A global meltdown. That’s the only way to describe the last 24 hours worth of market action.
The carnage started in the Middle East, where markets open first on the weekend. Then it spread to Asia, Europe, and now, the U.S. While the Dow Jones Industrial Average managed to rally from down-1,100 or so in the early going, it couldn’t hold all of those gains. The benchmark average ultimately closed off another 586, bringing its three-day losses to almost 1,500 points.
Meanwhile, the Nasdaq Composite plunged 3.8% … the S&P 500 tanked to its lowest in 11 months … and the VIX gauge of volatility soared as high as 53.3. We are now firmly in “correction” territory, with all major averages off 10% or more from their highs.
Why is this happening? Is the selling just about over? What should you do now? Let me share my thoughts …
First, the “why”: Global markets have been under pressure for some time due to slowing economic growth, falling commodities, a rising U.S. dollar, and political instability. Major indices in many emerging market countries have dropped by 20%, 30%, even 50% or more in the last year.
|Markets throughout the world were in turmoil.|
The U.S. averages held up until recently, at least on the surface. But behind the scenes, many stocks and sectors have actually been deteriorating since the spring. I’m not just talking about obvious ones like energy, but also materials, transportation, and industrials.
More recently, some technology and financial stocks have joined the selloff. And over the last several months, the bond and currency markets have been signaling increasing trouble, even as stocks continued to hold up. That’s similar to what happened during the credit crisis.
Second, “Is the selling over?”: Markets look ugly in the U.S. right now, no doubt about it. But as I said earlier, there are stock markets all over the world that have lost as much as half their value in the last year. Some countries have also seen their currencies take out the panic lows of 2008-2009. In a couple isolated cases, they’ve plunged to their lowest levels since the 1990s – or ever.
Also, as I noted, the domestic bond market has been signaling that all is not well behind the scenes for some time. The spread between where risky bonds and stocks were trading recently widened out to a near-record level. Historically, that’s a major red flag for stocks because bond investors are considered the “smarter money.”
Bottom line? As bad as these last few days have been, we could be in for much more selling over time. That’s because domestic stocks could easily play “catch down” to currencies, bonds and overseas markets.
Third, “what to do now”: If you add today’s losses to the losses from last Thursday and Friday, you’re talking about one of the largest three-day routs in history.
As a result, we are getting dramatically oversold and sentiment is getting hugely negative in a hurry. That’s typically what you see before a short-term bounce, especially if the U.S. Federal Reserve or foreign central banks intervene to stop the bleeding. I wouldn’t be surprised in the least to see a rally – and possibly a large one – soon.
|“As bad as these last few days have been, We could be in for much more selling over time.”|
But given how severe the turmoil has been in several overseas markets … how serious the divergences between many stocks and the broad averages has gotten … and how worrisome the signals from the bond market have become, you can make a credible case that we’re nowhere near done with this selloff in the longer term. It’s even possible that the long bull market that began in March 2009 is over for good.
Fortunately, here at Weiss Research and Money and Markets, we have four paid services – covering specific sectors — that have warned of the impending selloff and helped subscribers to not only protect their wealth, but to profit from the turmoil. They include my Interest Rate Speculator, Larry Edelson’s Supercycle Trader and Real Wealth Report, and Jon Markman’s Tech Trend Trader.
As a matter of fact, each of these services have delivered strong gains for their readers during this tumultuous year.
In the meantime, keep your eyes on Money and Markets for all the latest updates. I promise you that we will get through this together, and that the Weiss team will do absolutely everything in our power to guide you to greater profits and protection — no matter what the markets throw at us.
Meanwhile, please do share your observations on the current market activity, the risks and opportunities out there, and what you’re doing in your own portfolios at the website. Your fellow investors will appreciate your opinions, and I will too.
Until next time,