The stock market’s sharp post-election drop had some signs of panic liquidation and Moneyshow’s Tom Aspray explains why a disciplined technical approach can help you avoid selling with the crowd.
Wall Street voted Wednesday, and it was clear that many have little confidence that the two parties can come together to avoid the fiscal cliff. The 312-point drop in the Dow Industrials was matched by a similar percentage drop in the more broadly based S&P 500. Banks stocks were hit the hardest as the KBW Bank Index dropped 4.56%.
Over the past month the financial media seemed to think that a Romney victory would be best for the markets. Though many market pros seemed to feel the same way one should not forget that their primary goal is to make money. The selling Wednesday had some signs of panic liquidation as “get me out at any price” seemed to be the prevailing sentiment.
Many probably remember August 6, 2011, when the US lost its AAA credit rating and the Dow lost 635 points and the S&P dropped 80 points or 6.7% to close at 1119. Over the next month, the bearish sentiment continued to build as most were convinced we would see another recession. Instead the market formed a strong technical bottom in October and is now 24.5% higher.
The point is that selling when everyone else is also selling is rarely a good idea. Reacting to the fear of an economic development like the fiscal cliff can never be part of a disciplined investment plan. That is why it is important to have an exit strategy in place when you buy a stock or ETF. Then you can have a good assessment of the risk involved and have a better chance of not getting swept up in the crowd mentality.
While the intermediate-term outlook for the stock market is still positive, the short-term momentum is negative and there are no signs yet of a bottom. In fact, many of the technical studies are not yet oversold.
I would not be surprised to see another sharp down day before the current correction is over. It is important that investors and traders keep an eye on the key price levels and technical indicators outlined below so that you can have an objective reading of the market’s outlook
Chart Analysis: The weekly chart of the S&P 500 (updated through 11/3) goes all the way back to the 2009 lows and shows a long-term pattern of higher highs and higher lows.
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