There is an old saying that the market takes the escalator up and the elevator down. This was a classic example of an elevator down day. There was no place to hide as bids totally disappeared and sell programs dumped stocks into the abyss. There were about 6 losers for ever gainer and the number of new 12-month lows expanded to over 1060.
There wasn't any particular news headlines that triggered the barrage of selling. Bonds were fairly quiet but once the selling in equities started it picked up momentum as key technical levels feel and sell programs take advantage of the lack of bids.
There are three key things to keep in mind
- The indices are oversold but there is so much technical damage and selling momentum that the downside pressure could continue. However the conditions for a very sharp snap back are being created and at some point we are going to see a big bounce. The biggest bounces occur in the worst markets.
- This was broad based selling that had nothing to do with the particularly stocks you may be holding. In this sort of selloff the market doesn't try to distinguish between which stocks may be good values and those that may still be expensive. Right now everything is being punished and the "good" ones are going to come back much faster than the "bad" ones when the market turns.
- Much of the market is already in a bear market. Small caps were down another 2.8% and the Russell 2000 ETF is already well under its 200-day simple moving average. Over 60% of all individual stocks are already under that level. The S&P 500 and DJIA are still above those levels but are catching up to the downside. The correction is already well under way and there are many small cap stocks that at bear market levels that will present some real value as earnings season starts.
When we have market action like this it is a good time to contemplate the First Rule of Holes -- when you are in one, stop digging, This is not the time to rush and put more cash to work. The potential for more downside is high and if you are looking to build some positions you need to do so very slowly and only after there are some signs of stabilization.
While today was likely a very painful day for many of the stocks you are holding, the good news is that we have needed this sort of reset for a while and there will be plenty of great opportunities. This is normal corrective action. It may have been a bit more dramatic than we have seen in a while but this how it tends to play out with that elevator ride down that causes your stomach to drop.
Have a great evening and make sure you start thinking about potential opportunities.