It’s been a while since we’ve seen a day like today in the stock market, but we’ve had them before and we’ll have them again. And through it all, we’ll be just fine. Too many investors give up and get out of the market altogether, which is the wrong thing to do.
In fact, some of my biggest moneymakers through the years have come out of times like this. Same with the short-term trading we do here in High Octane Trader. We’ll talk more about that in just a second, but let me start by sharing some thoughts on the market overall.
Several reasons were bandied about for today’s sell-off, most notably ongoing concerns about Europe’s economy and some soft data here in the U.S., including a drop in retail sales, lower producer prices, and reduced manufacturing activity in the New York region. Added to that are fears over the Ebola virus and word from AbbVie (ABBV) that it may back out of its $55 billion takeover of Shire (SHPG) because of tax concerns. Late in the day, Wal-Mart (WMT) lowered its forecast for revenue growth in the current fiscal year (ending January 31) to 2%–3%, down from 3%–5%, though the market largely shrugged that off as stocks rallied into the close.
So after being down 460 points around 1:30 (EDT) this afternoon, the Dow ended the day down “only” 173 points, a 287-point rally off the lows. Around that same time, the S&P 500 was not only negative for the year (but turned green again by the close), it was down 9.8% from last month’s peak, which tells us the infamous long overdue “correction” the market has dreaded is finally on our doorstep.
Where do we go from here? It’s possible but not certain that the worst is now behind us. From a technical perspective, the S&P 500 has given up its hold on the 200-day moving average along with all shorter-term support lines. It will take a lot of news and more than a little healing before 1,900 becomes a floor again. The 1,800-point line could prove to be the next serious test, and isn’t far below today’s low of 1,821. If the S&P tested and held that line, we would be in roughly the same technical position we were in back in early 2012, when the SPY gave up close to 11%.
After that point, the market rallied 60% over the next 25 months without correcting once.
I would also mention some interesting research from the folks at Bespoke Investment Group, which shows the market is oversold. They pointed out earlier today that only 16% of S&P 500 stocks were trading above their 50-day moving average price. This has happened 15 other times since 1990, and stocks were usually higher one week later (80% of the time; average gain of 1.3%), one month later (87% of the time; average gain 3.1%) and one year later (93% of the time; average gain 16.9%).
All in all, I continue to expect a year-end rally once we get through this period of heightened volatility. Earnings season has barely started, and the growth bar is now set so low – on average, any results above 5% will be considered spectacular – that it’s a fair bet we’ll see plenty of companies generate both applause and the confidence traders are so searching for.
We may still see some back-and-forth action as investors try to find a level of earnings they believe is achievable for 2015, but the good news here is that recent developments help ensure that interest rates will remain low well into the new year, and that means the market should be willing to pay a relatively healthy multiple on S&P 500 earnings forecasts.
In addition, as we’ve mentioned before, we’re entering the time of year with strong historical trends of positive action in stocks, and they also typically get a bounce after the election, which is now just three weeks away.
In the very short term, each day is different right now. With these sharp and sudden moves up and down, we want to be both careful and opportunistic. I continue to look for calls on stocks that have held up well amid the recent selling and puts in stocks that have been broken buy it. I’m looking to stay within established trading trends of stocks, but use options to capture nice profits in the price movements.
This morning’s action pulled the S&P 500 to 1% away from a full 10% correction. We haven’t seen that in a while, and buyers did step in. If the market shows signs that it may be trying to bottom, one area I expect us to trade in is small caps. The Russell 2000, made up of small-cap stocks, has struggled much of the year but has been acting better lately than the large-cap stocks. It’s interesting to observe this rotation from the big companies that have held up well back into Russell 2000 stocks, and we could see similar money flow in the coming weeks and months as the first hit become the first to recover.
There are several potential trades on my screen already, so I’ll get an early start tomorrow and survey the landscape extra closely every day to see what opportunities we can take advantage of.
