This week’s behavior in the stock market went according to plan. We broke through several technical supports, reached a fairly critical level, and then bounced back. However, October isn’t over and the probability that we experience more downside remains high. Here’s my take on the week ahead.
Readers who read my column last week were prepared for the S&P 500 Index to break its 200 day moving average at 1,905. I expected prices to overshoot on the downside and they did The S&P 500 Index dropped further to an intraday low of 1,820 on Tuesday. That was thirty points lower than my best guess. But before the end of the day on Wednesday, the markets rebounded to close above my 1,850 target level. On Thursday, sellers tried again, but could only push the average down to 1,835 before rebounding once again. The Index ended the day at just about the same level of 1,862.
I advised readers last week that I expect the S&P 500 to continue this consolidation process, moving slightly above and then below that 200 DMA in the days ahead. So far things are going according to plan
So, what does that say about the markets and this correction? It says to me that this decline, although much-needed, is not about anything fundamental. Sure, Europe is struggling and Ebola cases are springing up in the United States but those are simply weak excuses for a market that simply needed a correction and now we have it.
Lesson one: do not panic. Lesson two: do not sell. Lesson three: buy when the blood is running in the streets, and we had some of that on Wednesday and Thursday. How can I tell?
One of my best indications came when I tried to log on to one of my brokerage accounts on Wednesday morning. The market opened down 40 points on the S&P and over 300 points on the Dow. I could not get quotes on the site and the on-line trading response was extremely sluggish. That usually happens when the number of people trying to sell stocks overwhelms the system. That told me there was panic in the air, which is a great time to buy stocks–so I did. The same thing happened the next day as the markets hit lows for the day once again. So I went shopping. Remember, I’m the kind of guy that buys straw hats in the winter and snow blowers in the summer.
I also look for 90 % down days when investors overwhelmingly rush for the exits. We had those too this week. I recognize that most investors find it difficult to buy when the markets are falling. It is a scary thing to do, but it almost always pays off.
As the headline says, “so far so good” but now what?
I suspect we need to re-test the lows just to be sure they will hold. That means we could get back down to the 1,820 level or maybe 1,800, since it is a round number and prices seem to gravitate to those marker buoys. Could we break 1,800? Of course we could, but only by 20 or 30 points and even then it would probably happen on an intraday basis like the lows of this week.
Friday’s rebound was a good sign. But the fact that investors were hoping the Fed will come to our rescue simply because we had a down week in the market is ludicrous. Listen people, you can’t continue to make gains in equities if you don’t have pull backs like this. The S&P 500 has only lost almost 10% from the highs before rebounding on Friday. That’s the way things are supposed to happen. We haven’t had a 10% pullback since 2011. It is great news if you care about the stock market in the months and years to come. This kind of sell-off clears the decks for further gains ahead.
There are some real values out there. Airline stocks have been pummeled because of the Ebola crisis. Panicked investors have dumped them en masse assuming that the entire industry will be shut down and no one will fly ever again. Poppycock! Oil companies have been trounced because bears are saying that global demand for oil is so weak and the dollar so strong that 30% declines in those stocks are justified. Are you kidding me?
There is no way I can guarantee you that my scenario will turn out as I expect. Remember, this is an art, not a science, but so far, so good. Take my advice, this too shall pass and there are good things right around the corner. Next week I’ll discuss some of those good things and what I expect after mid-term elections, so stay tuned.