US Stocks Skid

After going almost nowhere for several weeks, the S&P500 slipped badly last week. The index lost 2.5%, with most of that loss coming on Friday alone. Volume for the week was light, but that’s mostly because of the Labor Day holiday. Volume on Friday, when the market sold off badly, was stronger. And volatility also spiked on Friday, but with the VIX reaching only the mid-teens, this “fear index” never reached the levels associated with panic sell-offs in the past.

There wasn’t much in the way of economic reports last week. PMI services missed expectations slightly. ISM services was the biggest story of the week—it missed badly. And this miss echoes the big miss in ISM manufacturing. Together, the two poor ISM results strongly suggest that the US economy is in a soft patch…..again. On the brighter side, initial jobless claims were a bit stronger than expected.

The technical picture changed dramatically. As discussed here last week, the S&P was poised to take a turn, up or down. And with the big sell-off in the books, it’s looking like the turn will be for the worse. That said, it will take much more than a one-day 2.5% drop to change the longer-term direction of the US equity markets. While prices did close below the 50 day moving average, this average is still well above the 200 day moving average. So the “golden cross” is still in effect. And therefore the short-term outlook has not really turned bearish….at least not yet.

Finally, well-known money manager and PhD economist John Hussman noted in his weekly newsletter that it takes a lot of discipline to sit out and miss the temporary gains that come with a bubble in equity markets. And he suggested that this is a lot easier to do, when one understands the consequences of participating in a bubble, falsely believing that this time is different, or just as badly, mistakenly believing that one will be able to sell at high prices when the bubble does in fact burst. He reminded readers that must:

Understand that valuation levels similar to the present have never been observed without the stock market losing half of its value, or more, over the completion of the market cycle.

So unless one is willing to endure such a huge setback in portfolio values, one must be willing to sit out the bubble and protect one’s assets from huge drops by investing more in cash and near-cash securities.

Unfortunately, most investors, amateur and professional, will not be so wise.



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