the Nasdaq 9.7%, a proper correction by any measure but while it's well known that a correction is 8%-10%, it certainly is not limited to that amount. The VIX rallied almost 90% in a day, but we were missing a definitive fight to quality.

No flight, no fright

According to Investopedia.com, a "flight to quality" is the action of investors moving their capital away from riskier investments to the safest possible investment vehicles.  During the recent downdraft, there was little if any evidence of a flight to quality.  Gold, which is one of the assets that often benefits from capital being moved to less risky assets, is actually down 2.3% since the meat of the selloff began on February 2nd. The other asset class that may receive inflows is treasury bonds and notes. Here we actually saw a brief flight. In the 10 year note, for example, we saw a brief rally as the equity selling picked up steam. 

 

In the chart above you'll see mini-Dow futures compared to 10-year notes. You can see the white arrows show 10-year notes falling in price (rising in yield) and the Dow falling along with it until Feb, 2nd. The selling picks up velocity and volume and a brief flight to quality ensues (red and green arrows circled in purple). In the last 36 hours, however, they began to move in lockstep again. 

Enough to call this a panic?

No, this is a correction in a bull market. The fact this correction, like most of them, doesn't feel good while its happening doesn't make this a panic as in 2007 or 2000 or 1987. The inverse movement of the Dow to interest rates represents a repricing of assets with a new interest rate base. Economies are strong, blended earnings are up 13% so far and Central banks are still providing liquidity. While this is coming to a slow end, it is an orderly end. This correction is also orderly, though it may not be over. 

The information contained above may have been prepared by independent third parties contracted by Nadex. In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Please note, exchange fees may not be included in all examples provided. View the current Nadex fee schedule. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representations or warranties are given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk and any trading decisions that you make are solely your responsibility. Trading on Nadex involves financial risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results. Nadex contracts are based on underlying asset classes including forex, stock index futures, commodity futures, cryptocurrencies, and economic events.

Trading can be volatile and investors risk losing their investment on any given transaction. However, the design of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.