Let’s s get right to the million-dollar question for most investors today: How low will we go?
If you believe the chartists talking about heads, shoulders and necklines, much lower. Technical analysis shows the S&P is due for, at minimum, another 5% slide down to around 1,140. Worst case scenario – the bottom of last summer’s trading range with a low around 1,040, an additional 13% slide from here.
I’ll let InvestorPlace.com’s chief technical analyst, Sam Collins, explain the specifics of the charts to those who are interested in full details. And for those who think reading charts is a bit like reading ouija boards, this is one of those times when the “facts” of the market tell a very similar story.
There’s no point in running through a laundry list of specific reports – because there is one factor that matters most and moves most of the others. Namely, jobs.
Note that that the 7% drop in a month from February to March of this year coincided with news that the labor market was softening again and the unemployment rate was starting to creep up once more. From a “low” of 8.9% we’ve Marched back up to 9.2% and could be going higher soon. Challenger, Gray & Christmas says said layoffs surged in July to a 16 month high, though it seems enough jobs were created to offset those losses. We’ll see in the ADP report in a few hours.
Turn back the clock to summer 2010, when the market hit the lows referred to by head-and-shoulders chartists, and the story was the same. After the unemployment rate peaked at 10.1% in October 2009, it slowly edged down a little at a time to 9.5%. Then it flatlined in June and July before ticking up to 9.6% in August.
As labor market momentum waned, so did the stock market. In July, the S&P hit a low of 9,600. After a rebound, in August it corrected down to a low of around 1,040.
Obviously you can’t overlay unemployment rates and the S&P and get a direct correlation. But I’ll go out on a limb and say that the jobs issue is a pretty significant market mover.
So whether you’re looking at the patterns in charts or the state of the job market, the figure to watch is last summer’s low.
Many folks are trying to analyze why the market did exactly what it did this week. After all, the labor market has been showing signs of serious strain for a while. Why the brutal sell-off this week?
Frankly, you shouldn’t care reconstructing the crash in precise detail. For those interested in geopolitics, Louis Navellier sheds some light on the fallout from the euro zone that is weighing on U.S. markets – with a real cheery read about how “The Mood in Europe is Even Worse Than In the U.S.” Of course, that’s on top of the debacle over the debt ceiling (get my take on the wreckage from that disaster in “5 Ugly Truths about Life After the Debt Deal“) and a host of other domestic headlines. But it’s not very productive to spend your time combing through the wreckage too much, because the story is still all about jobs any way you slice it.
Huffington Post business editor Peter Goodman had a great post yesterday that said it best. Goodman wrote that the reading the market is like reading clouds, and you can see whatever shapes you like.“But what is clear about the 513-point dive suffered by the Dow Jones Industrial Average on Thursday is what it most certainly was not: An affirmation of the happy state of the economy, or a vote of confidence that those in power in Washington have a plan to improve our national fortunes.”
That’s the understatement of the century. And until consumers and businesses feel that the economy (that is, the job market) is improving and that government is going to be part of the solution – or at least promise to stop being part of the problem – we are in for some tough times.
How to Protect Yourself
I recently wrote a post Wednesday with a three-step survival guide to the market meltdown. They involved focusing on low-risk, bedrock investments (most of us so-called “retail investors” can’t go 100% to cash even if we wanted to without harsh IRA or 401k penalties), protecting yourself with stop-losses where you can and formulating an exit strategy right now before things get even worse. I continue to believe in those safeguards – and hopefully we will see some stability in trading today that will allow folks to put those ideas to use.
If you’re an aggressive trader, looking to get into good stocks at great prices when the dust clears, it may be a good time to start nosing around and formulating a list of bargain buys. InvestorPlace writer Lawrence Meyers offers up 6 solid picks to dumpster dive for after recent declines that could be a good place to start – including blue chips General Electric (NYSE:GE) and Coca-Cola (NYSE:KO). Though admittedly it may be a bit early to go bargain hunting just yet.
And of course if you’re really aggressive and really pessimistic, you can always profit from the misery. There are a host of ETN funds tied to the VIX volatility index that have soared as the “fear gauge” has also risen. The super aggressive VelocityShares Daily 2x VIX Short Term ETN (NYSE:TVIX) was up 40% Thursday alone. Of course, that’s because this is a “leveraged” fund that is meant to provide even bigger returns when the VIX index rises but also much more severe declines when the VIX rolls back.
Another way to play the downside easily in a typical IRA or brokerage account is through “inverse” ETFs that go up when the market goes down. Take the ProShares Short Dow30 ETF (NYSE:DOG) that was up 4.3% yesterday, since its methodology is to play the shortside of the Dow components. Of course, if the market rebounds the DOG fund will head in the other direction. But if you’re super gloomy or just looking to hedge your bets, there are a host of inverse ETFs out there to profit from declines in various indexes and sectors.
Whatever your strategy, keep a clear head and don’t just sit there refreshing your quotes pages every 15 minutes. Take a cue from Solomon and learn the mantra “This too shall pass.”
Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
