Decreasing earnings expectations, continuing geopolitical instability and the potential of Fed funds rate increases seem to be unsettling the stock market in the last few days. Could this be the beginning of a macro market decline is anyone’s guess. However we can take a look at recent history and see if this decline is anything out of the ordinary before rushing to any pessimistic conclusions.
The chart above shows over the last 15 months that four of the five declines in the S+P 500 being of the 100 point variety. So far, if we include today’s intra-day low (so far) we get an 80 point decline.
So the potential is there for some continued downside risk. On the chart above I have highlighted a potential support level for the S+P 500 at the 2020 price level. This coincides with the average size of the declines of the last 15 months, the October high that preceded the biggest correction since 2012, and February 2nd’s open price gap. We also have the 200 day moving average close by as well (red line). Unless or until that area gets violated I will conclude that the up trend is still much intact.
For those of you that follow Dow Theory, I have included a chart of the Dow Jones Transports Index above. This index has had a difficult time of it the last 4 days as it struggles to get into positive territory for the year. Currently price is testing support in the 8600 area, where the last three lows have formed. Should we see a significant break of 8600, the next logical support level in my opinion would come in around the 8315 level (green line). This coincides 10/22/15’s open price gap, July 2014’s high and would also match the size of the biggest correction that was experienced in in October of 2014.
The Nasdaq index is another market index that has gained much attention recently as it approached the 5000 level and the all time highs during the year 2000 and the internet-dot com bubble. Today the Nasdaq approaches a support area that is defined by the December 2014 highs (white line) and the area in which it would match the size of the December corrections inside the short term trading range (green line).
The Nasdaq happens to be the best performing market index year to date while the Russell 2000 (small caps) S+P 500 and the Dow struggle to stay in positive territory and the Transports and Utilities index sport year to date losses.
The conclusion here is as it always is, avoid the noise and stick with your plan.