ETFs Lead A Savage Stock Selloff

ETFs were seen as the major cause of Thursday’s incredible stock market swoon, demonstrating efforts by retail investors to avoid a more significant market correction. ETF outflows were believed responsible for nearly half of the stock trading volume on Thursday.

A good deal of quarterly rebalancing was apparently conducted on Thursday because Friday is a “quadruple witching” day, which marks the quarterly expiration of stock futures, stock options, stock index futures and stock index options.

Although the news concerning the quantitative easing phase-out was released on Wednesday, the reaction from retail investors took a day to manifest itself. Meanwhile, more sophisticated investors were concerned about the fact that Thursday’s sell-off involved all asset classes. The rise in Treasury bond yields – despite the assurance from Ben Bernanke that fractional interest rates would be in effect until 2015 – raised concerns that the Fed might lose control of bond yields in the secondary market, causing inflation.

Disappointing economic data came at a time when the market sorely needed some encouraging news. Initial unemployment claims increased by 14,000 more than economists had anticipated.

All of the worrying caused an enormous, 23-percent spike in the Chicago Board Options Exchange volatility index (VIX), which is also known as the “fear index”. The VIX closed at 20.49, which was its first close above 20 since December 28 (VXX).

The Dow Jones Industrial Average (DIA) took a 353-point nosedive to finish Thursday’s trading session at 14,758 for a 2.34 percent decline. The S&P 500 (SPY) sank 2.50 percent to close at 1,588.

The Nasdaq 100 (QQQ) fell 2.34 percent to close at 2,890. The Russell 2000 (IWM) sank 2.63 percent to close at 960.

In other major markets, oil (USO) sank 3.31 percent to close at $33.63.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by $4.06 (3.83 percent) to $102.06/bbl. (BNO).

August Gold Futures declined by $93.60 (6.81 percent) to $1,280.40 per ounce (GLD).

Transports drove off a cliff on Thursday, with the Dow Jones Transportation Average (IYT) falling 2.10 percent.

Japanese stocks declined on Thursday as a result of widespread fear that reduction of bond-buying by America’s Federal Reserve will impair liquidity on a global scale. The Nikkei 225 Stock Average dropped 1.74 percent to 13,014 (EWJ).

European stocks made significant declines on Thursday as the announcement by America’s Federal Reserve, concerning the phase-out of quantitative easing overshadowed a “less bad” June Flash Eurozone PMI report from Markit Economics (VGK).

The Euro STOXX 50 Index finished Thursday’s trading session with a 3.63 percent drop to 2,586 – remaining below its 50-day moving average of 2,723. Its Relative Strength Index is 31.49 (FEZ).

In China, stocks fell after the nation’s interbank offered rate rose 5.78 percent to 13.4 percent, causing severe liquidity problems. More bad news came in the form of the HSBC Flash China Manufacturing PMI report for June, which dropped to a nine-month low of 48.3 from June’s 49.2. The Flash China Manufacturing Output Index fell into contraction, with a reading of 48.8 compared with May’s 50.7 for an eight-month low. The Shanghai Composite Index sank 2.76 percent to 2,084 (FXI). Hong Kong’s Hang Seng Index fell 2.88 percent to 20,382 (EWH).

Technical indicators reveal that the S&P 500 fell below its 50-day moving average of 1,618 after closing at 1,588. Bears are anticipating a further decline as a result of the close below the 50-day MA. The S&P has not closed this low since May 1. Its Relative Strength Index fell from 49.17 to a dismal 30.12. An RSI below 30 is considered an “oversold” signal. The MACD remains below the signal line and has crossed below the zero line, suggesting the likelihood of a continued decline.

For the day, all sectors were solidly in negative territory, as the consumer staples sector took the hardest fall, with a loss of 3.02 percent. The financial sector escaped with the least damage, falling 2.17 percent.

Consumer Discretionary (XLY): -2.62%

Technology: (XLK): -2.22%

Industrials (XLI): -2.28%

Materials: (XLB): -2.58%

Energy (XLE): -2.92%

Financials: (XLF): -2.17%

Utilities (XLU): -2.83%

Health Care: (XLV): -2.57%

Consumer Staples (XLP): -3.02%

Bottom line: Retail investors led the charge for the exits on Thursday as ETF outflows were responsible for nearly half of the stock trading volume during the massive selloff, which sent the major stock indices falling by approximately 2.5 percent.

Disclaimer: The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector's Disclaimer, Terms of Use, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.