It was a perfect storm on Monday for the markets. A confluence of events: snowstorm in the NYC metropolitan region, weak auto sales and disappointing ISM (manufacturing data) led to a panic selloff on Wall Street’s stock markets and run to safety in the gold and bond markets. The fact that it was a Monday, typically the worst day of the week for stocks did not help. Then again, we should normally see a positive bias on the first day of the month. For the second consecutive month, the first trading day was a disaster.
Markets Off Just Over 2%
All told,the equity markets were off just over 2%. Be careful not to look at headline numbers such as Dow Jones Industrials (DJIA) being off 300 points or S&P 500 (SPX) declining 40 points. These are nominal results. We need to focus on the relative percentages as those are more meaningful. For the record, the DJIA declined 2.08% and the SPX dropped 2.28%. You might think that is an aberration, but that is not the case. On average since 1950 the SPX declined by at least 2%, a little more often than five times per year. The fact that the index declined by at least 2% only three times in 2012, two times in 2013 and so far twice in 2014 just goes to show you the strength that the market has exhibited over the last few years, and I believe will continue to manifest in the future.
How Bull and Bear Market Correct
In bull markets, we rise gradually and then correct suddenly. In bear markets we decline gradually and then bounce suddenly. The former statement is now operative. As I have said, you need to embrace corrections and not fear or panic because of them.
The perfect scenario for an end to the correction would be a lower opening today followed by a late morning or early afternoon reversal. Given the pre-market futures indications, we are not getting a weak open. However, let’s not get too cute. A mildly positive open, which is set to occur followed by an attempt to sell off with a positive close would also do the trick.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC had no positions in stocks mentioned — although positions can change at any time.
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