Is This the Discount Sale Investors Have Been Waiting For?
October has provided the usual bouts of anxiety that have characterized the month in past years. I warned that we could see volatility and so far, this has been the case.
From small-cap stocks to world-class blue-chip companies, we are seeing some selling capitulation emerge in the stock market.
All of the major key stock indices are below their respective 50-day and 200-day moving averages (MAs). As I said in a recent commentary, the chart risk is high.
Bearish investor sentiment continues to grip the stock market. We saw 354 new lows on the NYSE on Friday, followed by 308 new lows on Monday.
The DOW has reported four triple-digit-loss days over the past five sessions and in that period, it has declined nearly 600 points. The blue chip index is down 1.54% this year.
Technology has led the losers so far in October with the NASDAQ down 6.24% and off 6.08% from its peak.
The S&P 500 breached its 200-day MA for the first time since 2012. The index has corrected 5.89% from its record, so we could realistically see more selling in the weeks ahead; be careful. A decline to 1,792 would represent a 10% correction, based on my technical analysis.
Chart courtesy of www.StockCharts.com
A death cross remains intact on the Russell 2000’s chart, with the index down 13.56% from its peak as of Monday’s close.
Now, we could see further weakness should the earnings season disappoint. And Germany and Europe are already seeing contraction in their economies.
You should begin to look at investment opportunities to buy into weakness. Over the past two years, the S&P 500 rallied following a correction of six percent, so get ready.
The key at this time will be the third-quarter earnings season, especially the guidance put forth by the companies, which will go a long way in deciding if the stock market runs lower. So far, Citigroup Inc. (NYSE/C) beat, and Johnson & Johnson (NYSE/JNJ) provided a positive outlook going forward.
While the near-term trend in the stock market is bearish, the longer-term trend remains positive and intact.
What I suggest you should look at is to slowly add some positions on weakness as the stock market could easily stage a strong bounce on the chart. Look for support in the stock market before pursuing this.
Alternatively, you could also play the action via call options on the S&P 500 through the SPDR S&P 500 ETF (NYSEArca/SPY) to play a rally. Again, the index needs to show some buying prior to you buying.
I would avoid the higher-beta segment of the stock market, such as the small-caps, if you are fearful.
Of course, you can also hedge the stock market via the use of put options on stocks or the key stock indices.
The bottom line is that this may be the stock market discount sale we have been waiting for, so look to seize the investment opportunity.
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