Last week’s Capital Wave Forecast was a hard break from the bullish stance we’ve been enjoying.
I said on Tuesday, “This Capital Wave Forecast is your first warning. Markets are overly optimistic, have risen too far too fast, and are prone to a correction in the coming weeks.”
That abrupt turnaround last week came on the heels of a long weekend of research into how high and how fast benchmarks had moved up in the face of the coronavirus spreading, as opposed to the fake news out of China that infection rates were slowing.
Equities were moving higher in anticipation of a quick resolution to the spreading virus, mostly fueled by new cash plowing into “passive” funds.
That worked…until it didn’t.
What’s most worrisome now is the prospect of passive investors becoming “active” and selling.
We’re in essentially unchartered territory.
It’s not often markets get hit by an “existential” threat; in this case, it’s a real human existential threat.
Investors, when faced with unknowns – especially of this magnitude – take profits, which is all they’re doing now.
If calmer heads prevail, there will be analysts suggesting buying this dip. It’s just too early for that…at least from my perspective.
Profit-taking can lead to more of the same, which leads to net selling, which leads to big short selling by hedge funds and speculators trying to knock markets down, which often, but certainly not always, can induce panic selling.
We’re not anywhere near those follow-ons happening. But we could get there.
Here’s What You Need to Do to Prepare
Now’s the time to check benchmark support levels.
We already tested near-term support levels this morning and bounced off them, which is positive.
If we re-test near-term support and break those levels, there’s a good chance we could drop quickly to test far more important support levels.
For the Dow Jones Industrials Average, near-term support is 28,000.
If we can’t hold there the Dow’s next support, and it is major support is 27,000.
If we get to 27,000 on the Dow, it would be an 8.6% drop from recent all-time highs. That’s not unexpected in my reckoning, and if there’s any positive news on the coronavirus as stocks potentially drop there, that Dow level might be a good buy-in level.
For the Nasdaq Composite, near-term support is 9,200. Below that, there’s good support at 9,000. A drop to 9,000 would be an 8.5% drop from its highs.
The Nasdaq Composite led this bull run since 2009 and, if it falters, that’s a bad sign.
So far, so good this morning. We bounced of near-term support. But the day isn’t over and more importantly, the coronavirus’s impact is far from over.
That’s why this Forecast is your second warning.
Be safe out there. I’ll be back with you tomorrow.