Special Market Update
It’s been a while since we’ve seen a day like today in the stock market, but we’ve had them before and we’ll have them again. And through it all, we’ll be just fine. Too many investors give up and get out of the market altogether, which is the wrong thing to do.
In fact, some of my biggest moneymakers through the years have come out of times like this. Same with the short-term trading we do here in High Octane Trader. We’ll talk more about that in just a second, but let me start by sharing some thoughts on the market overall.
Several reasons were bandied about for today’s sell-off, most notably ongoing concerns about Europe’s economy and some soft data here in the U.S., including a drop in retail sales, lower producer prices, and reduced manufacturing activity in the New York region. Added to that are fears over the Ebola virus and word from AbbVie (ABBV) that it may back out of its $55 billion takeover of Shire (SHPG) because of tax concerns. Late in the day, Wal-Mart (WMT) lowered its forecast for revenue growth in the current fiscal year (ending January 31) to 2%–3%, down from 3%–5%, though the market largely shrugged that off as stocks rallied into the close.
So after being down 460 points around 1:30 (EDT) this afternoon, the Dow ended the day down “only” 173 points, a 287-point rally off the lows. Around that same time, the S&P 500 was not only negative for the year (but turned green again by the close), it was down 9.8% from last month’s peak, which tells us the infamous long overdue “correction” the market has dreaded is finally on our doorstep.
Where do we go from here? It’s possible but not certain that the worst is now behind us. From a technical perspective, the S&P 500 has given up its hold on the 200-day moving average along with all shorter-term support lines. It will take a lot of news and more than a little healing before 1,900 becomes a floor again. The 1,800-point line could prove to be the next serious test, and isn’t far below today’s low of 1,821. If the S&P tested and held that line, we would be in roughly the same technical position we were in back in early 2012, when the SPY gave up close to 11%.
After that point, the market rallied 60% over the next 25 months without correcting once.
I would also mention some interesting research from the folks at Bespoke Investment Group, which shows the market is oversold. They pointed out earlier today that only 16% of S&P 500 stocks were trading above their 50-day moving average price. This has happened 15 other times since 1990, and stocks were usually higher one week later (80% of the time; average gain of 1.3%), one month later (87% of the time; average gain 3.1%) and one year later (93% of the time; average gain 16.9%).
All in all, I continue to expect a year-end rally once we get through this period of heightened volatility. Earnings season has barely started, and the growth bar is now set so low – on average, any results above 5% will be considered spectacular – that it’s a fair bet we’ll see plenty of companies generate both applause and the confidence traders are so searching for.
We may still see some back-and-forth action as investors try to find a level of earnings they believe is achievable for 2015, but the good news here is that recent developments help ensure that interest rates will remain low well into the new year, and that means the market should be willing to pay a relatively healthy multiple on S&P 500 earnings forecasts.
In addition, as we’ve mentioned before, we’re entering the time of year with strong historical trends of positive action in stocks, and they also typically get a bounce after the election, which is now just three weeks away.
In the very short term, each day is different right now. With these sharp and sudden moves up and down, we want to be both careful and opportunistic. I continue to look for calls on stocks that have held up well amid the recent selling and puts in stocks that have been broken buy it. I’m looking to stay within established trading trends of stocks, but use options to capture nice profits in the price movements.
This morning’s action pulled the S&P 500 to 1% away from a full 10% correction. We haven’t seen that in a while, and buyers did step in. If the market shows signs that it may be trying to bottom, one area I expect us to trade in is small caps. The Russell 2000, made up of small-cap stocks, has struggled much of the year but has been acting better lately than the large-cap stocks. It’s interesting to observe this rotation from the big companies that have held up well back into Russell 2000 stocks, and we could see similar money flow in the coming weeks and months as the first hit become the first to recover.
There are several potential trades on my screen already, so I’ll get an early start tomorrow and survey the landscape extra closely every day to see what opportunities we can take advantage of.