Weekly Market Commentary

I often state that looking at broad measures of stock prices can be misleading. Instead of focusing on top-line numbers, we must dig deeper and attempt to uncover information that other investors have ignored. A recent example has been my focus on the lack of confirmation across many different indices.

I often state that looking at broad measures of stock prices can be misleading. Instead of focusing on top-line numbers, we must dig deeper and attempt to uncover information that other investors have ignored. A recent example has been my focus on the lack of confirmation across many different indices.

As the NASDAQ and S&P 500 rallied above their 200-day moving averages (MA), investors began to think further gains were on the horizon. However, I remained troubled that a handful of markets, most notably the Dow Jones Industrial (Dow) and Dow Transport Averages, refused to confirm these recent highs. Knowing that weak markets typically drag down the strong, I’ve remained cautious.

This week showed why caution was warranted. Monday’s 187-point drop in the Dow pulled the index below its important 200-day MA. Just as ominous, down-volume was 94% of total volume that day. This action marked a day of extreme panic wherein investors were fleeing stocks. Typically, 90% down days are followed by quick rallies as investors look for bargains. Instead, the market declined an additional 115 points over the next two trading days.

When a brutalized market will not rebound, we must remain cautious. Such activity is a sign of great weakness. With the damage done so far this week, the broad indices I follow are on average 6% below recent highs. When you consider that some of these highs were achieved last Thursday and Friday, you get a sense of how dramatic the decline has been.

Understanding the pummeling that has occurred, we turn our attention to what will happen next. I am not optimistic. A series of new confirmed highs over coming weeks is unlikely. Further, the Dow is approaching its 50-day MA. Were the 50-day MA to fail to offer support, prices should decline through the current trading range and approach 7,400.

With odds skewed in favor of new lows, we should remain cautious. For the past month, my
clients’ accounts have had little equity exposure. By positioning for weakness, we have retained
flexibility that will allow us to react to future price swings. For now, the focus remains on the Dow’s 50-day MA (currently 8,353). If bargain hunters fail to materialize at that price point, markets have much
lower to go.

Sean Hannon, CFA, CFP, is the publisher of EPIC Insights, a weekly newsletter providing Sean?s timely stock ideas and market commentary. Sean?s goal in EPIC Insights is to educate readers, giving them accessible advice they can use to manage their own financial future. The transparent portfolio that Sean has created in EPIC Insights has outperformed the S&P 500 during many investment cycles. Through this portfolio Sean offers readers a thorough... More