Understanding the Market | Suddenly Crashed! What Happened to the Overnight US Stock Market?

At 2:30 pm local time on Wednesday, the US stock market suddenly plunged, with all three major indexes collectively turning down and continuing to decline, ultimately closing down more than 1%.

At the close, the Dow Jones Industrial Average fell 1.27%, marking the largest decline since October 3rd, the Nasdaq Composite fell 1.50%, marking the largest decline since October 20th, and the SPDR S&P 500 fell 1.47%, marking the largest decline since September 26th.

What put an end to the recent expectations of a rate cut by the Federal Reserve and the dovish push for a rise?

First, the US stock market has approached historical highs and encountered a large amount of selling pressure, so this sell-off was expected. Second, the "barometer of the US economy," FedEx, reported lower-than-expected earnings for the quarter, which poured cold water on the "resilient" consumer expectations. Third, there were investors who bought a large number of put options on the SPDR S&P 500 index, which may have exacerbated the market sell-off. Fourth, trading was light during the holiday season, and with low trading volume, a few sellers were able to trigger a market collapse.

Jay Hatfield, portfolio manager at New York-based InfraCap, said that the stock market has approached historical highs and encountered a large amount of selling pressure.

Before Wednesday, the Dow Jones had set new record highs for five consecutive trading days, while the Nasdaq and the SPDR S&P 500 had risen for nine and two consecutive trading days, respectively.

Hatfield added, "The sell-off was so intense that it was shocking, but considering how far we have come, it makes sense."

Although home sales have been strong (with a slight rebound from historical lows) and consumer confidence has risen significantly (with a decrease in inflation expectations), the earnings reports from FedEx and General Mills have dampened the idea of a resilient consumer cyclical rebound.

FedEx, considered the "barometer of the US economy," reported profits for the quarter that were far below analysts' expectations and also lowered its full-year revenue forecast, expecting weak consumer spending during the upcoming holiday period (Thanksgiving to Christmas and New Year).

Affected by the earnings report, FedEx fell 12%, leading the decline in the SPDR S&P 500 constituents.

General Mills, the US snack giant, reported Q2 sales and adjusted earnings per share that were below expectations, with a 10.41% year-on-year decrease in net profit for the first half of the year.

After the earnings report, General Mills fell 3.6%, accumulating a 22.7% decline for the year. In addition, some traders have indicated that there has been a significant amount of buying of SPDR S&P 500 put options by investors recently, which may have exacerbated the market sell-off.

A major buyer of put options purchased a large quantity of SPDR S&P 500 put options with a strike price of 4755 points. This may have spooked the market, triggering panic selling and causing the SPDR S&P 500 index to suddenly plummet below the previous support level of 4755 points.

At the same time, traders who previously held a large number of call options on the seven major tech giants suddenly started selling these call options on the expiration date.

From the Goldman Sachs trading platform, some trading details can be observed:

Most of the trading in SPDR S&P 500 E-mini futures occurred in large volumes after 2:30 pm, even before the SPDR S&P 500 index fell below 4800 points.

Within the first 45 minutes of the stock market's initial decline, there was a significant surge in trading volume, about 5 times the usual amount.

A large electronic trade purchased SPDR S&P 500 put options expiring on December 20th with a strike price of 4755 points.

Last week, the Federal Reserve hinted that its tightening cycle had ended and opened the door to interest rate cuts in 2024. Chicago Fed President Charles Evans reiterated on Tuesday evening that cooling inflation rates to the Fed's 2% annual target would drive a policy of interest rate cuts.

According to CME's FedWatch tool, there is a more than 70% probability that the Federal Reserve will initiate its first interest rate cut in March next year.