U.S. stocks have boldly entered correction territory, down 10% from their recent highs. So what does that mean as investors head into the weekend?
"I still don't think this is the big one," said Brad McMillan, investment chief at Commonwealth Financial Network. "I do have to admit, however, that it has come far enough that I am taking a closer look."
The S&P 500 this week broke below its 100-day moving average. It's still well above its 200-day moving average, but the indicator could be a useful tool of predicting where stocks might go should the S&P fall below the 200-day average line.
In a Feb. 9 note, McMillan pointed out that in 2000 and in 2008 when the S&P 500 broke beneath its 200-day moving average, "larger declines followed soon thereafter."
"What you can see, however, are the multiple occasions when the index broke through the 200-day average and then bounced back up - rather than declining further," McMillan said. Those times include major breaks in 2016 and mid-2015 and a minor break in 2014, plus a break in 2010 and one in 2011.
"While a break of the 200-day moving average can be a warning sign of trouble ahead, over the past 20 years or so, there have been about four false alarms for every real alarm," McMillan wrote. "This is why I start to pay attention then, but don't react. Chances are, even if we break the trend line, this is just another false alarm."
McMillan submitted that the "worry point" is 1,540 on the S&P and 22,800 on the Dow. "While we are above those points, we are actually not that far away," McMillan said. "It is getting really close to paying attention time."
But McMillan made it clear: it is not yet getting close to reacting time.
That time won't come until the stock indexes break below their 400-day moving averages, McMillan noted. "We are nowhere near close to those levels and I suspect we won't get there," he said, given a strong economy, rising corporate revenues and fairer valuations.
For now, investors can do their best to breathe a sigh of relief. It's only time to pay attention, not to react.
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