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October 25, 2018 @ 09:20 +03:00
A few short weeks ago the Dow industrials were on the verge of busting through another psychological milestone at 27,000. However, all that momentum has evaporated as a sweeping downturn grips financial markets, sending the Dow Jones Industrial Average DJIA, -2.41% tumbling more than 600 points on Wednesday and pushing the Nasdaq Composite Index COMP, -4.43% into correction territory for the first time since Feb. 11, characterized as a drop of at least 10% from a recent peak.
On top of that, the Dow and the S&P 500 index SPX, -3.09% on Wednesday wiped out all their hard-fought gains over the past 10 months to turn negative for 2018. So, what happened?
The return of volatility
Well, investors have grown all-too comfortable with a market that has merely churned higher as it did in 2017, producing boffo returns without a significant bump lower. October, an already seasonally volatile month, has delivered the clearest sign so far that the old quiescent regime is over.
A breakdown in support levels
Wednesday’s losses gained steam partly because the market has had difficulty finding support, or buyers that might steep in to stem a fall. And selling that had already eroded certain levels throughout the month in financial markets — like cutting away strands from a bridge of ropes — has made the markets more vulnerable to succumbing to subsequent downturns.
The fear gauge
On Wednesday, the Cboe Volatility Index VIX, +21.83% or fear gauge as it is often called, closed at 25.23, gaining 22% on the day and closing at its second-highest level of 2018 (see image above). The VIX tends to fall when stocks rise, and vice versa, because it measures how much traders will pay for protective options on the S&P 500 in the coming 30 days. A reading of 25 is well above the index’s normal average of around 20 and above its average this year. Moreover, the VIX has climbed 109% so far in October alone. That means investors have been steadily paying for protection from a coming market downturn.
The source of all this stock-market angst is manifold. MarketWatch has previously outlined many reasons for worry but it is worth repeating: The overarching theme is that investors are concerned about slowing growth here and abroad and the impact of tariff clashes between the U.S. and China.