It was “manic Monday” on Wall Street.

In a blunt and unpleasant reminder of how crises thousands of miles away can puncture the heart of the U.S. markets, a real estate crisis in Hong Kong took much of the blame for the sharpest daily losses in more than two months for the major U.S. indices. The so-called “horsemen of risk” like bonds, volatility, the U.S. dollar, and “defensive” stock sectors climbed back into the saddle after months of lazing around the corral.

While analysts mainly cited the issues around Hong Kong-listed Chinese developer Evergrande Group and whether Beijing will let the debt-laden firm fail, that wasn’t the only issue sending a shudder around the world today. Though it should be noted that a default could mean potentially billions in losses for shareholders and bondholders not just in Asia but throughout the globe. Reuters reported that Evergrande bonds were trading for 29 cents on the dollar on Monday.

The Spillover Effect

The news came on top of continued concerns that there could be ripple effects for the rest of the global economy as the Chinese government continues to tap down on its real estate and other industries that it’s been trying to rein in. This includes technology, gambling, and video games. Remember, markets in China were closed on Monday for a holiday, so we could see increased action and volatility overnight when the market opens tonight.

Worries about the default and its possible side effects could help explain why Financial stocks in the S&P 500 Index (SPX) were among those taking the most heat Monday. Also, Energy got clobbered as crude sank amid global growth fears. Crude oil futures (/CL) tested the $70 level before moving a little higher on a down day. And the Cboe Volatility Index (VIX) traded above 28 but fell to just below 25 at the close.

Materials took a major punch, with stocks like Freeport McMoRan (NYSE: FCX), Nucor (NYSE: NUE) among the worst-performing S&P 500 stocks amid concerns about possible slower global growth and what that might do to the price of raw materials. Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), and Halliburton (NYSE: HAL) were some of the Energy sector victims in Monday’s downturn.

Meanwhile, In Washington …

Back at home, worries keep growing in Washington, D.C., as the House prepares to vote this week on the debt ceiling and a stopgap spending measure to keep the government operating past the end of the fiscal year, which ends on Sept. 30.

Along with that, the Fed starts its two-day meeting tomorrow. Last month, Fed Chairman Jerome Powell made clear that the central bank plans to start easing its stimulative bond-buying sometime soon, perhaps this year. Following that, the European Central Bank (ECB) announced it would lower the amount of its own stimulus.

The prospect of central banks starting to pull back the punch bowl even as global economic fears loom larger could be a factor not just in today’s selloff, but in the overall weakness that we’ve seen through much of September. It’s less likely we’ll hear taper talk any time soon as the Fed tries to determine if the Evergrande event is simply flushing out speculators or is a launching pad for something bigger.

Talking Technicals

From a technical perspective, a lot of damage got done on the charts today. The SPX took out its 50-day moving average pretty quickly, and that’s a level that had been holding firm for months. It takes more than a single day’s close below a key moving average to determine if the technical pattern is changing. Back in May, the SPX had several closes in a row below the 50-day but managed to claw back and resume its rally. We’ll have to watch closely to see if that level–which was 4436 coming into Monday–comes back into play over the next day or two.

“Buy the dip” has been the rally call on Wall Street all year, and analysts say there’s plenty of cash still on the sidelines. You can’t assume one day of weakness, or even weakness for half a month like we’ve seen means anything about the longer-term trend. One level that was being watched Monday was near 4370, which the SPX brushed against twice in August during a short weak period before beginning to rally again later that month. By the end of the day, the SPX had fallen below 4370 to post its weakest levels since mid-July. The July low of 4233 is still a way lower. But the 100-day moving average is near 4330, and the SPX fell well below that in intraday trade before popping back toward the end of the day.

It’s important after a day like this to watch the overnight trading and get a sense of whether buyers come in and try to make a stand. Sometimes weakness begets weakness, so to speak, and early the day after a selloff you see more selling in the first half-hour. It’s what happens after that, really, that might matter more. To buy the dip or not buy the dip is the question anyone active in the market could be contemplating.

In a development that may be favors the bulls, major indices closed well off their lows Monday, scrambling back in the last half hour. It was still a really ugly day, but maybe the slight rebound suggests some positive sentiment that could give things a little more zip tomorrow.

CHART OF THE DAY: S&P 500 DIPS. The S&P 500 Index (SPX–candlestick) has experienced consistent buying on the dips over the last year, but a new low suggests a long, overdue correction. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim(R) platform. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade(R) commentary for educational purposes only. Member SIPC.

Image by Alessandro D’Andrea from Pixabay

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