Ship at sea heads into storm
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Having sold everything on Friday, July 9, I posted the explanation in “Opportunity Ahead? A Week Of Negatives Increases Probability Of Stock Market Correction.” The four major negatives at the time were:
- China’s actions against US-listed Chinese companies
- Covid-Delta’s expanding negative effects
- US government’s concerns/actions regarding large US companies
- Contrary stock pattern: Meme stock downward stagnation
Not only have these issues worsened, but also additional negatives have joined the list. At some point, even the most bullish investors take notice and act. That point looks to be upon us
So, how come the four-week delay?
The earnings report period happened – something that bullish investors were excitingly anticipating. Throughout the earnings report period, attitudes and media reports remained hopefully bullish. However, beneath the happy tune grew a discordant erosion of support.
The overall result was that earnings reports often were touted as being excellent, exceeding analysts’ published estimates. The problem was those better earnings were already priced in, with many stocks stagnating after their reports.
How do we know attitudes have shifted?
Still the optimism remained – until this week. Now, the chinks in the market’s armor are being noticed. For example, The Wall Street Journal reported today (Wednesday, August 18), “Economic Data, Virus Worries Help End Streaks.” It was a begrudging admission, buried on page B-11:
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“Tuesday’s pullback marked a divergence from the recent performance of U.S. stocks, which have largely ground higher throughout August, thanks to a strong earnings season and thin trading volumes.”
What about “streaks” and “higher throughout August” as stock market descriptors? Certainly, the July and August daily news reports frequently contained “the stock market made a fresh high” description. The WSJ article led off with that view: “U.S. stocks slid Tuesday, retreating from a stretch of records….” However, many of those new market highs were based on only one or two market indexes closing higher, even when the rise was minor.
The better way to see what actually happened over the past four weeks is to look at the cumulative results for the three major U.S. stock indexes. The graph below shows both the small overall gains for the S&P 500 and the Dow Jones Industrial Average, along with the loss for Nasdaq Composite from their closes on Friday, July 9.
Three major stock market indexes July 9 to August 18
John Tobey (StockCharts.com)
The bottom line: There now is new respect for negatives and an adjusted stock market perspective
In that last graph, note the number of days when the three indexes failed to make new highs at the same time. That realization probably explains why The WSJ felt it necessary to report, “All three major U.S. indexes tumbled….”
Therefore, it is now a good time to raise cash. A stormy market ahead will bring buying opportunities.
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