I just saw an article on CNBC which states that downside is limited because Wall Street was expecting bad earnings this quarter. Hog wash. If Wall Street had been expecting it, stocks would not be trading close to all-time highs and we would not have a 200+ drop in the Dow today. Downside is far from “limited.” In fact, this is just the beginning of a serious correction. Although there may be some bounces on the way down, as uninformed investors who buy into the media hype from the likes of CNBC, ultimately fundamentals will win-out, and stocks will adjust down to reflect slower growth and sliding corporate profits.
I already discussed Dow theory – the fact that the Dow Transports and deverging from the Dow Industrials, and this is a strong predictor of a correction (clearly visible in the chart above). The NASDAQ Composite is also diverging from the Dow Industrials, which again, is a clear predictor of a correction, since the technology-heavy NASDAQ typically leads the Dow during times of economic expansion.
In the chart above, we can clearly see that the NASDAQ has recently started heading lower while the Dow is still advancing. (The Dow should roll over and follow the NASDAQ lower.)
Given all that we see, both fundamentally, and technically in the markets, it is wise and prudent to raise cash and sit on the sidelines until the market adjusts down to more favorable levels.