The bulls and bears have been battling back and forth the last few days, but today the bears delivered the knockout punch. The Dow suffered it second worst drop of the year and closed the session down 311 points or 2.3%. The S&P 500 also fell 2.3% with a loss of 35 points. Holding up a little better was the NASDAQ, losing 1.8% or 48 points.
Today the bears hit the trifecta with the credit concerns, housing slowdown, and higher oil prices creating a selling frenzy. They were able to trump great earnings from Apple (symbol: AAPL) and Ford (symbol: F), which could not keep the bears from ravaging Wall Street.
TECHNICALS
Today’s market action was very interesting in that the indices rallied in the last hour to close well off the intraday lows and still finished with one of the worst days in a year. First things first, let’s break down the three major indices before looking at the overall market.
The Dow broke below short-term support at 13,675 within the first few minutes of trading. This level was the prior high set in June and thus turned into support after the breakout. The next support area to be taken out was the 50-day moving average (13,587). Finally the Dow hit an intraday low at 13,335, just above the 89-day exponential moving average (an indicator it has been above since March) and price support from June. The fact the Dow held above the June double bottom at 13,250 was the one bullish signal on the day.
The S&P 500 was already below it’s 50-day moving average and the next two levels of support were the 89-day MA and the June low. Both levels were breached quickly and when the closing bell rang the index was 2 points below the June low of 1484. I will give the index the benefit of the doubt and say it held support. However, it must prove itself tomorrow or I rescind my endorsement. The low of the day was 1465, 4 points above the old February high of 1461, which is now support. There is also the 200-day moving average hanging around the 1450 level to provide long-term support.
Strength in AAPL today helped the NASDAQ pare its losses and hold its ground against the other major indices. The index is below its 50-day MA (2616), but did close above the 89-day MA (2577) and the previous lows. Amazingly the NASDAQ has not breached the most recent pullback low that was hit in late June. As a result, the NASDAQ is the strongest of the big three.
Yesterday I pointed out two broad-based indicators that we use to determine market tops and bottoms. Both hit very negative levels today, which in turn suggests a short-term rally based on a contrarian viewpoint. The CBOE Volatility Index (VIX) spiked to 23.36, less than a half point from the 4-year high.
Since 2004 the VIX has only been above 22 on two other occasions. In March 2004 the S&P 500 rallied 4.5% in the next 10 days after the VIX spiked above 22. A similar rally of 4.5% occurred in June 2006 when the VIX also topped out above 22; the only difference was it took about two weeks the second time. THIS IS THE SHORT-TERM GOOD NEWS!
WHAT TO DO NOW
THE INTERMEDIATE-TERM BAD NEWS is that each VIX rally was short lived and more weakness appeared in the coming weeks. This being said, our view is to use any short-term rally as an opportunity to see the laggards in the portfolio and raise cash. There will be another great buy set for investors that are patient and wait for a signal the intermediate-term pullback is over.
When the stock market is hitting highs everyone wants to be in the investment industry. Unfortunately that is not the case all the time and with the good we must take the bad. Today was one of those rough days. However, my past experience has taught me not to let my emotions take over and sell into the panic of the masses.
This is not to say today’s action did not worry me. What it did do is open my eyes to what could be around the corner and I have since altered our strategy for our Portfolio Management Clients.
THINK ABOUT THIS: Exactly one week ago today I was writing to you and tell you how the market closed at a new all-time high!
ALSO: I want to thank everyone who tuned into my CNBC interview this morning and the supportive emails. The good news is that I already have 2 more interviews scheduled for August. I will keep you up to date on the days/times.
For those of you that missed it, you can click the link below to watch:
http://www.cnbc.com/id/15840232?video=441199642&play=1
Have a great night,
Matt McCall