Watch Out for These Cracks in the Market

Investors should buy any dips that come their way in the next few months

By Charles Payne, Editor, Smart Investing

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The market has become more volatile of late although, from a historical perspective, it’s still significantly below average.

Investors have become so comfortable with relative calm, the slightest spike causes uproar. I look at the market mostly from a fundamental point of view but respect the power of technical analysis particularly when it comes shorter-term trading and measuring the pulse of the crowd.

Remember, from time to time markets move up and down for reasons that have nothing to do with the economy or even valuations. When it comes to longer-term investing, I would caution against selling any stock solely because it was lower — especially after this kind of market rally.

Instead, you should know when to reassess. That’s what I want to talk about today. We’ve seen a few nice up days on renewed hopes for tax reform, but I’m still watching places where the market must find support if pressure continues.

Support Levels to Watch

My technical work suggests that the first downside test for the Dow Jones Industrial Average is at 23,270, and after that, the big test would occur around 22,972. Note that a 5% correction would take the index to 22,286.

From a valuation standpoint, the S&P 500 is changing hands at a forward price-earnings (P/E) ratio of 18, which is high but nowhere near levels that have precipitated past market crashes. On this index, key support points are at 2,550 and 2,450. That’s where I’d begin to reassess. If there were to be a pullback, 5% weakness would land the index at 2,443.

The most volatile of the major indices, the Nasdaq Composite, would be a wild ride on a downside adjustment. Key support points to keep an eye on include 6,600 and then 6,370. A 5% pullback would put the index in the middle of those levels at 6,450.

The good news is that current valuations tell us there is no irrational exuberance right now, and I continue to see the market as poised for a huge but selective rally if Republicans can deliver on tax reform. If the GOP blows it, the rally could take a bigger hit than I was considering just a couple weeks ago.

For the record, though, I do think a bill gets done, and I think the market will cheer it as a sign of more accomplishments down the road. Therefore, investors should focus on the upside and even buy the dips.

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