IT LOOKS LIKE THE STOCK MARKETS IN THE U. S. ARE IN “CORRECTION” TERRITORY; BUT, IN ASIA AND OTHER DEVELOPING MARKETS, THINGS ARE EVEN WORSE.

Today, sellers piled-into Friday’s already depressed market, sending stocks down a great deal further in late afternoon.  The Dow Jones Industrial Average fell 3.1% on the day, to close at 16,459.70, or just a little more than ten percent below its recent high.  The broader-based Standard and Poor’s 500 fell below the psychological 2,000 level, closing down 3.1%, at 1,970.89.  But, that was just a little more than seven percent below its recent record high.  And the tech-heavy NASDAQ closed down by 3.5%, at 4,706.04, and nearly ten percent below its recent high.

The importance of a decline of ten percent, at least in market parlance, is that a drop of that magnitude is referred to as a “correction”.  Remember that the stock market has many participants.  Small investors and large, those with market savvy and those without, and many, many types of institutional investors. The point is:  there are always buyers and sellers; but, just at what price?

In many developing markets, oftentimes ones with less financial sophistication, the decline has been much more substantial.  China for instance, had had a significant market bubble earlier this year, with the Shanghai Composite Index (its major Mainland market) having appreciated by over 150%, at the time Stock valuations, the price-to-earnings ratio (i.e. how many dollars you pay for one dollar of earnings) was trading around 70.  For comparison, on the major U. S. indices, the P/E traditionally trades in the teens, and is now even somewhat lower–following the correction.

Now, going back to those many potential buyers and sellers, sometimes it takes a correction to encourage those wanting to cash-in their assets, or at least a portion of them, to do so.  Likewise, lower prices often encourage potential buyers to step-in and support the lower prices.  There was one other thought that I had when I heard that sellers were piling-on, late on a Friday afternoon.  Was the late afternoon fire sale a “Capitulation”?

Capitulation is more of a theoretical concept–and quite difficult to identify.  It is thought of as a point when everyone who had considered selling their investments, has done so.  And, if that turns out to actually be the case, then the market would be expected to have reached its bottom and, at some point, begin to build upward support from that point.

So, if you’re feeling frazzled, take the weekend off.  We’ll start this back-up again on Monday.

NOTE:  This week has brought back memories of how much fun it was (not!) to be a financial advisor during the 18 month Great Recession, when swings in the Dow of some 1,000 to 1,200 were quite common.  For instance, one day I left the office at 3:30 PM and noticed that the Dow was trading up by 250 points.  At least some good news for a change!   When I checked that night, the Dow had posted a 300 point loss when it closed at 4:00 PM..  A 550 point reversal in just 30 minutes.  I do not, however, expect a reoccurrence.

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  1. #1 by Paul Huber on August 22, 2015 - 2:27 PM

    Well said

    • #2 by cheekos on August 22, 2015 - 2:31 PM

      Mr. Paul, thanks very much for visiting my Blog, and for commenting.

  2. #3 by cheekos on August 27, 2015 - 3:14 AM

    When you watch a big uptick, as part of (hopefully) a market rebound, be sure to do your Math. Let’s say that you originally started with $100 dollars, and the market dropped by ten percent. OK, then you had $90.

    And then, assuming that you just have $90, an uptick of ten percent would thus have brought your investment up to just $99. That wouldn’t quite be the $100 that you started with.

    Perhaps, just $1.00 doesn’t sound like a big deal. But, if you had saved over your working life to amass, let’s say, $250,000, that same one percent (f your nest egg) would amount to $2,500.

    Percentages are always based on your starting point on a single computation. So, your initial base was $100, and in the second example $250,000. But, in the rebound sequence, your base would only be $90, or $225,000 in the second example. On a rebound from a lost, the base is always lower–because the base was less.

    So, hold-off counting your chickens. Also tomorrow will bring another day–maybe Up and maybe Down.

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