As I write this on Thursday morning, the Dow was down as much as 800 points from yesterday's close, which represents a drop of around 2.7%, but the real damage is being done in the Nasdaq, where the index was done over 5% at its lowest.
Given that the large-cap market was up around 9-10% in the month preceding today, it's easy to make the argument that equities had gotten well into overbought territory and a pullback was long overdue. It's easy to search for catalysts, but I really believe that today's decline is nothing more than that and there's not a deeper meaning to discover.
However, there may have been signals that such a move was coming.
I'm looking at the one-month chart of the VIX here and you can clearly see a trend.
Ignoring today's decline for a moment, we can see that the VIX got as low as 21 roughly two weeks ago, which marked a brief dip in the S&P 500. As the index moved higher from the 3375 level then to the 3575 level it reached yesterday, we see that the VIX also moved up from 21 to briefly above 27.
We know that rising volatility is typically associated with downtrends, not uptrends. The fact that volatility was rising during a period where large-cap prices were also rising quickly suggests that this move higher was at risk of being unsustainable.
Take a look at the relative strength index of the major indices recently.
The Nasdaq and the S&P 500 were both over 80 at yesterday's close, easily levels that would indicate overbought market conditions. While momentum traders were likely willing to ride the trade, there were some clear indicators that suggested investors might have wanted to take a little more cautious approach here.
Is this just a brief, sharp downturn or the start of a bigger decline to come. Hard to say. The VIX is higher, but not that high, so I wouldn't say it's in risky territory yet. The RSI was clearly due to come back down a bit, but today's move should shake out a fair amount of the excess.
The one overriding factor I see here is investors' willingness to continue buying up risk assets. We've seen dips like this before this year and traders have shown a tendency to swoop in and buy them up quickly. There's still an overwhelming bullish sentiment in this market and a one-day drop won't derail it yet.
I'd suspect we'll see a reversal at some point in the near future, but risk is certainly higher today than it was yesterday.