Opening Bell: Volatility Climbs; USD Bottoms, Gold Sinks, Oil Slides

US equities extended a selloff to a second day, ending their worst month in two years, even as yields on the 10-year bond—the purported catalyst of the near 12-percent stock decline between January 29 and February 9—dropped three basis points to 2.87.

The S&P 500 dropped 1.11 percent, with all sectors in the red. Energy led the dip, falling 2.31 percent, while Real Estate—which was yesterday's laggard after losing 2.14 percent—fought its way through, dropping only 0.13 percent. The total decline for real estate shares for both days was 2.36 percent. The SPX monthly slide totaled 3.9 percent, trimming back the intra-month low of 10.3 percent that was registered on February 9.

Technically, the two-day drop is considered a return-move, part of a pattern after a breakout. The preceding two-day rally provided an upside breakout to a continuation flag pattern. Now, a presumed increase in demand, following the sharp rally preceding the consolidation, is expected to pick up the supply and rebound prices higher.

The Dow Jones Industrial Average plunged 1.51 percent, or 2.65 percent over the two day period. The monthly decline totaled 4.24 percent, significantly trimmed from the 10.62 percent low of February 9.

The NASDAQ Composite slipped the least, 0.76 percent, to a total two-day loss of 1.99 percent. The monthly loss of 1.24 percent, which pruned an earlier 10.55 percent plunge, means the information-technology index is once again the outperforming index on every parameter.

The Russell 2000 plunged 1.63 percent for the day, for a total 2.99 percent two-day drop, thus once again underperforming its peers. The monthly decline was 3.9 percent—mirroring losses on the S&P 500 Index—cutting back the 8.85 percent plunge of February 9.

The main takeaway for stock investors is the return of volatility, both in the equity and Treasury market.

The 10-year Treasury yield held just below 2.9 percent. This is roughly where it began at the beginning of February, a month that saw it fall to as low as 2.70 percent, but also rise as it came within just five basis points of the 3 percent mark—a level it hasn’t touched in four years.

On Tuesday, we forecast that yields would drop after both the MACD and RSI provided sell signals. On Wednesday, they dropped 3 basis points, forming a potential H&S top on the four-hour chart, with an implied 2.75 percent target, upon a downside breakout. Such a decline would halt an uptrend line since the beginning of the year, opening the door to a reversal, which almost always includes a tug-of-war between bears and bulls. In other words, more volatility.

February volatility provided an upside breakout to its downtrend since March 2016. The breakout was so severe that it climbed back to those March 2016 levels.

The repercussions are twofold:

1. The major players—hedge funds and investment banks—must exit complex positions designed for a stable market, and reshape their strategies based on an environment beset by volatility; and
2. Classic bond investors have migrated into equities during a stable market as they sought positive yields in a low-yield environment, benefiting from stock dividends in lieu of bond yields. However, when prices swing between extreme profits and deep losses, the typical bond investor will presumably not be comfortable with the volatility that rocks the equities market.