Stocks took it on the chin Friday with the Dow Jones Industrial Average shedding 400 points, dipping below 16,000 for the first time since September. The tumultuous week could signify the beginning of a larger correction. Anticipation for a rebound in the stock market has all but evaporated as investors have waged another massive selloff amid deepening fears of a global economic slowdown while crude oil tests new lows again.
The international benchmark Brent crude plunged below $30 a barrel again on Wednesday, a level at which it is current buoyed. Stocks in the three major indexes are struggling with the Dow down 7.88% for the year, the S&P 500 down 7.75% and the Nasdaq composite index down 9.89%. Even the Russell 2000 index has plunged by over 20% from its high of last June.
This all prompts questions of whether this correction will continue and is headed for an even larger decline?
The panic selling by investors is driving the current correction and is not the outcome of actual stock market valuations and fundamentals failing, said Jon Ulin, a managing principal of Ulin & Co. Wealth Management in Boca Raton, Fla.
“While the markets may be rational over time, people are not,” he said. “We are not in a recession, nor is there a current catalyst for one on the table in 2016. Whether or not the DJIA index goes down another 500 points should not concern you if you are a disciplined investor in a diversified portfolio with a long term mindset.”
Dow To Stay in 15,000 Range
The Dow could trade between 15,370 and 18,351, said Carl Sera, a portfolio manager with Covestor, the online investing marketplace, and research director at Sera Capital Management, a registered investment advisor in Annapolis, Md. If the Dow dips below the August 2015 low of 15,370, the decline could force the index to plummet in a “measured move to 12,389, or a 32% drop from the May 2015 high,” he said.
“It represents a level where value conscious investors would be buying,” Sera added.
The extreme declines in the Dow include the 80% decline from 1929 to 1932 and the four drops in excess of 45% in 1937, 1973 to 1974, 2000 to 2002 and 2007 to 2009. The “run of the mill drops” of 7%, which have occurred in 2016, do not occur often but are not unheard of. There have been 36 of these since 1950, and nine of them resulted in drops of 20%, he said.
“That’s the stock game,” Sera said. “It’s a game where buying the dip works like magic until it doesn’t, and investors have no idea when the magic won’t work.”
The market is likely to test several levels, said Matthew Tuttle, the portfolio manager of Tuttle Tactical Management U.S. Core ETF (TUTT). The first level for the Dow is the October 15, 2014 low of 15,855. If the Dow does not remain at that level, then the August 2015 intraday low of 15,370 could occur, he said.
“If that doesn't hold, the last line in the sand is the February 2014 low of 15,340,” he said. “That level has to hold for the bull market to stay intact. If it does, then we will probably rally to new highs before the bear market starts. If it doesn't hold, then watch out.”