Dan Stewart CFA®
President/Chief Investment Officer
NorAm Asset Management
The markets took a major hit yesterday erasing all of Wednesday’s gains, and then some. It was broad and it was ugly.
Now I wrote in Thursday’s newsletter that Wednesday stocks, bonds, the Yen, and commodities were all in positive territory, and that was unusual and unstainable. Something had to give. I went on to say that stocks looked the weakest and had the highest probability of giving way.
That turned out to be more apropos than I thought. The NASDAQ, not the DOW, but the NASDAQ was down -130 points. This is over a -3% decline and the single biggest drop on the NASDAQ since late 2011. All the major indices have gone into the red for the year.
Volatility has risen significantly. 100+ point day swings from the upside & downside are becoming commonplace. I have attached a graph of the Volatility Index on the S&P 500 versus the S&P 500 itself. Notice the steep positive slope of the VIX line in red.
The big question is how do you navigate this market, and what is next. Yesterday we registered a 90% Down Volume day on the NASDAQ coming in at 94%. We narrowly missed a 90% Down Volume day on the NYSE registering 89%. Breadth was very negative with declining issues clobbering advancing issues. It was a broad selloff across virtually all sectors.
The 2 bright spots were bonds and precious metals. So it was unquestionably a risk off day. Normally when you get a 90% Down Volume day, you will get a relief rally.
That said, if selling continues and we don’t hold the line at 1835 on the S&P 500 (1822 on the S&P June futures contracts) or the NASDAQ at 4050 (June futures at 3480), you should raise cash culling your weakest or most volatile positions to fight another day. Don’t be a hero. I have attached graphs of both the S&P 500 and the NASDAQ so you can visualize what I am referring to.
If we get a rebound rally, but on light volume, you should ‘fade the rally’ doing the same. Cull your weakest or most volatile positions. Only if we get a strong, broad rally on volume should you stand pat if you are fully invested.
This is definitely not a 2013 environment. You will get opportunities to catch trends but only if you preserve principal during strong pullbacks.
One thing that could provide an impetus for a rally is earnings by 2 major banks today. Both JPMorgan Chase (JPM) and Wells Fargo (WFC) report today. So today may be a pivotal day.
For a complimentary portfolio review, e-mail me at Dan.Stewart@NorAmAsset.com and we would be happy to review positions. We can evaluate your sector exposure and individual stock risk.
We have a few economic reports including the various Producer Price Index (PPI) measures. We have 3 companies reporting on the S&P 500, one of which, JPMorgan Chase (JPM), is also included in the DOW.
We have only 1 company reporting in the broader markets and it is not worth mentioning. But earnings season begins in full force next week.
Remember to tune into The Wall Street Shuffle Saturdays on 1190 AM at 10 a.m. in DFW. I hope you enjoy the show. If you have any investment questions you would like discussed on the air or specific investment questions in which you would like personal advice, e-mail me at Dan.Stewart@NorAmAsset.com and I will be happy to respond.
Dan Stewart CFA®
Chief Investment Officer
NorAm Asset Management
Economic Reports Today:
PPI Final Demand
PPI ex Food & Energy
University of Michigan Consumer Confidence
Some Notable Earnings Reports Today:
JPMorgan Chase (JPM)
Wells Fargo (WFC)
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