I never like to see this kind of big intraday reversal–but it’s not that serious YET

U.S. stocks came racing out of the gates on strength in overseas markets with the Dow Jones Industrial Average trading at 26,000–283 points higher than the Friday close at one point during the day.

Then came the plunge as indexes gave back all their gains and then some. The  Dow closed 10.3 points lower at 25,793. The Standard & Poor’s 500 traded above 2,800 for the first time and then fell to close down 0.4% for the day. The NASDAQ Composite also finished lower on the day.

This kind of intraday reversal is never a sign of market health. But the reversal today didn’t quite reach the magnitude of what technical analysts call a “key reversal.” In a key reversal the intraday push moves the market to new highs–accomplished today. But then plunges to a level below the previous day’s close. (Friday in this case since U.S. markets were closed on Monday.) The intraday reversal didn’t quite send us back that far so while the reversal left the warning lights lit, it didn’t leave them strobing red. The most likely denouement of a drop intraday drop like today’s is for a soft end to January with prices trending 3% to 5% lower as the market takes a breather.

Or at least that’s how I read today’s market action.

As I’ve said recently “Correlation is not causation” but the game in most market commentary is pinning a move higher or lower on some event or news. Today’s explanation of choice is to point to the looming deadline–midnight on Friday–for passing a stop gap measure to keep the government open. It’s generally agreed that there isn’t enough time to pass any complicated legislation–such as a deal to link DACA protection to funding for border security–and even the usual kick the problem down the road has grown increasingly unlikely. So maybe, the thought is today, the drop in the market was caused by a sudden awareness of an impending government shut down.

I’d go with that explanation except that the level of worry in this market is still extremely low and it didn’t jump much in today’s session. The CBOE Volatility Index (VIX) rose only 14.5% to 11.63. That still leaves the index mired at the low end of the historic range for what used to be called “the fear index.” And a 14.5% move to all of 11.63 isn’t the kind of wild gain that we usually get when the market suddenly discovers fear.

It is, however, the kind of move you see when some players in the market decide to hedge a little because uncertainty is gaining. Stocks have indeed, historically, struggled in the days after past government shutdowns like that in 2013. That shutdown with the associated furlough of all non-essential government employees ran from October 1 to October 16. It’s thought that it led to a decline of about 0.1% to 0.2% in GDP. The longest recent shutdown was that in 1996, which lasted for 21 days.

Other reasonable explanations for today’s intraday reversal are the need for the market to take a breather after the quick jump to start the year, continued weakness in the U.S. dollar (and strength in the euro) and general nervousness after recent events such as the false missile attack alert in Hawaii.

If this shutdown looks like it will exceed the 1996 event in length, it will be time to re-evaluate everything. Of course.