Fundamentals could resurface after wrenching selloff

Mon Jan 18, 2016 4:38pm EST
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By Rodrigo Campos

NEW YORK (Reuters) - The dramatic selloff on Wall Street through most of the past two weeks could signal a capitulation-type blowout, giving fundamentals the upper hand for the next week even as international stocks and the price of oil continued to fall Monday while U.S. exchanges were closed for a holiday.

The current slide in stock prices, which on Friday briefly dragged the S&P 500 to levels not seen in more than a year, is reminiscent in breadth and tone of drop-downs seen during the Great Recession.

The U.S. stock market was closed Monday in observance of the Martin Luther King Jr holiday.

In Europe, the Stoxx 600 index followed Asian shares lower and fell 0.5 percent after the European Central Bank said it would quiz euro zone lenders about high levels of bad loans. The price of Brent crude slipped 0.9 percent, to $28.63 a barrel, on the prospect of more supply from Iran. Prices had fallen as low as $27.67 in earlier trading.

Some argue the broad decline in U.S. stocks is warranted. In addition, the US market has not seen the kind of sell-off in high volume that signals a capitulation, and the S&P 500 could enter a bear market, more than 9 percent below current levels.

From most indications the U.S. economy is far from being in a recession, according to many market participants. The repricing in stocks could help the market shift back to fundamentals after years of focusing on the Federal Reserve and its ultra-low interest rate policy.

That is welcome news for some in the market who have seen stocks trade on variables other than economic data and company earnings.

"I actually am encouraged to see the market drop so we can just get to fair value and take it from there, then it is really determined by the path of the economy, and profits and revenues," said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.   Continued...

Traders work on the main trading floor of the New York Stock Exchange shortly after the opening bell of the trading session in New York, January 15, 2016.  REUTERS/Brendan McDermid