Wednesday, July 25 Market Assessment

It's Time to Get in Out of the Rain!

After a long, steady upward climb, the markets are turning down. It may only be a brief correction, but it's going to be nasty for a few weeks. Yesterday was brutal.

Key breaks of closely-watched support levels in several of the major indices triggered a massive sell-off across the board Tuesday. After gapping lower on the open, a reversal attempt in the Semiconductor Index ($SOX) helped stocks try to recover at mid-day. But the bears took control again in the afternoon, sending the broad market to new intraday lows. Small-caps got pummeled, as the Russell 2000 Index swooned 2.8%. The 2.3% loss in the S&P Midcap 400 Index wasn't far behind. The S&P 500 plummeted 2.0%, the Nasdaq Composite 1.9%, and the Dow Jones Industrial Average 1.6%. All of the major stock indexes closed near their worst levels of the session. Not a single important stock fared well, unless you include AMZN after the close, when they recovered the six-point drop they suffered during the day.

On a technical basis, one of the worst things about yesterday's selling spree was the accompanying surge in turnover. Total volume in the NYSE rushed 30% above the previous day's level, while volume in the Nasdaq similarly jumped 22%. The 2.07 billion shares that traded hands in the NYSE was the highest volume day in the exchange since stocks formed their recent bottom in March. The sharply higher volume that accompanied yesterday's losses caused both the S&P and Nasdaq to register another bearish "distribution day." It was the third such day of institutional selling within the past five sessions. One more this week and we can declare an official "bear market".

Market internals, particularly in the S&P, were about as nasty as could be. Declining volume in the NYSE crushed advancing volume by a margin of 14 to 1. The Nasdaq ratio was negative by a little more than 6 to 1. Further, the $TRIN reading in the NYSE was only 1.6. Levels above 2.0 to 2.5 are often considered extreme and unsustainable, but yesterday's reading of 1.6 tells us the selling was steady, not indicative of massive panic selling. The bottom line is that, despite the bloodletting, market internals gave no sign of a short-term bottom yesterday.

So what we have is not storm warnings, but a 50-mph gale beating on our windows. The upward trend is over. It will resume later this year, in my opinion, but not anytime soon.

Summary of Outlook: Short-term bearish, long-term bullish