What Last Week’s Big Sell-off Means for the Market

If you were looking for a reason to be cautious about the financial markets, then last week’s action in stocks offered you one giant yellow light. The selling in domestic stocks nearly across the board pushed the major U.S. averages below their 50-day moving averages last week, a first salvo in what could well be a wider sell-off.

Now, the breaking of the 50-day average does not mean that this current bull market is over, or that U.S. stocks now are headed into a downward spiral. The price action on Monday certainly was a positive for the bulls; however, what I do think is important is to view last week’s big selling as an early warning for the markets at large.

Take a look at the charts here of the price action during the past 12 months (through 4/14). As you can see, stocks in the SPDR S&P 500 (SPY) recently fell below the 50-day average, as did stocks in the PowerShares QQQ Trust (QQQ).

I do think the breakdown in the domestic equities last week does require you to take a look at how much equity exposure and risk you have in your portfolio.

Now, one thing to keep in mind is that every significant market pullback during the past 15 months actually has been a buying opportunity. If recent historical trends continue, then the yellow warning light we saw last week also may be a buy signal. However, I do suspect that the characteristics of this current pullback should make even the most ardent bulls a little worried.

Characteristics such as a very sharp slide off of their recent highs in market-leading segments such as biotech, semiconductors and other widely held stocks all could be a very bearish harbinger of things to come.

Then we have the action at the Federal Reserve, with the central bank basically sticking to its “taper” guns and withdrawing the monetary stimulus candy by $10 billion per month. Finally, market leadership is shifting from growth to value, and even to Treasury bonds, yet another indicator of a change in the current market milieu.

One area of the market making big headway of late is commodities. The charts here of the GreenHaven Continuous Commodity Index Fund (GCC) and the DB Commodities Tracking Index Fund (DBC) are prime examples of sectors trading in the opposite direction of stocks.

The bull market in commodities is one of the segments we currently are taking advantage of in my Successful Investing advisory service. If you’d like to find out more about what commodity ETFs to own, then I invite you to check us out today!

Hall Wisdom

“The information is in the people, not in your head.”

— Edward T. Hall

The prominent anthropologist wasn’t referring to the movement of financial markets in the quote here but, in fact, this bit of wisdom from Hall does apply to stocks. That’s because regardless of which way you think the market should go, sometimes people act to buy and/or sell securities in counterintuitive ways. Realizing that “the information is in the people” signals for us to pay attention to the price action in stocks — and not on how you think or want the market to behave.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter from last week about what 2014’s lower interest rates mean for investors. I also invite you to comment about my column in the space provided below.