Gut Check for Investors
Strongest selling since the rally started in March. What does it mean? Investors are not confident in the outlook for growth. The data is mixed, but the key points show weakness is still apparent in the economy. Manufacturing shows no build up in inventory, in fact they are low and that isn’t good for future growth. Business spending was up 2%, but it was on incentives and not inventory nor capital purchases. New home sales were down 3.6% with the tax credit still in place? 52% of home purchases were over $200k showing the lower end sales have declined. Consumer confidence fell to 47.5% again at recessionary levels. The list goes on, but it all adds up to confidence in the outlook for growth.
The dollar was the big headline as it was stronger again yesterday. Stronger dollar, weaker economic data and lower interest rates all add up to selling in equities. The key point to take away from yesterday was the technical damage done in the selling. This has been a technically driven rally. More focus on the trendline, moving averages and support resistance than fundamentals. Why? Simply put the fundamentals have been in shambles. We broke the major trendline from the March low, took out the solid setups in energy and industrial stocks and put in doubt the continued rally into year end. Not bad for four days of selling.
This is the first quarter investors started looking in earnest at fundamental data and look at the results. Decent earnings, but faltering economic data to show sustainability for growth. Throw in a revision from Goldman Sachs on GDP to 2.7% growth from 3% estimates and we get a sell off lead by technology and small cap stocks. Energy did its share giving up 2% on the day.
There are still some nice set ups technically at support. I discussed these on the video updates last night and I will be watching to see if they hold and bounce or if they continue the downside. The GDP and weekly jobless claims are out this morning and they will have an impact on the sentiment to start the day. A big miss in either will only add to the selling in motion.
I like to use current events to reinforce teaching and the move off the recent high is one we all need to remind ourselves to use stops. I know, I state this almost daily, but it never ceases to amaze me how many investors still don’t use stops. Why? They think they will have the discipline to sell when the rally ends. However, the psychology of selling stocks when the market is moving downs is tough. We get too focused on a bounce from oversold conditions. I skimmed headline and viewed some video last night and the number one thing, buy the dip. What if this is more than a dip? What if the S&P 500 index tests the 950 level of support or even 850? The test of the September low at 1020 is clearly in sight. That is a give back of nearly 7.5%. Some stocks and/or sectors are down twice that the last week. Point being set your stops - protect your principle and take advantage of the opportunities on the other side of whatever happens.
Watch the 8:30 data and see how it plays. If we continue down collect cash. If we bounce, watch for the opportunities and entry points. They are there and the patterns are setting up short term. Be patient, take what the market gives and be disciplined in your approach.
Have a great investment day!
