Don’t Lose Your Sense of Value in This Market

On Thursday, the Dow industrials were hit with a 300-plus point sell-off with every stock in the red, and the S&P 500 was lower by 2% with all 10 sectors of the index down. The selling included large- and small-cap stocks alike, with the Russell 2000 down 2.3%.

The reason for the decline can be debated, but in retrospect, when Wednesday’s strong GDP numbers were ignored, that was a clue that an overbought condition existed.

Negative news from abroad may have contributed to the selling. The Eurozone CPI gained just 0.4% in July versus an expected 0.5% increase. Argentina defaulted on its debt, and a major Portuguese bank reported a big loss. There were earnings disappointments overseas as well by Samsung, Adidas and Deutsche Lufthansa.

Here at home, Exxon Mobil (XOM) fell 4.2% due to a decline in production, Whole Foods Market (WFM) lost 2.3% following a cut in yearly sales projections, and Akamai Technologies (AKAM) lost 2.8% after forecasting lower sequential profit margins.

The market ignored news that the economy expanded by 4% in Q2. And unemployment claims for the July 26 week came in at 302,000 versus an expected 310,000.

At Thursday’s close, the Dow Jones Industrial Average fell 317 points to 16,563, the S&P 500 lost 39 points at 1,931, the Nasdaq was down 93 points at 4,370, and the Russell 2000 fell 27 points to 1,120.

The NYSE’s primary market traded 926 million shares with total volume of 4.2 billion shares. The Nasdaq crossed 2.2 billion shares. Decliners outpaced advancers on both exchanges with the NYSE at 9.3-to-1 and the Nasdaq at 5-to-1. But declining volume, at 7.9-to-1 on the NYSE and 5.6-to-1 on the Nasdaq, did not reach the threshold of panic, which is normally considered by technicians to be in excess of 10-to-1 negative volume.

SPX Chart
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Chart Key

Thursday’s break of the upper band of the support zone at 1,925 to 1,951on the S&P 500 and the penetration of its 50-day moving average at 1,953 are a violation of two important inflection points. The next support line is at the June low of 1,925. Then the support at the April high of 1,900 comes into play, along with the 200-day average at 1,857.

Nasdaq Chart
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Despite a 93-point hit, the Nasdaq is in better shape than the other indices. Two inflection points are now in view — the 50-day moving average at 4,359 and the support line at 4,352. The March high at 4,371 was taken out Thursday.


The Dow industrials are trading under their 50-day moving average for the first time since May, and its 200-day moving average at 16,877 is in clear view for the first time since February.

The S&P’s first line of support at 1,951 was sliced through like it didn’t even exist, and even if 1,925 holds, the index is flying a yellow caution flag.

However, before we get too anxious about the overall direction of the stock market, keep in mind that the long-term bull market is still intact. Thursday’s sell-off, even at 300 points down on the Dow, was not accompanied by the panic selling that I would associate with a change in a major trend.

Considering that we expected a seasonal correction, we should not be dismayed when it arrives. In fact, I believe that we are about to enter the buying zone that we’ve been anticipating for three months. Now is time to dust off the list of stocks that we would like to buy and review the prices that we wished to pay for them.

In order to buy the best stocks at the lowest price, we need cash. Since the intermediate-term trend is now down, we should consider any rally as a selling opportunity and hold the cash to put to use when this phase of the overall bull market has passed. A solid, planned approach will pay off in the future. Investor panic, however, will only result in creating fear that could keep you out of the market and deprive you of taking advantage of some solid bargains. We must keep our heads clear while others are losing their sense of value.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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