Markets Stumble but Recover: S&P 500 and Dow Face Midweek Volatility Amid Fed Moves

Technical Stock Market Briefing for Day & Swing Traders
| By Harry Boxer, Technical Market Analyst

Market Volatility Strikes Midweek
Last week, stocks took a volatile turn, with the major U.S. indexes falling around 2% overall.

After a 27% gain in the S&P 500 through Monday last week, it was not unexpected to see some pullback in the major indices, particularly as we head into year-end and investors consider profit-taking, rebalancing, and tax-loss selling.

Stocks took a sharp turn midweek, with the major U.S. indexes falling around 2% overall in a week punctuated by a significant decline on Wednesday. However, a partial recovery rally on Friday offset much of the earlier drop.

S&P 500, Dow Corrections, and the Dow’s Historic Streak

Even with last week’s pullback after the Fed meeting, the S&P 500 is still up about 24%, while the less tech-heavy Dow Jones Index is up about 14%. From peak to trough, the decline in the S&P 500 was approximately 3.5%, while the Dow Jones dropped around 6%, indicating that both indexes experienced corrections of less than 10%—a common occurrence in most years.

The Dow’s 2.6% decline on Wednesday marked its tenth consecutive negative trading day—the longest such streak since an 11-day decline in 1974. During this skid, the Dow fell 6.0%. The streak ended on Thursday when the index rose slightly.

The VIX Surges and Bond Yields Rise

The VIX volatility index, which tracks investors’ expectations of short-term U.S. stock market volatility, surged about 74% on Wednesday, with nearly all the increase occurring after the U.S. Federal Reserve concluded its policy meeting in the afternoon. The CBOE Volatility Index closed Wednesday’s session at 27.7, up from 15.9 the previous day. By Friday’s close, it had settled back down to 18.4.

For the second week in a row, bond prices tumbled, pushing yields higher. The yield on the 10-year U.S. Treasury note climbed to its highest level in nearly seven months, reaching as high as 4.59% on Thursday before retreating to around 4.53% at Friday’s close. This was up from 4.15% two weeks earlier and a recent low of 3.62% on September 16.

Looking Ahead: Light Trading Week with Bullish Momentum Possible

Next week is expected to be light on the economic front. There are no major earnings reports on the calendar, and there are only 3.5 trading days (a half-day on Tuesday, with markets closed on Wednesday). As a result, trading volume will likely be light, and the potential for recent bullish momentum to persist remains relatively high.

Bull Market Drivers Remain Intact

More broadly, traders and long-term investors should take comfort in the fact that, despite last week’s volatility, not much has changed from a fundamental perspective. Markets will undoubtedly face increased volatility and new “walls of worry” next year, including uncertainty around government and Fed policies. However, the underlying drivers of the bull market remain intact.

As always, we will continue “Trading What We See Technically, Not What We Think.”

*No credit card required