The stock market cratered on Wednesday. The Dow fell 3.16%, the Nasdaq fell 4.08%, the Russell 2000 fell 2.86%, and the S&P 500 fell 3.29%.

You can see the daily changes in all four indexes in the charts below. This was the biggest decline since February. There wasn’t a major catalyst for such a vicious decline. But there were ample reasons for stocks to fall.

Stocks were overbought at the peak in September. The S&P 500 hadn’t declined or increased more than 1% in 74 days. This was one of the least volatile periods in market history.

There weren’t any 1% moves in the S&P 500 up or down in Q3 for the first time since 1963.

Since October is the most volatile month of the year, it’s not a surprise this decline occurred. There are worries about a global slowdown, weakness in China, and a hawkish Fed.

Since these aren’t new worries, some investors are perplexed. My answer to them is the market doesn’t price in risk smoothly. Negative catalysts cause violent reactions. Since we hadn’t had a correction in so long, this was almost expected.

S&P 500 Falls - Bullish In The Short Term

Since 1928 there have been 325 days with 3% losses or worse. That equates to 3.5 per year on average. They usually happen in bear market recessionary periods. Occasionally they are sprinkled into bull markets.

Now that we had one, I’m bullish on stocks in the short term. Don’t question why stocks fell 3.29% in one day instead of 1.5% in two days; just go buy the stocks you like. I prefer the small caps. The Russell 2000 outperformed on Wednesday. However, it’s down 9.5% since its record high in August.

The CNN Fear and Greed index is at 8 out of 100 which signals extreme fear. This is an extremely bullish indicator. Many bearish investors are mocking this indicator because the S&P 500 is only down about 5% from its record high.

If we are headed for a bear market, this correction isn’t a big deal. However, even if you believe that, it’s not the time to sell stocks as the market is oversold.

The S&P 500 14 day RSI is at 41.61 which is the lowest since June. It’s amazing how quickly the tide has turned. A few weeks ago, I was discussing the need for a correction because the RSI was briefly above 70.

S&P 500 Falls - Tech Taking The Brunt Of This Correction

Tech stocks and emerging markets had a dreadful day. The emerging market index fell 2.97%. It’s down 24% since January 26th. Once again Tencent was in the middle of a bad cross section as it fell 4.45%. It’s down 41.92% from its record high in January.

Facebook stock fell 4.13% to its lowest point since June 2017. Technically, Facebook has little support now that it broke its low on the year. However, if you trust analysts’ forward estimates at all, it’s amazingly cheap. Its forward PE is only 20.72. That’s its lowest forward multiple since January 2017.

Facebook isn’t the only weak name in the FANG index. Netflix stock fell 8.38% on news Apple will be giving away free original content to users.

This was a terrible day to have any bad news come out. The best example of this is Square which fell 10.11% during the day and then fell 8.65% after hours because its CFO stepped down.

The FANG stocks lost $125 billion from their collective market caps on Wednesday which was its biggest decline ever. $125 billion is the combined value of 460 companies in the S&P 500.

As you can see from the chart below, the Nasdaq 100 fell 4.44%. This was the worst decline since August 2011. In the S&P 500, all sectors were down.

Best sectors were the utilities and consumer staples which fell 0.53% and 1.27%. General Mills stock was a winner as it gained 1.5% as traders flocked to safety.

Worst sectors were technology, communication services, and consumer discretionary which decreased 4.77%, 3.94%, and 3.74%. The VIX was up 42.9% to 22.79. That was the 12th biggest daily increase since 1990.

S&P 500 Falls - Dow Transports Crashes: Fastenal Falls On Earnings

The Dow Transports is known as a leading indicator for the economy. It fell 4.05%. As you can see from the chart below, this was its worst single day decline of the year. CSX stock fell 6.77% and Union Pacific stock fell 4.87%.

One reason for the correction was fear about the slowdown in China. There were negative comments from PPG and Fastenal about China and tariffs.

PPG stock was up 1.01% because Nelson Peltz made an investment, but it’s still down from before it announced negative guidance. Fastenal stock fell 7.14% even though it beat EPS and revenue estimates.

It beat Q3 GAAP estimates by 2 cents, coming in at 69 cents. Revenue was $1.28 billion which beat estimates by $10 million and was up 13.3% from last year. Daily sales of fastener products were up 13%. Non-fastener products were 65.3% of sales and grew 14.9%. This company is a key bellwether name because it literally makes nuts and bolts.

Investors in Fastenal are worried about the tariffs which could go up to 25% by the beginning of 2019.

The company stated on its conference call “Fastener products have a very high content of imported products and a lot of that is coming out of China. So if you think about that third of our business, a big piece of that is sourced globally and most of that had moved outside of North America before we even started in business back in the late 60s. And so that 35% is a pretty big piece. On the non-fasteners, it’s also a quite large piece.”

S&P 500 Falls - Conclusion

Wednesday’s decline was a buying opportunity just like September’s rally was a selling opportunity.

There are certainly reasons to fear tariffs, rate hikes, and an economic slowdown. But when stocks fall sharply, we should remind ourselves of the solid earnings growth in 2018. Also remember the coming earnings season, which should be good.