Written by William Kurtz
The stock market declined sharply on Friday, as had been foretold by the “closing of the a-b-c Loop” (actually, two of them in succession). The updated 30-minute chart of the Dow Industrials shows the a-b-c patterns, Friday’s decline, and Friday’s Close at 15988 in the Dow, Down 390.97 points on the day and Down nearly 13% from its all-time High of 18351 last May. Click ‘Read more’ for larger graphic and rest of article.
We all remember the “surprise spike-down Low” in stock Index prices late last August. It was such a wallop that some observers focus on it as a significant benchmark against which to assess price events in the market since that time, and to attempt to divine what might happen now and in future days. Of the “big three” stock Indexes (the Dow Industrials, the S&P 500, and the NASDAQ Composite) only the S&P 500 has broken below that August Low (by only about 10 points).
On the other hand, the Dow Transports, the S&P 600 SmallCaps, the S&P 400 MidCaps, the Russell 2000, and (most especially) the Value Line Geometric have broken below that August Low in very significant fashion. (I especially point up the Value Line because it is an unweightedIndex of more than 1600 listed stocks – every stock has the same value as every other; there is no “skewing” of the result by such heavy hitters as Apple, Google, Microsoft, ExxonMobil, IBM, or Microsoft. It gives us a better reading of the market in general).
It seems far more likely that all of these are more likely to drag the Dow Industrials and the NASDAQ Composite below the August Low than it would be for the Dow Industrials and the NASDAQ Composite to drag any of these ABOVE its August Low. And what good would it do? They’ve already spiked hard below the August Low; the pattern has been set.
It’s in the books. It can’t be undone.
It’s very hard to imagine that the Dow industrials and the S&P 500 could diverge with respect to the August Low (or in any other major respect, for that matter) for very long. There’s too much commonality of constituent stocks between them now (including Apple [which may not be an “industrial” company, anyway; what’s your opinion on that?]) to allow this divergence to continue indefinitely. Something has to “give;” and it seems more likely that the Dow industrials (and the NASDAQ) will be priced below their respective August Lows within the foreseeable future.
The burden of all of this is to argue in favor of the proposition that Index prices are likely to continue to decline now, possibly very robustly – maybe more so than almost anyone dreams could be possible.
The other side of the argument has merit, though: The market is oversold; most (if not all) of the Indexes appear to be ready to stage a bounce (i.e., an upside partial retracement of their previous decline); my Momentum indicator shows a decline in downside Momentum on Friday, relative to Thursday; and our other Indicators are calling for a bounce now, or very soon.
The bottom line is that I can’t tell which way the stock market is most likely to go on Tuesday (the market will be closed on Monday in observance of Martin Luther King Day). I specialize in spotting Reversals of Trend early; but the signals are so conflicted now that I can’t make a prediction.
Discounting for a moment the large bounce which followed the August spike-low, from last December 1 the Dow has declined 10.66%, most of it very quickly within the first 15 days of January. Bear markets do evil much faster than Bull markets do good. This very probably is indicative of a loss in value of stocks which may still be in your own portfolio, as well as a missed opportunity. For many months, I’ve maintained that (except for (1) Special Situations with “play money” and (2) “Golden” stocks for which you’ve arranged protection for possible declines in their market value) the “retail investor” should be out of the market entirely and should be taking positive steps to profit from a declining market. Those sentiments still hold.
You can see how quickly things came apart in two weeks. This is just a “taste.” The burgeoning of this Bear market will be worse than “2008.” At the Low, Prime stocks will be available at bargain prices; but that won’t do you any good if you don’t have the Cash to buy them.