A Correction! After years of not having a 10% or more correction in the markets and with August tending to be one of the worst performing months for equities, this was the perfect set-up for the long overdue correction in stocks to take place. However, just as fast as the stock market correction occurred, the ensuing snap back rally was equally eye-poping. For the month, the Dow Jones Industrial Average (chart) fell 6.57%, the tech focused Nasdaq (chart) lost 6.86%, the S&P 500 (chart) -6.26% and in the month of August the small-cap Russell 2000 (chart) experienced a 6.45% decline. Last week we did witness very rare market behavior with whipsaw action not seen since the 2008 financial market crisis. This brought back memories of how stocks and financial markets can irrationally behave as emotions and high frequency trading take over.
The question now is, is this type of market volatility over? I don’t think so. Let’s first take a gander of the technical health of the four major averages. Without question, short term technical damage in these key indices have occurred. Each one of the index have fallen sharply and have closed below their respective 200-day moving averages. Furthermore, today at the open and for the first time in years, the S&P 500 (chart) will have its 50-day moving average crossover its 200-day moving average. Technically and historically speaking, this is not usually a good thing. The Dow Jones Industrial Average (chart) saw its 50-day crossover its 200-day in the middle of August only to experience exhaustive selling thereafter. The good news technically is that stocks had been way oversold to the point 0f capitulation. Hence, the ensuing sharp rally from the most recent lows.
So where do we go from here? I suspect that we will continue to experience outsized market moves in both directions and trading this kind of market environment is not for the feint of heart. I revert back to a more conservative approach starting with identifying the most current “best of breed” in their respective industries. The first prerequisite for me in identifying potential investment candidates in this type of market environment is for companies to have pristine balance sheets with little to no debt levels. However, if they do have debt they must have have historic and current cash flows that can easily service their debt. Without this and in today’s market I have no interest on really owning anything. Of course there are many other metrics that do apply but for me personally the balance sheet is where it begins. Another huge factor for me especially today is to implement disciplined “protective stops” in any positions I hold. This ensures that your portfolio is somewhat protected should the markets decide that we are in the early innings of this correction. With that said and especially in today’s market, please consider consulting with a trusted certified financial planner(s) before making any additions or modifications to your own portfolio.
Both Paula and I wish everyone a very safe and Happy Labor Day holiday weekend 🙂