Fundamentals could resurface after wrenching sell-off

NEW YORK: The dramatic sell-off on Wall Street through most of the past two weeks could signal a capitulation-type blowout, giving fundamentals the upper hand for the next week.

The current slide in stock prices, which on Friday briefly dragged the S&P 500 to levels not seen in more than a year, is reminiscent in breadth and tone of drop-downs seen during the Great Recession. Some argue the decline is warranted. In addition, the market has not seen the kind of sell-off in high volume that signals a capitulation, and the S&P 500 could enter a bear market, more than 9 percent below current levels.

From most indications the US economy is far from being in a recession, according to many market participants. The repricing in stocks could help the market shift back to fundamentals after years of focusing on the Federal Reserve and its ultra-low interest rate policy.

That is welcome news for some in the market who have seen stocks trade on variables other than economic data and company earnings. “I actually am encouraged to see the market drop so we can just get to fair value and take it from there, then it is really determined by the path of the economy, and profits and revenues,” said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.

“To me, this is really a result of Fed influence, just a reversing of all this Fed intervention.” Many point to a slowdown in China’s economy and its expected weight on global growth as a reason for the slide in stocks and the 12-year lows in crude oil futures.

The Shanghai index .SSEC closed Friday at its lowest level since December 2014, down more than 20 percent from its November high and nearly 44 percent from its 2015 high.

“The spillover from China has been concentrated in crude oil and there are reports that commodity hedge funds have experienced a sharp increase in margin calls as the price of oil falls,” said Gail Dudack, chief investment strategist at Dudack Research Group in New York in a Friday note to clients.

“Typical of most margin unwindings, selling will flow into equity markets since stocks are often the most liquid assets in portfolios. This explains why movements in the (S&P 500) have been closely aligned with crude oil in recent weeks.”

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