Stocks skidded Friday, on the back of weaker commodities, and appear to be heading for the biggest correction in at least the last year.
The S&P 500 collapsed through a key support level at 2,004, and was trading down below 2,000 Friday afternoon. Technicians are eyeing the next stop at 1,980. The S&P is down almost 4.5 percent this week, and is now off about 6.5 percent from its all-time high in May.
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Its last biggest pullback was in October 2014 when it fell 7.5 percent on a closing basis, and while this drop could be greater, it's still not seen as a major double-digit correction that would drag stocks into bear market territory. The Dow, meanwhile, is already down 9.3 percent from its May close, a steeper decline than the 8.6 percent move lower in October, 2014.
"Based on what I'm seeing, I see no reason to get in front of this," said John Kosar, chief strategist at Asbury Research. "I think at some point, within the next month or so, there will be a really good opportunity to buy, but it's not time, it's price. We'll see investor sentiment get bearish, and we'll see volume crank up, and that's when you start to look for a bottom."
The Dow was off 4.3 percent and the Nasdaq was more than 5 percent lower. The Russell 2000 was down 4.5 percent and is now in official correction territory with a more than 10 percent decline. The , meanwhile is soaring, jumping at one point to its year high above 24, and is now on track for its biggest monthly gain of more than 100 percent.
"This is a scare going on right now, and people are looking for a story line. The story line is that there's growth weakness and the VIX, volatility, doesn't stay high on simply weaker growth as long as you don't have a recessionary problem," said Jonathan Golub, chief U.S. market strategist at RBC Capital Markets.
U.S. equities were slammed for a second day, after weakness in world markets, particularly in the emerging market currencies. China's weak manufacturing data overnight continued the selling spiral, and were down more than 4 percent. Commodities were also slammed as the oil complex was sharply lower, with West Texas Intermediate crude futures falling through $40 per barrel.
"The VIX at these levels breaks one of two ways," said Golub. He said if the VIX breaks higher, as it did around Bear Stearns and Lehman, that's a bad sign that there's a real problem for stocks. But if it breaks to the downside from here, the stock market could be set to turn around.
"What you see is when it spikes up on light news flow, it drops like a stone. When it drops like a stone the rule of thumb is for every 7 percent, there's a 1 percent move up in stocks," he said. The VIX is viewed as the market fear meter, reflecting the trading in puts and calls in the S&P 500 on the CBOE.
"The China weakness is nothing new, but it's a wake-up call that all is not good in the global economy, whether the Fed raises rates or not," said Peter Boockvar of The Lindsey Group. "Whether it raises rates slowly, or it's only 25 basis points, it is a second form of tightening with the end of quantitative easing being the first."
The market has been increasingly moving away from the idea of a September rate hike, even though Wall Street's top economists lean more toward September than later in the year, or even January. That divergence in opinion has added to market volatility.
In the bond market Friday, investors continued to seek safety, driving the 10-year yield to 2.04 percent.
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"I think we're going to 2 percent. People are running out of the stock market, and are looking for a place to go, and Treasurys are kind of old faithful for that," said Kosar.
As for stocks, "I think we've been in a stealth bear market for awhile," said Steve Massocca of Wedbush Securities. "I think this is starting to affect the more visible areas." Four stocks that had been leading, Facebook, Amazon, Netflix and Google were all moving lower.
The S&P 500 has been flashing warnings for some time with fewer and fewer stocks leading. At this point 66 percent of the S&P stocks are down 10 percent or more, while 28 percent are lower by as much as 20 percent or more from highs.
"The reality is underlying asset prices got disconnected from the fundamentals, so there's just reality checks everywhere," Boockvar said.