While there is little gained in figuring out the vacillations in equity 'markets' from one moment to the next, there appear to be three reasons being discussed for this drop in stocks. First, this is the worst month for the long bond in absolute price deterioration since Dec 2009 - for managers in balanced portfolios, there will need to be a month-end rebalancing 'into' bonds and out of stocks to ensure the weightings remain with their mandates. Second, the index rebalancing is having some effect on the equity market (though that has been well telegraphed). Third, and perhaps more important to some, based on intraday data so far, the much-discussed Hindenburg Omen [3] has been spotted (as it also was before QE2 was announced to save the world [4]). The last time we were this high in stocks and the Hindenburg was spotted was October 2007...
Bonds worst month since Dec 09 - sparks rebalancing...
[5]
and The Hindenburg Omen... (red bars on upper pane)... click for large version...
[6]