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The Near-Term Forecast Calls for Continued Selling

Stay out of the way of this looming pain


On the back of a tepid jobs report on Friday, stocks traded higher for just a short time before plunging for the second consecutive day. Both the Dow industrials and the S&P 500 recorded their worst weekly losses in over two years.

Stocks seem to drop into a vacuum with few buyers available to stop the landslide of selling. Investors, cautious over the timing of a Fed hike in interest rates and rattled by the Israel-Gaza conflict and the default of Argentine sovereign debt, as well as a potential revival of the Cold War with Russia, seemed in no mood to go bargain-hunting. This disinterest is a change from prior periods of foreign crisis, when opportunistic traders would jump at the chance to buy on weakness.

The jobs report, which showed a rise of 209,000 in nonfarm payrolls, missed expectations. This relative softness gives the Fed breathing room to wait longer before raising rates.

Utility stocks and consumer staples, widely considered defensive sectors, were the only broad groups to show gains on Friday.

At the close the Dow Jones Industrial Average fell 69.93 points to 16,493.37, the S&P 500 lost 5.52 points, closing at 1925.15, and Nasdaq fell 17.13 to 4352.64. The Russell 2000 lost 5.21 points and closed at 1114.86. The NYSE’s primary market traded 791 million shares with total volume of 3.8 billion shares. Nasdaq crossed a total of 2 billion shares. Decliners outpaced advancers by about 1.8-to-1 on both exchanges.

For the week: The DJIA fell 2.8%, the S&P 500 lost 2.7%, Nasdaq was down 2.2%, and the Russell 2000 fell 2.6%.


S&P 500 vs. 17-Month Average

Although the premium between the current price and the 17-month moving average has narrowed to 9.3% from last month’s at 12.5%, the bull market is very much intact. Part of the reason for the loss in premium is the rapidly advancing 17-month moving average against the first monthly price decline since January.

VIX -- Down Slightly

After a rise of 65% from its July 3 low, the CBOE Market Volatility Index (VIX) closed lower on Friday. This slight drop could be a signal that we may see a bounce early this week following the broad declines of last week.

DJIA -- Target

The Dow’s chart is nasty — worst of the major indices. After slicing through its 50-day moving average and the support (now resistance) line at 16,735 on Thursday, it picked up where it stopped and on Friday fell another 70 points to the downside. The Dow’s next support is at its 200-day moving average at 16,322 and then the March low at 16,046, which I’m predicting will become its final target. A decline to that level would represent a full 61.3% Fibonacci retracement of the February-to-July advance.

Nasdaq -- Support

Compared to the other indices, Nasdaq has held up rather well. Although it broke its 50-day moving average on Friday, the July low at 4351 has held — a positive for the bulls. But the trends are negative, and the next meaningful support after the 200-day moving average at 4174 is the support zone from 3,940 to 4,132.

Conclusion: There is no sugar-coating last week’s decline — it was nasty. And it was especially tough on the Dow’s blue-chips. As noted, I would not be at all surprised to see a full Fibonacci 61.3% pullback of the March low to July high on the senior index. (As bad as that sounds, it is only a 6.4% decline from the July high.)

One indicator that shows the breadth of a decline is the volume ratio of declines vs. advances, with anything over 10-to-1 considered significant. On Thursday the volume breadth was 8-to-1 on the NYSE and 6-to-1 on Nasdaq. These numbers don’t qualify as a meaningful trend shift, according to Michael Ashbaugh of Market Watch.

And so, although last week appeared to signal a trend shift to some, it really wasn’t all that bad. Most of the declines were made from all-time highs notched just the week before — and even the Dow’s big smackdown amounted to a mere 2.8% pullback. And so, as we proceed to the traditionally “most difficult” time of year for stocks, the overall bull market is still intact … if a bit tarnished.

We may get a snapback rally this week as bargain-hunters make a grab for undervalued tech stocks. But given the likelihood that any rally may be just a “dead-cat bounce,” our strategy is to continue to accumulate cash until the summer is at an end and Halloween is in sight. According to the Stock Trader’s Almanac since 1987, August has been the worst month for the Dow and the S&P 500, and the second worst for Nasdaq. Why fight the stats? Go with the trend — and the near- and intermediate-term trends are down.

Chart Key

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