(Adds Monday market action)
By Rodrigo Campos
NEW YORK, Jan 18 (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.
"To me, this is really a result of Fed influence, just a
reversing of all this Fed intervention."
Many point to a slowdown in China's economy and its expected
weight on global growth as a reason for the slide in stocks and
the 12-year lows in crude oil futures.
The Shanghai index .SSEC closed Friday at its lowest level
since December 2014, down more than 20 percent from its November
high and nearly 44 percent from its 2015 high.
"The spillover from China has been concentrated in crude oil
and there are reports that commodity hedge funds have
experienced a sharp increase in margin calls as the price of oil
falls," said Gail Dudack, chief investment strategist at Dudack
Research Group in New York in a Friday note to clients.
"Typical of most margin unwindings, selling will flow into
equity markets since stocks are often the most liquid assets in
portfolios. This explains why movements in the (S&P 500) have
been closely aligned with crude oil in recent weeks."
Friday had some of a capitulation type feel, with 944 New
York Stock Exchange issues hitting a 52-week low. It is only the
fourth day since the end of 2008 that the number is above 900.
It also was the seventh day in a row of more than 500 NYSE
stocks at their lowest in at least a year, a streak not seen
since October 2008 -the month following the bankruptcy of Lehman
Brothers.
Major indexes fell Friday for a third consecutive week. The
S&P closed at its lowest since late August while the Nasdaq
Composite ended at its lowest since October 2014.
FUNDAMENTALS ON TAP
U.S. markets are closed Monday for the Martin Luther King
holiday and on Tuesday will reopen to fresh industrial output
and retail sales data out of China. Chinese GDP data is also due
Tuesday, late Monday on Wall Street.
"Some of the (market) fears may be comforted if we get good
numbers out of China Monday evening," said Brian Jacobsen, chief
portfolio strategist at Wells Fargo (N:WFC) Funds Management in
Menomonee Falls, Wisconsin.
He said if next week's U.S. core inflation data does not
surprise on the upside and manufacturing returns to expansion
investors could feel more comfortable returning to the stock
market.
"That in addition to strong earnings, of course."
Among the largest companies to report results next week are
Morgan Stanley (N:MS) MS.N , Bank of America (N:BAC) BAC.N and Goldman Sachs (N:GS)
GS.N in the financial world, while Starbucks SBUX.O and a
handful of airlines will speak to the health of the consumer.
(Aditional reporting by Dion Rabouin, Chuck Mikolajczak and
David Randall; Editing by Bernard Orr and Nick Zieminski)