The narratives that surrounds the stock market always changes to match the stock market action in order to explain it. Back in April when the market began to rally after the March crash the story was of the supposed massive “V” economic boom that was going to come when everything opened back up. Well everything obviously did not return to normal and there was no “V” economic boom. The market churned for a bit in June, but then when it began to go up in August a new narrative was born – the market would never fall again, because of Federal Reserve action.
Well then Labor Day came and the stock market has been dropping ever since in what is now an obvious correction as the Nasdaq is now down over 10% from its highs and so is the DOW and S&P 500. Since 2009 there have been several 10% corrections, almost one every year, and then two 20% corrections. Then we had this crash in March.
In a normal market I would say a 10% drop from thighs would do it, but I’m expecting a 20% decline from the highs of the S&P 500. One or two day bounces happen within a larger corrective phase until it comes to a real end. In fact on Tuesday the market actually hit the bounce price target for the S&P 500 I wrote about before the open that day and then immediately peaked out. It subsequently fell much faster than I thought it would and to my surprise took gold and silver prices down with it to show us that this is a now a real correction.
Before the open yesterday several online brokers sent out emails notifying their customers that they were cutting their margin limits from 50% to 35% on everything. I never seen that happen before. I suspect part of the reason for this move is that many people went manic buying calls in August and going on margin. The brokers don’t want to be on the hook for people who got into the markets for the first time in the past few months going on margin never having seen a simple correction before.
Soon a new narrative will be born once the market closes below Monday’s lows on the S&P 500 – election worries. So people will get into the mode of selling into election day.
I personally have held to a roughly 50% cash position in all of my accounts. So I plan on basically watching for the next few weeks for potential buys for later. Now is the time to do the work to figure out what you may want to buy later this year or if you are new to learn trading strategies and study. Maybe we’ll get a real bottom in energy stocks.
A 20% drop in the stock market from its highs a year from now would be forgotten about and look like no big deal. No one talks about the Fall drop of 2018 anymore. The real reason for the current drop though is that the market went up so much in just a few months that the momentum stalled out. The S&P 500 went up 65% from its March low to Labor Day – it wasn’t going to repeat that move in the next six months so we are now watching the market trade like it is now. That is the real reason that the stock market has been falling. Unfortunately this creates a possibility that it falls more than I even expect before the end of the year. But we’ll just have to take one day and one week at a time now.
As for gold it didn’t go up as crazy as the stock market did. It looks likely that gold will hit its 200-day moving average to make a potential bottom now in the $1775-$1800 area.
The price of gold rolled over yesterday by closing below its August low. I have not sold my gold, silver, or mining stocks except for one position in AU. I’m not 100% invested in my accounts though and use a rebalancing strategy to manage my money. I have had roughly half my money in CD’s and bonds all year – even after the March crash. If I was 100% invested I would be doing some selling.
Gold’s next support level is at $1843, the 1/3 retracement point of the March low and August high. Below that we’re looking at support at the area of the 150-day moving average and 50% retracement area around $1775. That seems like a likely real target, with silver also aiming for a similar zone. I do expect gold, silver, and the mining stocks to bottom out before the stock market does and snap back faster just like what happened in March.
The stock market is not heading for a crash like March. The bond market is not going to lock up like it did then. The world is not ending. Remember the stock market went up 65% in just a few months. Gains straight up that fast are volatile and volatility leads to bigger and faster corrections than we have gotten used to since 2009.
I talked about the market action and my thoughts yesterday with Jim Goddard of howestreet.com.
-Mike
