Bear Market Territory; Stocks Plunge On U.S. Downgrade

Monday, August 8, 2011
Stock Market Commentary:

Late Friday night, Standard & Poor’s downgraded the U.S.’ AAA credit rating to AA+ due to the country’s onerous debt levels and poor public policy. Over the weekend, stocks were smacked across the globe as investors shunned “risk assets” and moved into so-called safe havens (i.e. gold and bonds). This market is clearly in the midst of a severe correction as all the major averages and a slew of leading stocks get smacked in heavy volume. To be clear, the bears remain in control of this market until the major averages close above their longer term 200 DMA line.

Bear Market Territory:

The small-cap Russell 2000 index has plunged a whopping -25% over the past few weeks which easily puts that index into “bear market” territory. Traditionally, Wall Street defines bear markets when any market declines by >-20% from its recent high. The S&P 500 and Dow Jones Industrial average are down -17% and -15% respectively over the past few weeks, which is not “healthy” action. Meanwhile, the tech-heavy Nasdaq composite is down -18%. Meanwhile, Gold has surged to a fresh record high above $1700/ounce and the VIX (volatility index) surged a stunning +50% today to 48! This, ladies and gentlemen, is not healthy action. Trade wisely.

S&P Downgrades U.S. Credit, Moody’s & Fitch Hold AAA rating:

Over the weekend, stocks were smacked across the globe in the aftermath of the ominous downgrade of the U.S.’ AAA credit rating. Over the weekend, The G-7 said came out and said, “we, the Finance Ministers and Central Bank Governors of the G-7, affirm our commitment to take all necessary measures to support financial stability and growth in a spirit of close cooperation and confidence.” Unfortunately, that did little to allay the bearish pressure. On Monday, S&P downgrade several other U.S. entities which hold a lot of government paper. President Obama addressed the world at 1pm but again did little to allay the bearish pressure.

Technically, the action in major equity markets across the globe is downright awful and suggests we are heading lower, not higher. However, that could change if/when any of the structural issues which caused this mess are actually addressed (i.e. onerous debt levels, profligate spending, etc.). In the short term, the major averages are extremely “oversold” and one should expect a “bounce” of some sort to occur in the near future which will help alleviate that condition and send them back towards their respective 200 DMA lines. With that said, it is imperative to note that markets can very easily get “more oversold” very easily.

Market Outlook- Market In A Correction

The latest action in the major averages suggests the market is back in a correction as all the major averages remain below key technical levels. Our longstanding clients/readers know, we like to filter out the noise and focus on what matters most: market action. That said, the recent action suggests caution is paramount at this stage until all the major averages rally back towards their respective 200 DMA lines. If you are looking for specific help navigating this market, please contact us for more information.

 

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