Dow Storms Back After Dipping Into Correction

(CNN Money) — The stock market is storming back after briefly sinking into a correction.

The Dow declined 567 points at Tuesday’s open, then raced back to a 350-point gain in extremely volatile trading.

The losses just after the opening bell briefly sent the Dow into a correction, a 10% decline from its record high less than two weeks ago. The stock market hasn’t closed in correction territory in two years.

“We had an extreme sell-off followed by an extreme bounce,” said Peter Kenny, an independent market strategist and founder of Kenny’s Commentary. “It was a massive reversal: Nearly 1,000 points on the Dow is mind-bending.”

Kenny said that large investors probably led the rebound, picking up beaten-down stocks when the Dow entered correction territory.

The stock market freakout of 2018 hit a crescendo on Monday when the Dow plunged a record 1,175 points. The 4.6% plunge was the index’s worst day since August 2011 and knocked it into the red for the year.

“There’s been a seismic shift in sentiment, which had reached extreme levels,” said Paul Hickey, co-founder of Bespoke Investment Group. “When people view the stock market as an ATM machine, the market is going to fight back.”

The tremors on Wall Street spread around the globe. Stocks in Europe and Asia posted heavy losses.

Major markets in Europe shed roughly 2%, and stocks in Germany, Sweden and Spain fell into a correction. Japan’s Nikkei nosedived 4.7%, while Hong Kong’s Hang Seng suffered a loss of 5.1%.

“We can all admit that the market went parabolic in the first 4 weeks of 2018 and we’re just back to square one,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a report on Tuesday.

After months of unusual calm, fear has raced back onto Wall Street in dramatic fashion.

The VIX index of market volatility surged another 32% on Tuesday. That’s after it spiked by a record 116% on Monday, to the highest level in more than two years. CNNMoney’s Fear & Greed gauge of market sentiment has gone from “extreme greed” a week ago to “extreme fear.”

The sudden mood shift in the once-euphoric market is all about the threat of inflation. Worries about inflation first emerged in the bond market. Heavy selling sent the 10-year Treasury yield spiking to a four-year high.

Investors have become concerned that the era of extremely low interest rates that propped up stock prices for years may soon be over. The fear is that the U.S. economy could overheat, forcing the Federal Reserve to aggressively raise interest rates. That could take a lot of air out of the stock market.

“There is concern that it won’t take much of a rise in interest rates to create havoc,” said Ed Yardeni, president of the investment advisory firm Yardeni Research. “2008 spooked us all. Very few people understood that credit markets can create a domino effect worldwide.”

Despite the heavy selling, the Dow is still up significantly since President Trump’s election. But that’s down significantly from the 8,000-point gain it was showing a few weeks ago.

It’s becoming clear stocks ran up too far, too fast in the euphoria over Trump’s tax cuts and the improving economy. The U.S. unemployment rate is sitting at 17-year lows and global growth has gained momentum.

“The tax cut euphoria drove stocks up at an unsustainable pace,” Scott Minerd, global chief investment officer at Guggenheim Partners, wrote in a research note. But concerns about oversupply in the bond market and higher interest rates have been growing, he added.

Market analysts have long been saying the market was overdue for a cooling-down period. The question now is how far stocks will retreat before investors feel emboldened to start buying again.

“This correction is a healthy development for the markets in the long run, and the equity bull market, while bloodied, is not broken,” Minerd said.

Yardeni agrees, pointing to the strength of the economy and corporate profits.

“The fundamentals are great. Earnings have been on fire,” he said. “I’m still bullish.”