On Tuesday the S&P 500 suffered its worst loss since Aug. 23, when trade war worries took hold. The poor action this time was driven by a weaker-than-expected ISM Report with a reading of 47.8, which indicates that the economy is slowing more than many anticipated.
The indices consistently have been bailed out by optimistic headlines about China trade developments, but with a week-long holiday in China and no meetings scheduled for a while there wasn't the usual upbeat platitudes to trigger the buy programs. There is much skepticism about a China deal in the near term, but all it takes for the market to rally is some indication of progress.
This morning the indices are indicated sharply lower again as market players await the ADP Jobs Report. There is fear that the report will reinforce the negative narrative that the economy is slowing and that central banks do not have the ammunition to do much about it.
Individual stocks have been signaling market problems for weeks. As I've noted dozens of times recently, the action under the surface in individual stocks has been covered up by the indices, which have held up. Bears have been going after a variety of sectors lately and have put tremendous pressure on momentum stocks.
One proxy for momentum stocks is the Innovator IBD 50 ETF (FFTY) . This instrument is down around 11% from its highs in July versus about a 2% correction in the S&P 500 from its high in September.
Within momentum stocks there are some pockets of major damage, with initial public offerings (IPOs) containing some major wreckage. Some market pundits are comparing the blowup in IPOs to the events that triggered the tops in 2000 and 2007.
The biggest problem for the market at this juncture is that the indices still must undergo quite a bit more downside before they more accurately will reflect what is going on under the surface. Even though many stocks are already washed out and finding some support, it will be very difficult for them to bounce if the indices remain under pressure.
The S&P 500 is set to gap down to an area on the chart without any nearby support. The August lows are the next area of support and that is still a long way off.
My game plan here is not complicated. I continue to hold very high levels of cash and will complain about the lack of good technical setups. There should be some potential bounce plays, but the indices still must play catch-up to the downside.
Very soon there will be plenty of calls that the worst is over, but be slow to embrace them. Markets such as this one that breakdown may see bounces, but it will take a while to correct the technical damage. Don't waste your time trying to pinpoint an exact bottom.