In Focus: The Stock Market Crash 2018
Updated: Nov 8, 2020
Now Entering Correction
Wall Street defines a correction as a market being down 10% from its highs. By that definition the NASDAQ is there, and the S&P 500 and Dow Industrial Average are not to far behind. The panic on Wall Street and Main Street is real, and it should be. There are a lot of global issues that could drive the markets down further as well as technical indicators that favor the bears over the bulls.
Global Issues Weighing the Markets Down
I have to tip my hat to the markets, they have been pretty resilient this year. If you think otherwise take a moment to read through the list of global issues weighing down the markets. The list was composed by Mark DeCambre for MarketWatch. Some issues are recent, some are older, but boy what a list.
Rising interest rates that could make borrowing more expensive
A slowdown in global economic growth exemplified in China weakness
An overall breakdown in stocks, represented in equities trading at multimonth lows
Midterm election jitters, which have seasonally resulted in some jitters in U.S. markets
Seasonal October volatility, which has tended to translate into choppy trade
Worries that the U.S. economy is in the late stages of its expansion and due for a recession
Italy’s budget crisis
The looming end of quantitative easing in Europe
The political implications of the killing of dissident journalist Jamal Khashoggi
Worries about the health of emerging markets outside of China.
Signs from U.S. companies that they are see earnings growth slowing
U.S.-China trade relations which may be exacerbating Beijing’s economic malaise
Growing deficits partly derived from President Donald Trump’s corporate tax cuts in 2017
Weakness in the banking sector which hasn’t benefited from rising interest rates
Softness in transports which Dow theorists tend to follow as a gauge of the health of the market
A rotation of investors out of growth stocks and into those names viewed as value
Major cracks in the housing market
A weak earnings outlook
This is a pretty impressive list of problems and for the most part the markets have continued to bounce back in 2018 after short term declines.
The Bounce Back or The Fall?
Six times this year the Dow has broken below it's January 2, 2018 open of 24,809.35, turning the markets negative for the year six different times. Will this seventh time be the one that causes the markets to free fall into Bear Market territory? I don't know. The 200-day moving average (the blue line on the charts) of the Dow has been a pretty solid area of support in 2018, but the Dow, S&P 500, and NASDAQ all traded under and closed below their 200-day moving averages this week.
Charts: Yahoo Finance
In September of 2015 the Dow broke below it's 200-day moving average, and after a three month climb back to it's 200-day moving average the Dow rolled over again. However since that roll over in January 2016 it's been a nice run up.
We've Doubled Top, Will We Double Bottom?
For the technical analysts, especially those that are bearish, the Dow behaved exactly as one would expect. After testing the all time high on October 3, 2018, the market rolled over. In the chart below you can see the all time high which occurred in January of 2018, a big fall, a nine month grind back to the high, a test of the high, and a failure. What the failure at the high tells market participants is that the bulls or buyers can't find value at these levels of the market, since buying dries up, the fall begins again.
Now as the Dow heads down it could test several levels of support, creating a double bottom. If the double bottom theory holds, the bulls/buyers will enter the markets at these levels of support driving the markets back up. Will the bulls be ready to buy at these levels of support, time will tell. I'll be keeping an eye on the 23,344 level on the Dow, the 2,553 level on the S&P 500, and the 6,630 level on the NASDAQ, these are the lows for 2018 from each index. If the markets trade down and through these levels, it could get uglier in the markets.
It's a Blue Light Special Sale
The recommendation this week is to hurry up and wait. You should hurry up and do whatever it is that you do to determine asset value, and create a list of the best of the best. Pull backs like these put good companies on sale. This is where the wise experienced money making investors swoop in and buy cheap stocks, while the not so smart investors hide under the covers waiting for the market to go back up.
You should then wait for the market to do one of two things to start buying again. The first is to wait until the markets reclaim their 200-day moving average (trade and close above the average). The second is to wait for the market to hit one of those areas of support we've diagramed, these support levels are where other buyers are waiting to enter, you can align your money with the smart money.
It's been rough out there in the markets these past few weeks, but trade safe and invest with your head not over it, and may your next investment be your best investment.
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