Stock Market Analysis

Monday, August 19, 2013

Deeper Correction This Time?

The Dow lost another 70 points today this first trading day of the week as investors start to sell out of the equities market in anticipation of changes in Fed policy in September.

It was a quiet day without any major economic releases but the equities market still sold off shortly after a strong opening and never looked back. Even though news credited the move to investors selling out of the market in anticipation of next month's Fed policy change, the significant increase in bond yields across the board and total equities put call ratio remaining above 0.9 tells me that it is the traders that are running out of the market while investors are actually selling out of bonds and buying into the weakness in order to continue riding this 2013 bull market. This is particularly true for institutions who have actually missed a big part of this rally due to their skepticism. However, is this truly a good point to buy into the weakness at all?

The Dow cannot have formed a more dangerous pattern; Two significant retreats back to back within one quarter usually mean that the second retreat is going to be a much deeper one. Such a significant retreat on the back of a previous significant retreat suggests that investors were too quick to end the last correction and is now seeing more downside evidence and acting on it on regret. And regret is always sorrowful. Worse of all is the resolution of downside move after breaking the 30MA, without even popping to retest the 30MA. And even worse, it does have a credible "Fed Related" story to back it up. Such resolute move does look like it is going to test the 14,000 level that I said it will in the last correction in May but didn't. Truly the old adage "Sell In May and Go Away" does seem true this year. The rally this year has been strong all the way to May and since then, has been nothing but volatile.

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For now, the Dow turns a short term bear trend and intermediate neutral trend within a primary bull trend.


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