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Today we had another nasty drop in the markets. The Nasdaq which has been the strongest acting index for weeks lead today’s decline with a drop of 2.15% . Even the Dow which generally speaking is the most defensive index and the least impacted during a decline fell almost 2%. The breadth of the decline was wide (very few stocks were shielded from it), which is not a good sign.
Since the first of the year we’ve had a very shaky market, lots of wild swings intraday, which usually portends a top … not necessarily implying a major decline, but certainly a decline.
Volume for the past two weeks has been way above average with very little price movement, which tells us the market is struggling to make headway in its’ current direction (up). Strong volume with no upside gain can be a signal that the big guys are exiting while there are still buyers in place. They unload gobs of shares to the unsuspecting. This works well as long as the buyers outnumber the sellers, but what we saw today is that the buyers dried up and the selling continued, causing the market to crater.
Except for the Nasdaq, the 50 day moving average was taken out in high volume today. A moving average is exactly what it sounds like … it is the average price over the previous 50 days and used very heavily to help institutional investors get a gauge of the state of the market. When it is healthy, the current price is above the moving average, and the MA is rising, and when things start to get iffy we see the market close below it and eventually the average itself starts curving downward.
Who cares … right?? Well, the 50 day moving average is a particularly good indicator for many traders because most big funds use the 50 day to buy. So they wait for the price to fall back down to this level, then they start purchasing and the price bounces higher as a result. Many ‘value’ investors use this important level as a buying opportunity. But, today, we saw the market pierce below the MA with NO slow down and in fact, volume increased as the price kept falling below it. There was no support there … which isnt a good sign.
The 50 day average was broken on the Dow, NYSE and S&P500, while the Russell 2000 (small caps) and the Nasdaq are still holding above it for the time being.
Volatility has been increasing over the past few weeks but went through the roof today, which is a troubling sign as well. This means people are getting nervous and getting sketchy with their trades. In fact the VIX which is a measurement of market sentiment and fear of investors rose almost 30% today … the highest level since October of last year.
As I mentioned in previous posts, the market is very ‘pricey’ right now, so dropping a bit should bring in the value buyers that have been sitting out. Of course, time will tell whether their buying will reverse the decline and bring more gains (which is exactly what happened last year in April, June and October) or whether they will sit out this time and let the market correct properly.
We are VERY late in this bull ‘cycle’ which started in March 2009 with no major correction since and we are VERY overdue for even a mild correction since we haven’t had anything sizeable in approximately a year and a half. Late cycle markets are usually bumpy … so today isn’t surprising in that regard.
Looking at the market using a longer term perspective, from a technical analysis standpoint, we are still very much in an uptrend on all indexes and holding a small amount in the market for a bit longer to see if the strength will resume when prices fall a bit is prudent.
Our new volatility trigger kept us in today, although we were close at one point to exiting. The new signal gives us a little more ‘cushion’ to ride the small bumps in order to gain the larger move.
For now, we remain cautious with only a 30% investment in our flagship ‘The One’ fund and still fully invested in our longer term strategies. Short term, things are definitely broken or breaking (in the Nasdaq’s case), but long term we are still looking at a healthy market, although a bit frothy.
Regardless of the outcome, we will continue to monitor and act accordingly protecting your hard earned investing dollars …
Hope you have a wonderful and safe weekend.
Resnn Investments, LLC