It was nasty on Monday for investors, as stock markets plummeted in a massive sell-off that drove major indices down between 7.0% and 11.85% in the case of the small-cap Russell 2000. The selling was triggered by a combination of an overbought stock market, given the five-day rally that saw the DOW rebound 19% from its recent low, and comments on Monday from the National Bureau of Economic Research suggesting that the U.S. has been in a recession since December 2007. While, until now, the U.S. recession was not technically considered to be one, we all knew the country’s economy and numerous sectors were slowing and were subjected to reduced spending.
The fact that only a small percentage of stocks are above their key moving averages is bearish. Investor sentiment continues to be extremely bearish and, unless we see a reversal in this, any rally would be questionable as to its sustainability.
In our view, it will be important to see if stocks rebound after the fire sale. We will see some an immediate oversold reaction to the selling, but the key will be how stocks react in the upcoming sessions given the realization that the U.S. and global economic slowing would likely cripple our country as we move into 2009.
The reality is that the news continues to be negative and supportive of buying. General Electric Company (NYSE/GE), a bellwether stock on the economy, reported on Tuesday that its fourth-quarter earnings would come in at the low end of its guidance. And, in the housing market, news from homebuilders and mortgage providers continues to be negative, indicating that the slump will continue.
Our view is that you should hang tight and wait to see how things develop. Do not chase stocks higher, as we are not positive on stocks at this time. Capital preservation is key. You may want to start to look at some tax-loss selling as we move towards the end of the year.