Today the market answered the question "Do poor earnings matter?" with an emphatic "Yes!" Alcoa (AA) started off the third-quarter earnings season with a poor response to its report and we've seen a steady flow of negative responses since then. The market hit the tipping point today when key stocks in various sectors of the market all issued weak reports and decreased guidance. Google (GOOG), General Electric (GE), Microsoft (MSFT), Chipotle Mexican Grill (CMG)and McDonald's (MCD) where the primary culprits today but other leaders, without earnings news, like Apple (AAPL) and Amazon (AMZN) fell by the wayside as well.
Technically, the Nasdaq is by far the worst of the major indices. It cracked support as it took out last week's lows and it now looks like it is headed for the 200-day simple moving average at 2968. The S&P 500 looks better, as it is still above last week's low and is sitting right at its 50-day simple moving average. However, it is in a very precarious position, and a break blow 1425 will spark another round of sell-stops.
When the market is downtrending, like the Nasdaq obviously is, the best advice I can give is to just stand aside and let it play out. That is, respect the trend. Many market pundits would rather try to time the action to the point where the market hits its lows, but generally they are wrong and will end up having to make up substantial ground just to return to even. I find it preferable to just wait for better action and then jump in. I don't worry about being late, as my focus is to buy stocks when they have the best chance of producing sustained gains.
Although days like this can be very painful if you are holding many long positions, I often find that they make me more optimistic because it is action like this that shakes things up and eventually leads to a new crop of opportunities. We just have to have plenty of cash on hand and be mentally prepared.
Give the bears some respect today. They showed that they still have some claws. They could easily take the market down even more.
Have a great weekend. I'll see you on Monday.