If you still harbor doubt that the correction in the equity markets now is underway, then all you have to do is check out a price chart of the Dow Jones Industrial Average. Monday’s steep 300-plus point drop in the Dow sent the most widely watched measure of the equity market plunging below its long-term support at the 200-day moving average.
The decline in the Dow marks the first time in more than a year that the Industrials have broken their long-term uptrend, and that situation is a very bearish sign for stocks going forward. The only saving grace here for the markets is that the Dow so far is the only major market metric that has fallen beneath its 200-day average.
The S&P 500 Index continues to trade above its 200-day average, while the NASDAQ Composite also continues trading above its long-term support levels. I think that if we were to fall below the 200-day average, particularly in the broad-based S&P 500, that drop would be the biggest negative signal from the markets for a very long time.
Meanwhile, the correction already has gone into hyper-drive in other regions around the world, particularly in China and the emerging markets. Fear of a continued slowing in China’s growth rate, as well as instability in emerging market currencies, has put heavy selling pressure on stocks in these respective areas.
The iShares MSCI Emerging Markets (EEM) already has plunged below its 50- and 200-day moving averages on its way down to the lowest levels since August 2013.
So, what happens next? Are stocks ready to rebound soon, or will the sell-off continue for a while?
It is my opinion that we will see the S&P 500, as well as other broad domestic equity indices, trade lower in the weeks ahead. Given how far the market became overextended at the end of 2013, it just makes sense that we’ll have to see a little more of a shakeout, and a little more of the pain trade evolve before the selling ceases and before we can call a short-term bottom.
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