Healthy Corrective Action – Or Something More?

Are we in a healthy correction or is this something more? The recent market selloff including yesterday’s 500 point drop on the Dow Jones Industrial Average (see chart here) has caught the attention of investors and traders alike. The S&P 500 (see chart here) experienced its toughest month in over a year closing down almost 5%. The Nasdaq Composite (see chart here) was lower by over 5% in the month of September. It is not too surprising that the major averages were weaker to close out the third quarter. Historically, September and October for that matter are usually softer months for stocks.

So back to the question is this healthy corrective action or the beginning of a meaningful drawdown? The answer depends on who you ask or how you are interpreting the Federal Reserve’s updated guidance to the monetary policies that the Fed has in place. It is hard to be bearish here based on where the Federal Reserve currently stands. In one breath we hear that “bond purchases” will start to taper off before year end. Then in another breath, the Fed continues to signal that they are prepared to support our economy in the event we experience another surge in Covid. My feelings are the Fed will not put the brakes on their easy monetary policies until such time that our country is out of this pandemic. One thing is for sure, each upcoming Fed policy meeting and subsequent guidance will be put under a microscope more now than ever.

Let’s take a quick gander at the technical shape of the aforementioned indexes. The Dow Jones Industrial Average (see chart here) closed yesterday just below 34000 with its 200-day moving average currently at 33360. The S&P 500 (see chart here) closed yesterday at 4307 while also breaching and closing below its 100-day moving average. The Nasdaq Composite (see chart below) closed the month of September at 14448 also breaching its 100-day moving average. So the current technical set up could mean more downside ahead, but on the other hand, if these moving averages hold and acts as support, we could see a strong relief rally.

Good luck to all šŸ™‚

~George

Healthy Corrective Action - Or Something More? - Paula Mahfouz

 

What A Rollercoaster Ride!

This week started off with the vote no one expected. Global markets were shocked with the outcome of the United Kingdom’s vote to the leave the European Union. Here at home, the Dow Jones Industrial Average (see chart below) lost close to 1,000 points between Monday and Tuesday, the Nasdaq (see chart below) over that same two-day period lost close to seven percent as did the S&P 500 (chart) and the small-cap Russell 2000 (chart). A breathtaking 2-day drop which was so swift and profound that it violated the 200-day moving averages of all of the aforementioned indexes. Fast forward to today and what seemingly was the start of an angry correction, has turned into yet another “buy the dip” opportunity. No matter what the challenges are or have been on the macro-economic or political front, markets over the past several years have shrugged them off. I honestly did not think stocks would snap back this time as quickly and as powerfully as they have.

Yet again, oversold conditions created a trader’s dream with this snap-back rally. Ever since this bull marketĀ began, every shocking or unexpected headline which have rattled the markets have always been met with strong supportĀ that then turns into the resumption of this protracted bull market. However, it is also very clear that we have been trading in a range for quite some time now and every time we have tried to breakout of this trading range, resistance is met and we retrace back to a variety of moving averages.

So you may be asking how do weĀ break out of this S&P 500 (chart)Ā 2000 to 2120 tradingĀ range? One catalyst that can do this is the upcoming second quarter earnings reporting season which kicks off here in July. I do not think that the economy is such that record earnings results will come forward. In fact, companies may take it upon themselves to use the Brexit circumstance to soften their future guidance? We will see. In my humble opinion I think the possibility of a downward break is more probable in the near term than stocks breaking out to all-time highs, especially after this snap back rally. Good luck to all!

Paula and I wish everyone a safe and Happy 4th of July holiday šŸ™‚

~George Mahfouz, Jr.
Dow Jones George Mahfouz JrNasdaq George Mahfouz Jr.