From the intraday high of 2132 on July 20th, the S&P 500 has fallen by almost 12.5% to its intraday low of 1867 yesterday.
For fans of support and resistance, 1867 is within hailing distance of the 1820 intraday low for the index in mid-October 2014. The closing lows at that October bottom were 1867 on both October 15th and 16th.
That all adds up to a severe correction by the experience of the past few years, but still one that might be called “garden variety.”
What’s unusual about this decline is that virtually the entire fall happened in a panic-filled two-day period–last Friday and yesterday.
So this all gives us two opposing market signals. On the one hand, in the normal two-steps-forward-one-step-backward rhythm of stock markets, we’ve finally made a significant backward step over a suitably long period of time. One might conclude that we’re done with that phase and are ready for the next up move.
On the other hand, the past two trading days have been fear-filled. On Friday, the S&P was down by 3%+ and closed on its lows. Yes, it was a Friday, so brokerage houses flattened their books going into the weekend (translation: dumped inventory into the market near the close). Even so, closing on the lows sends shivers down traders’ spines. Then the market opened on Monday down by about 6%, another stomach acid inducer. Pundits rushed in to “explain” the goings on to retail investors as a sign that the Chinese economy (the largest, or second-largest, depending on how you count, economy in the world) was imploding–with dire consequences for the rest of the globe. That increased the fear quotient.
My point here is that emotions are much more powerful that we usually recognize–and they linger. Maybe the market had been fearful for close to a month and purged that fear over the past two trading days. But I don’t have the sense that anyone was afraid before fireworks erupted on Friday. That’s my main hesitation about saying Monday represents a selling climax that clears the way for upward progress.
China not the cause
I think that China is the trigger for what’s happening in markets now, not the cause.
I’m torn between two viewpoints on China as an economy. I think the hedge funds proclaiming that the selloff in oil and metals is due to economic weakness in China that Beijing is covering up–and that we are due for a protracted bout of global economic weakness–are completely wrong. On the other hand, either they or their brethren spouted similar nonsense about hyperinflation being induced by Fed action five years or so ago. Everyone now knows that was totally wrong–yet this craziness struck a responsive chord and influenced stock trading for an extended period of time.
My conclusion: this isn’t a time to bet heavily on whether the market is going up or down (it almost never is).
During periods like this, most investors, even professionals, tend to go on vacation. They just don’t look at the daily ups and downs of prices. For anyone who can stand the rocking of the boat, however, there’s useful portfolio work that can be done to upgrade holdings.
–clunkers that have never gone up usually don’t go down a lot in general market declines. Strong stocks that have gone up a lot typically get pummeled. So this is a great time to ditch the former and use the money to buy the latter.
–we’re in a time of significant structural economic change. I think the prophets of doom are mistaking that for cyclical economic weakness. Losers in a time like this are typically large and well-known; potential winners are typically smaller and more obscure. For most of us, the appropriate switch is from old-line, status-quo stocks into ETFs that are focused on Millennials.