REDRUM.

US equities were bludgeoned again on Thursday, falling for a sixth consecutive session and closing on the lows, with the Dow down nearly 1,200 points.

We seem to have reached that threshold beyond which fear feeds on itself, snowballing and tipping dominoes along the way, as discretionary investors and systematic players frantically and mechanically de-risk into an already falling market, sapping liquidity and driving up volatility, in a self-feeding “doom loop”. (“Come and play with us, Danny.”)

It didn’t help that Goldman’s David Kostin slashed his outlook for US corporate profit growth in 2020 and 2021, and neither was it particularly encouraging to hear CIOs calling the COVID-19 crisis “possibly the worst thing I’ve ever seen in my career”.

Whether or not it actually serves any purpose – i.e., accepting as a given that cutting rates won’t cure viruses or bring shut-in capacity back online – the Fed will now almost surely be compelled to say or do something to shore up confidence.

This is the type of dramatic selloff that can slam the vaunted “wealth effect” into reverse, potentially imperiling consumer spending, the pillar on which the US economy now rests after three straight quarters of declining business investment.

Thursday was one of the worst days for US equities since the crisis, and this is shaping up to be one of the worst weeks for the S&P in history. I don’t know how else to put it. The same goes for the Nasdaq.

Energy shares are down more than 16% this week alone. Thursday saw the highest dollar volume traded in QQQ since the day Lehman blew up.

(BBG, h/t Luke Kawa)

And barring a dramatic turnaround on Friday, February will be among the five worst months for stocks versus bonds since October of 2003.

The Nasdaq 100 has gone from overbought to oversold in the space of six sessions. What you see in the following visual is, as far as I can tell anyway, largely unprecedented.

Expectations for Fed action are running rampant. As Bloomberg’s Edward Bolingbroke recounts,  “gains across the eurodollar strip were matched by some explosive action in options [as] a flood of flows across white-pack tenors included ~275k EDM0 99.75/100.00 call spread bought at 0.5, targeting zero lower bound rates by June and a 50bp rate cut in March”.

Last week, Richard Clarida went out of his way on two separate occasions to play down the idea that the Fed is a hostage to the “hall of mirrors” effect (or “affliction” as he called it), whereby market pricing ends up dictating policy outcomes.

(Goldman)

Not to put too fine a point on it, but Clarida is about to be proven wrong.

“This introduces the real possibility that the market will end up forcing the Fed’s hand to deliver on the substantial amount of easing priced into the front-end rates complex”, BMO’s Ian Lyngen, Ben Jeffery, and Jon Hill wrote Thursday morning, adding that “in the past 30+ years, there has never been this degree of accommodation (outside of the lead up financial crisis) reflected in the Eurodollar curve without the Fed having either already delivered, or imminently about to deliver a rate cut”.

That commentary was written prior to Thursday’s action in equities. There is now no chance (none) that Powell can walk back expectations for Fed action without exacerbating (materially) equity volatility, which is already the highest since Vol-pocalypse, having surpassed the Q4 2018 spike on Thursday.

Yields have fallen in six consecutive sessions. 30-year yields fell to 1.78%.

Crude is now below $47, the lowest in some 14 months, after logging a fifth straight decline. OPEC will need to take decisive action to stabilize the market as demand destruction jitters have the potential to make this situation materially worse.

To say that “buy the dip” has malfunctioned as a viable “strategy” during this week’s rout would be to grossly understate the case.

Pavlov is still missing.