May 18th, 2006

Major Stock Market Correction has Begun

I didn’t know how right I was when I wrote my blog yesterday, “Major Stock Market Correction in the Offing?”. But yesterday (May 17), the stock market indexes took a major beating with the DJ-30 declining 1.88%, the SP-500 declining 1.68% and the NASDAQ declining 1.5%. The declines are steeper when they’re measured from the beginning last Wednesday. The charts through yesterday’s close are impressive (I’ve also linked in the longer-term charts of my February 12 post for comparison purposes)

Standard & Poor’s 500 (.SPX) (click here for longer-term perspective):

On February 12, I wrote:

  • some may say that the index is part-way through completing a head-and-shoulder sort of top with a neckline at the 1249 support trendline.
  • the 50-day moving average has been violated and the 90-day moving average is converging with the 1249 trendline and is also at risk of being violated.
  • if there were a bounce at the support trendline, then on retesting the line, the major 180-day moving average could also be violated.

That involves many “if’s” but, if all come about, it could mean the beginning of a major market correction which could carry the SP-500 down 5% to 1200 in the best case or 8 1/2% to 1155 in the worst case.

The SP-500 continued to move up to 1325 by May 10 the tip-top of the head of this evolving head-and-shoulder formation. Subsequently, the 4.2% collapse of the index has brought it back down to within striking distance of the 1249 support trendline, a level that might be the neckline of that topping pattern. In order to reach there, the index will have had to violate each of the 50-, 90- and 180-day moving averages. At that point, a bounce would be in order. However, it wouldn’t be prudent to look at that bounce as a buying opportunity. More confirmation would be needed to prove that wasn’t merely the right shoulder of that top and that the further declines weren’t going to continue.

NASDAQ Composite Index (.IXIC) (click here for longer-term perspective):

On February 12, I wrote:

  • the Nasdaq Composite successfully broke through the upper channel boundary and appears to be retracing and testing that trendline as a support
  • here, too, the 50-day moving average was violated with the 90-day moving average trailing behind at 2213 and 180-day moving average at 2175. Both are critical possible support tests
  • the major support is the lower channel boundary currently at 2105, or 7% below current levels. Violation of that support has dire consequences for the Nasdaq index.

The NASDAQ did move up through the upper boundary of its long-term channel. However, on April 20, before the other indexes, the NASDAQ began it’s sharp retreat below all moving averages, below the upper boundary of that channel and, now, appears that it will test the support of the lower boundary of the channel. That lower-boundary trendline was begun in April, 2004, when the current bull market began, and has held against two previous attacks (April and October, 2005). At yesterday’s close of 2197, the index is 4.2% above the 2105 level indicated above.

Dow-Jones 30 (.DJI) (click here for longer-term perspective):

On February 12, I wrote:

“It’s hard finding a causal explanation but the Dow Jones 30 Industrials is the one index that appears to be attempting to breakthrough a resistance trendline at 10955, a trendline that originated at the high set in March 2005.
Perhaps this struggle reflects the fact that large caps, as reflected by the
DJ30 have lagged the stocks in the other two indexes.”

The index followed-through on that breakout and continued up to 11670 on May 10 when everyone began measuring the index in terms of the points needed to breakthrough its all-time high. But, the market is a bewitching sort of beast and now may be headed back to the resistance level that now seems to be turning into a possible support level neckline of a head-and-shoulders formation (although the other indexes violated similar support levels to head lower.

“Sell in May…”

Well, I followed my own advice and last week sold just over 40% of my equities. It so much goes against my grain that I’m sitting here with a large does of seller’s remorse, chomping at the bit to get back into stocks, watching the market trying to stage some sort of recovery and, I feel guilty confessing, hoping for further declines to prove that I was right to sell. Because, so far, it hasn’t had as significant an effect as I would have imagined for uprooting so many of my positions.

One of the biggest reasons is that I didn’t catch the exact top of each stock
I sold, but after they had already begun their declines. So, as of last night, I had saved 1.9% in market value on the stocks I sold; it would have been more but I realized an opportunity cost in one position, KFRC, that actually moved up 8.7% after I had sold it. During the same period, the 60% of stocks that I continued to own dropped 3.9%. So, one could say that had I converted everything to cash, I would have saved a weighted average 3.04% in equity value as compared with a buy-and-hold position. Let’s see what happens over the next several weeks.

CNBC Squawkbox Fantasy Portfolio Challenge Rankings

By popular request, here are the rankings of the top challengers. It was explained on CNBC this morning that Thomas Ko, who was a guest, had gambled everything on Escala Group bouncing back from its 82% drop the previous week after announcement that the Spanish government was investigating fraud and the resignation of it’s key officers. Thomasko claims he purchased the stock prior to Friday’s close; over the weekend, the company came out with press releases denying the charges and Monday the stock more than doubled. Luck? Insider information? Ability to place orders before the open Monday at prior close prices? We’ll never know but always suspect. You have to be pretty desperate to try to “catch a falling knife” or
hope for that knife to bounce …. as Escala did; so many, if not most, don’t.

5/12 5/15 5/16 5/17
thomasko 2,176,047 4,731,922 4,790,313 4,649,313
JCUPIUS 3,675,007 3,502,007 3,449,007
alfanyc 3,237,690 3,239,690 3,043,464
jorge27 2,505,022 2,491,185 2,631,769 2,906,460
vizion117 2,989,136 2,991,136 2,686,616
btumhhay 2,488,411 2,542,473 2,656,420 2,658,420
rjcline 2,483,507 2,614,360 2,495,156
tarheel1 3,048,681 2,488,681 2,478,201
firestarter0.. 2,789,763 2,701,177 2,475,324
KaptKos 2,461,775
traderandres 3,272,322 2,668,338 2,445,258
dc7mm 3,271,420 2,667,602 2,442,583
dseff 2,744,402 2,501,050 2,439,300
ungi 2,671,711 2,658,857 2,436,577
matt2403 2,710,021 2,712,021 2,433,778
audgar 2,386,454
Dexter101 2,542,284 2,544,284 2,504,070 2,375,528
utkmatt 2,375,100
bighugeguy 2,399,742 2,307,646 2,332,241 2,357,205
nukten 2,355,657

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