By Profit Confidential
The major stock indices started the week with another downward blast, just as I had warned.
You shouldn’t be surprised; in fact, it was more obvious as the stock market traded higher and higher (sometimes for no reason) that a time of reckoning was on the horizon. Even at a 5% discount in the recent months, I was still hesitant to jump into the stock market with reckless abandon. (Read “Buyer Beware: Stocks May Be Signaling More Weakness to Come.”)
Now with the 7% correction in the S&P 500, my senses are beginning to tingle, but I’m still not ready to join the market yet. Recall my recent dinner with my investment manager friend (see “Wine, Steak, and the State of the U.S. Economy”). I came away from that dinner thinking my friend was expecting a major correction in the stock market and was buying put options as a hedge. Well, the stock market could be in the midst of a major correction.
If stocks don’t settle down and find a place to pause, it could easily translate into more losses. A 10% adjustment is possible. I would love to see a more significant correction, as I would then be looking more seriously at nipping the stock market.
The Federal Reserve created this current stock market drama. But don’t forget—you also owe Fed chairman Ben Bernanke a big “thank you” for the money you’ve made over the past few years.
Let’s go back to a chart of the S&P 500 that I first created in May (featured below). Note the purple ovals that pointed to a correction. I was quite concerned about the advancement this year and said it was not sustainable at the same pace. Now take a look at the current deterioration on the chart, highlighted by the selling that has driven down the S&P 500 by more than 110 points from its peak in May.
Chart courtesy of www.StockCharts.com
The 1,550 level appears to offer some support, but failure to hold here could see the index become vulnerable to dropping below 1,500.
The chart below shows the downward move of the S&P 500 stocks that had been above their respective 200-day moving averages. The reading was in excess of 93% during its peak in May, but it has since collapsed to below 80%.
Chart courtesy of www.StockCharts.com
Over the next few weeks, the key will be to see how the stock market behaves and whether the so-called “bargain hunters” start to surface.
I would rather just take a seat and wait for potentially more selling before jumping in. The fact is that there will be opportunities to make money on the market swings to be sure.
Article by profitconfidential.com
