Tuesday the S&P closed at 1,755.20 and looks to give up a nickel at the opening.
From Barron's Wall Street's Best Minds column:
The charts and investor sentiment suggest that indexes have further to fall, writes a Charles Schwab pro.
By LIZ ANN SONDERS
Here are some key points.
•For now, the emerging-markets tail is wagging the dog, but the U.S. remains the world's big dog and should ultimately get through the latest turmoil.
•The so-called "January Barometer" has sent mixed signals for the remainder of the year historically.
•More technical and sentiment recovery is likely needed before a market recovery is likely.
The United States has always been the big dog … the one that typically wags the tail. So far this year though, emerging markets (EMs) are the tail that is wagging the dog. The obvious question is how much longer … the answer is less obvious.
As most readers know we've been alerting investors of the likelihood of a correction since late last year; largely due to the frothy sentiment conditions that accompanied a stellar year in 2013 and the beginning of monetary policy normalization via the Federal Reserve's tapering of quantitative easing (QE).
We have also noted that the next "crisis" was more likely to occur in the emerging markets than in the United States. As for whether EM turmoil will knock the US market fully off its rails, read on.
As January goes, so goes the year?
Let's start with the so-called January Barometer. Since the inception of the S&P 500 in 1928, there have been 31 down Januarys, with an average decline of 3.9%. About 58% of the time, the market went on to post a negative year, with an average decline of 13.8%. Narrowing the analysis down to the post-WWII era; since 1950, there have been 24 down Januarys, with an average decline of 3.9%. About 54% of the time, the market went on to post a negative year, with an average decline of 14.9%.
Of course, there were exceptions. For the negative Januarys that were associated with up years, the average gains were 13.6% since 1928 and 8.9% since 1950. In fact, the most recent occurrence of a negative January was 2009; during which the S&P posted a 23.5% gain for the full year. (Thanks to Ed Yardeni for this data.)
Technical damage … more likely to come
A lot of attention has also been devoted to the breach by the S&P 500 of its 50-day moving average) on January 24. It had been three months since it last closed below that level. The potential good news is that more often than not, the break below has not been indicative of more serious correction.
According to Bespoke Investment Group, in the S&P 500's history there have been 62 occurrences of the index closing below its 50-day moving average after trading above it for the prior three months or more. The average returns over the subsequent week, month and three month periods are pretty strong: 0.48%, 1.66%, and 3.21%, respectively.My comment on Monday's drop, talking DJIA, This does not satisfy:
Looking at the more recent past 30 years, there have been 23 instances when the 50-day moving average was crossed after at least three months of closes above it.
The average gains for the subsequent one week, one month and three months are 1.03%, 2.95% and 3.97%, respectively. Over this period, the market was up 65%, 74% and 83% of the time, respectively. Excluding the extreme outlier of 1987, the only three down periods over the following three month period in the past 30 years averaged a decline of only 0.76%.
Although I don't profess to wear a technician's hat very well, it does feel like we're at a greater risk this time of breaking down further and possibly testing (or breaking through) the S&P 500's 200 day moving average. That would take the decline to over 7% from its peak. If the market doesn't hold there, that would likely set the stage for a legitimate correction (defined as a drop of at least 10%)....MUCH MORE
...Well the venerable index's decline added another 110 points from there and toward the end of the day there really was a stink of fear as a bottom note to the high-buck cologne. Additionally, this was too measured a decline for my jaded tastes. The day's chart looks like the slope of a bunny hill....Reinforcement theory:
Reinforcement theory is a limited effects media model applicable within the realm of communication. The theory generally states that people seek out and remember information that provides cognitive support for their pre-existing attitudes and beliefs. The main assumption that guides this theory is that people do not like to be wrong and often feel uncomfortable when their beliefs are challenged....Wikipedia
