Here's Why You Shouldn’t Panic After the Big Decline
The market bears are back. In a kamikaze attack, the bears threw everything they had against the market yesterday - and won. The decline started eight days ago, but in yesterday's plummet there was no shelter and if you owned stock you lost money - it's that simple.
Declining stocks to advancing stocks were about 19 to 1. Down volume to up volume (some of which was us) was an incredible and jaw dropping 1.8 billion to 20 million.
Going into the day, I expected a nice leisurely decline to Monday's low, then stabilization, maybe even a bounce back to 1280. I figured the indices were oversold, and near a reliable support zone. Wrong.
In a blood curdling descent, the indices moved lower and lower and lower. And despite the oversold conditions, no one was buying. And everyone was selling. To give you perspective as to how oversold we are; the market has not had an oversold reading like this since 2008-2009. The bear market of 2007-2009 took the indices into oversold conditions a few times. But our current level registers more oversold than the flash crash of May 2010 and the lowest price from March 2009.
When conditions are this oversold, the market may move lower for a day or two afterward, but chances are mostly likely that the worst of the trend move is already behind. Now the opportunity is to trade a countertrend move as the indices recover from extreme oversold areas.
The relentlessness of the bears was commendable yesterday, and they are officially back in charge of the trend. Accordingly, I think any move higher is going to be countertrend, which means that ultimately I think the indices go lower: 1175 perhaps 1050. But I think that with the indices this oversold at 1197 (which is very close to 1175 long term support) the buy side offers slightly more return, with the same amount of risk.
With that mindset, I recommended adding three positions yesterday. It is difficult to buy during a heavy decline, but with tight stop losses we can likely avoid taking major hits. After all, heading into yesterday's bearish session, we had only two open positions and a lot of cash waiting to be used since we were stopped out of 8 positions within the last week. Thankfully, we were able to eke out a few gains just before the big fall.
I was looking for stocks with 20% upside and 5% downside and I found three yesterday that fit the bill. Those three stocks are in addition to the two we went long earlier in the week, EXLS CHRM, which performed remarkably good yesterday.
Thankfully, the employment data this morning was good - or at least not obnoxiously bad. Nonfarm payrolls expanded by 117,000, from 46,000 in June, and past the 90,000 expectation. The "official" rate of unemployment in the U.S. ticked lower to 9.1%. Most importantly (for the little guy) average hourly earnings increased 0.4%, which should help finance the 20% increase in gas price.
The data this morning was hardly good, but it was not bad enough to justify a 8% decline from the indices this week - let's see if a few bulls take the bait and buy the "good" employment numbers this morning.
To the upside the first and most important price zone is 1250. Certainly, there are sprouts of resistance in the 1225 area, but nothing significant. The 1250 zone was an established area of support that kept SPX intact the entire year. Yesterday we bid that support level farewell, but I think we do test it (and perhaps surpass it) again this year.
As mentioned throughout the past few weeks, I haven't viewed the U.S. potential default as a major bearish headline. I do however believe the recent economic data was frighteningly awful. The debt negotiations were amazing distractions that covered up terrible durable goods orders and a monumental first quarter GDP revision. And now that the bears have broken 1301 a large decline is back on the table.
