Yesterday, the Dow lost 312 points or 1.92% and approached the lower edge of its range. Even worse, the S&P lost almost 50 points or 2.57%. The day got off to a bad start with the news that corporate earnings in China were less than expected. Then, we learned that debt-ridden commodity giant Glencore in England may be in serious trouble, following the unimaginable self-immolation of Germany’s largest employer, VW. Then, investing legend Carl Icahn released a video promoting his new website by saying “the end is near.” Lastly, Nasdaq’s 50-day-moving-average crossed below its 200-day-moving average, which is the “fourth horseman” of the “death cross.” That is considered a very ominous market signal.
In the background, investors are facing up to the continued dysfunction in Washington with a naive President and a Congress that cannot even spell c-o-m-p-r-o-m-i-s-e. Remember the Fiscal Cliff? This year could be far worse, with a government shutdown – plus a government default if the debt ceiling is not increased. This could happen shortly before Christmas – throwing a terribly dark cloud over the joyous holiday season and crushing holiday sales.
The next important market signal is whether the S&P will break its previous low. The belief is that the recovery begins when the stock market re-tests its previous low and bounces upwards. The previous low was 1,867 on August 25th. Closing yesterday at 1,881 – it is less than one percentage point away. If the S&P goes below 1,867, it will set a new low that then must be re-tested before recovery can begin.
Is the world coming to an end? Of course not!
Should you sell everything and get out of the market? Of course not!
Would you run out of a store that just put everything on sale?
Stocks in America’s greatest companies are now 12% cheaper.