I’m usually an optimist when it comes to the stock market, but the recent tape action shows the market could still go lower.
DJIA One-Year Chart
First off, after the mini-crash in August occurred, we all knew the market would not only go back down to the lows, but pierce them as well. Today it happened, and the DJIA is currently at the lows for the year. Money managers knew we would go back down to the lows. This isn’t a surprise.
What is a bit of a surprise is the market’s not quite oversold enough to bounce higher.
Europe is really hurting stock markets across the globe. I’m not concerned about the contagion leaking over here long-term, but the uncertainty is pounding the U.S. market right now.
Overbought Oversold Oscillator One-Year Chart
To the right is the Overbought Oversold Oscillator for the DJIA. This chart shows we were more oversold back in August. This isn’t good.
What I don’t like its the leading stocks — supposedly stock market winners — are getting hit the most. The good news is when the market does turn higher these stocks will likely bounce back swiftly.
Bottom Line
Brace for more downside. I think we are too low to sell at this point, so its best to ride it out. When something Europe comes to a resolution on what to do about its debts, we should get a solid rally. Any recession we see here in the states should be minimal. With the stock market selling at around 10 times earnings right now, this is an opportunistic time to get in if you’re a buy-and-hold, Warren Buffett style, investor.
