foxex: A Grizzly Day for Stocks

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Thursday's Headlines

1. Stocks Sink to Multi-year Lows as Bears Circle

2. Chart of the Day: The Dow is the Latest Index to Form a Death Cross

Markets Close

Dow
22,859.60 -1.99%

S&P
2,467.42 -1.58%

Nasdaq
6,528.41 -1.63%

VIX
28.38 +10.95

INV Anxiety Index
97.72 Low Anxiety

US 10-Yr Yield
2.789 +0.40%

Stocks Sink to Multi-year Lows as Bears Circle

There was so much red today it felt like we were in a 1980s horror film. We're just one day out from the Fed's decision to raise interest rates, in which Chairman Powell brought out sellers by refusing to say the agency wouldn't raise rates again in 2019. Here are a few lowlights from a bruising session across U.S. Markets:

The DJIA closed at a 14-month low, down 470 points or 2%. It fell in to the dreaded 'Death Cross' technical pattern, which James explains below.
The Nasdaq fell into a bear market for a few hours but managed to crawl out by market close. Before today, the Nasdaq hadn't been in bear territory since October of 2011
The S&P 500 is down 16% from its September high
More than half of the stocks in the S&P 500 are in bear territory
There were 175 new lows for stocks on the S&P 500 today, but no new highs
Crude Oil prices are down 40% from their highs, hitting a 17-month low today
The U.S. Government may actually shut down Friday after all. Something about someone insisting on a few billion dollars for a steel wall with slats...

Surely there are more data points, but why go on? If you are a regular reader, you are pretty familiar with the reasons this may be happening. The end of the year always brings about some selling, but the combination of rising rates, a slowing economy in the U.S. and abroad, the trade war, the fading benefits of the corporate tax cuts, and a potential earnings recession have all come together to create the perfect storm for stocks. Cash and savings accounts have become a lot more attractive over the past few months, meaning investors finally have alternatives to diversify away from stocks.

Why it Matters:

What matters most in times like these is perspective. You have to have it if you are going to be invested, and you have to be invested if you want to grow your money over time. We are likely to slide into a bear market, whether it's in the next week, month, or few years. They are part of the cycle. Accept that. Here's what you should know about them:

The average bear market period lasts 1.4 years with an average cumulative loss of -41%.
The average bull market period lasts 9.1 years with an average cumulative total return of 480%.

First Trust has a beautiful infographic that makes this perspective easier to swallow. Here's a screenshot, but click this link to see it in all its glory.

Somehow, seeing the transition from bull to bear on a chart makes it easier to digest. But bear markets are personal. They impact investors differently depending on their age and needs. If you are close to retirement and your 401k, pension, or IRA is in long stocks, you'll feel it more than the 30-year old who has at least 30 more years to invest. The bottom line: you have to allocate your money and your investments responsibly based on who you are and what you need. We know that you know that by now, but we also know how hard that can be to do.

What's Next:

There is no magic switch that will turn the markets around anytime soon. A resolution of the trade war with China ahead of the 90 day deadline would help, but markets are under pressure on a variety of fronts. You still have to time to re-balance before the end of the year if you need to do that. You can book losses if that helps your tax bill. But selling out of fear is not recommended, unless of course you don't need the cash for at least a decade. We are in a downturn and downturns eventually end. This one will too.

Chart of the Day: The Dow is the Latest Index to Form a Death Cross

It happened to the small-cap Russell 2000 in mid-November. Then, the Nasdaq Composite in late November. The S&P 500 followed in early December. And now, it just happened for the Dow Jones Industrial Average. One by one, all of the major benchmark indexes have fallen victim to the ominous-sounding death cross, a technical analysis indication that's considered exceptionally bearish.

A death cross is a chart pattern defined by technical analysts as the crossing of a shorter-term moving average below a longer-term moving average. Typically, the most common moving averages used in this pattern are the 50-day and 200-day moving averages.

The death cross rarely occurs on major equity indexes like the Dow. The index has formed only a small handful of such patterns in the past decade. As a result, it's one of the most widely watched technical formations that exists, and it's also among the patterns thought of as most foreboding.

This is especially the case since recent market moves have been unusually bearish, volatile, and prolonged. On Thursday, not only did the Dow confirm the noted death cross, the Nasdaq Composite fell briefly into bear market territory, as it dropped slightly more than 20% from its late August peak at a few points during the day. The Dow isn't there yet — but could soon be.

The fact that the Dow has joined the death cross club may not be all bad. Only in a very few cases has the pattern resulted in an acute and extended sell-off. More often, a market recovery commences within a few short months after a death cross. Let's hope that will be the case this time around.