February 4 was a terrible day for key stock indices. The S&P 500 and the Dow Jones Industrial Average plummeted by more than two percent each and broke below important support levels.
That day was also Janet Yellen’s first day on the job as chief of the most important central bank in the world.
Was Wall Street giving Yellen a message? Was that message, “Think twice before pulling back on money printing”?
While the severity of the sell-off in the stock market in January and into February of this year has caught many by surprise, to us, it was one more of those “I told you so” moments. And it should have been of no surprise to our readers at all, since we’ve been “singing the blues” of an overpriced and overbought market for months.
Here are four important points my readers need to know about the stock market:
Looking at the bottom of the chart below, you will clearly see an increase in stock market trading volume. As the stock market went down in January and into February, volume increased. When volume rises sharply during a stock market downturn, it means panic selling is setting in. February 4, 2014, was the highest volume day on the Dow Jones Industrial Average in about five months.
Chart courtesy of www.StockCharts.com
Secondly, the Dow Jones Industrial Average has fallen below its 200-day and 50-day moving averages, as I’ve circled in the chart above. This move is considered bearish among technical analysts and suggests stock market sentiment is turning negative very quickly.
Thirdly, insiders continue to aggressively dump the stocks of the companies they work for. In January, the insider sell-to-buy ratio—the number of shares sold compared to shares bought by insiders—was 21 to 1. (Source: “Market Insider Activity,” CNBC web site, last accessed February 4, 2014.)
This means that for every one share insiders purchased, they sold 21 shares! If corporate insiders would rather dump the stocks of companies they work for as opposed to buying those stocks, what does that tell you about their confidence level?
Finally, the economy is in the dumpster, and it’s getting worse.
Manufacturing is getting soft fast: the Institute of Supply Management reported its Purchasing Managers’ Index (PMI)—an indicator of where manufacturing activity in the U.S. economy is going—declined 5.6% in January.
Consumer spending is pulling back: auto markets in the U.S. economy reported auto sales in January declined to an annual rate of 15.24 million units. This rate has been declining. In November, it was 16.41 million. (Source: Motor Intelligence, February 3, 2014.)
Dear reader, in the weeks ahead, you will hear commentators say that the stock market correction is over, that stocks are a good buy again. I’d be very cautious about taking that advice, as it won’t take much for the stock market sell-off to become an outright stampede out of the stock market.