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Pick your poison for what has led to the quick US stock market sell-off: Rising interest rates, upcoming elections, increasing uncertainty concerning the potential trade war with China and the potential negative impact of bad news to corporate earnings. This sell-off is like the one that occurred during the first quarter of this year. As prices of stocks went down, key technical or price levels were violated. This led to momentum strategies (i.e. “buy what’s working”) and other computer based, technical strategies selling risky assets. Selling leads to more selling. These strategies have mushroomed in popularity the past decade. On Wednesday, let’s look at the price levels that did not hold:

– The Dow broke below its 50 day moving average.
– The Nasdaq broke below its 200 day moving average.
– The S&P 500 broke below its 50 day moving average.
– The Russell 2000 (small caps) broke below its 200 day moving average.

The machines took over and blew out of stocks, just like they did earlier this year. Unfortunately, I think the machines are here to stay so we must tolerate these vicious sell-offs.

The S&P 500 is down nearly 8% from its all-time high price in the past 20 days. Guess what? Going back to March 2009, the median correction for US stocks has been a loss of 8.4% over 26 days (source: Charlie Billello, Pension Partner). Recall earlier this year, we shared the chart below about frequency of sell-offs. They happen. Take a deep breath and don’t abandon your plan. From our standpoint, the carnage in stocks, especially those overseas, is presenting some interesting opportunities. We are not making any significant changes yet.

One other item. Many investors have wanted to abandon the time-tested diversified approach that we believe in. We wrote about this last month (http://psgplanning.com/market-insight-diversification-matters/ ). “Why own bonds?” is a question we have spent many hours discussing with clients this year. Most of this is because US stock prices were going up while bond prices were down approximately 2% this year. Down bond years are rare, but they do happen. Just think – on Wednesday, stocks lost more in percentage terms in a couple of hours more than bonds have ever lost in an entire calendar year!


Please do not hesitate to reach out to us to discuss any questions.

Jon Giordani, CFA
Chief Investment Officer