Major indices retest lows from 2008
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For several weeks we’ve warned investors that market risk remains high and further caution was warranted. This week we’ve seen declines in major indices and the Dow and S&P 500 reached lows approaching their lowest levels of 2008. So far this year the Dow has dropped about 14% and the S&P 500 is down about 12%. The Nasdaq has fared slightly better, but is still off 6%.
The chart below shows price action of the Dow over the past year. The severity of this bear market is readily apparent from the plunging price. Notice that this week the Dow fell to approximately the same level as its prior low in November 2008. Many investors and analysts believed that the November lows would be the lowest point of this correction. Now we can see that such beliefs were premature.
The gold line is a 50-day simple moving average (SMA). The Dow is currently trending below its SMA and has done so for most of the past year. The green line is a trend line that I added. This marks the top of the trading channel. As long as the bear market remains in place, short-term advances should find strong resistance at this level.
The middle portion of this chart is a moving average convergence divergence (MACD). While this indicator remains negative, it is currently headed in a mostly sideways direction. While it could turn up from here, it has not reached a level where one would anticipate an imminent reversal.
The bottom indicator is a slow stochastic. A stochastic is an oscillator that is useful in determining waxing or waning momentum. In other words, it helps pinpoint short-term reversals. In this case, the stochastic has reached a level where it is showing that the S&P 500 is oversold. That indicates that we could easily see stocks rebound in the next few sessions. This would only be a short-term reversal dominated by the longer-term bear trend. That means that it should end somewhere near the green trend line on the top portion of the chart.
It is important to note that while we closely watch technical indicators like these for clues about what the markets might do, these are lagging indicators so their predictive value is limited. Nevertheless, right now all of our indicators portray a market where risk remains high, justifying our decision to remain on the sidelines.
F.S.