All three major indices fell today, following Friday’s sizable rout. The Dow lost 41, the NASDAQ lost 44, and the S&P 500 dropped 8. Although the NASDAQ’s drop was significantly larger in percentage terms than the declines of the other two indexes, the S&P 500’s losses over the past few trading days are far more significant. First, the S&P 500 penetrated its 50-day moving average on Friday. It also fell through 1,800. Today’s drop to 1,782 brings the index dangerously close to support at 1,775. If we see the S&P 500 fall through 1,775, which could certainly happen this week with all that is going on (especially the Fed meeting, which starts tomorrow), there is nothing to stop it from declining down to at least 1,700.
We need to watch 1,775 closely tomorrow and throughout the week for indications of the market’s next major move. If the S&P 500 can hold above 1,775, we will likely see a rebound rally, possibly back to new all-time highs. If we fall below 1,775, I would expect to see at least a 10% correction from the high (1,850).
As you know if you read my blog, I sold on January 2nd and hold significant cash balances currently. I am prepared to take action if stocks correct to more reasonable valuations, as they did back in early October 2013 when I bought the correction and rode the rally through the end of 2013.