Stock Market Plummet: Should You Be Worried?

Stock Market Plummet
iStock.com/OlyaSolodenko

Market Sell-Off Means New Opportunity

The world is not ending, folks, despite the Dow plummeting 660 points on Friday. The stock market is clearly adjusting after what was a ridiculous January, when the NASDAQ was up over 8.5% at one point prior to the selling.

The reading of the Volatility Index (VIX) broke above 17 on Friday after drifting at the 10 level for months, as the so-called “fear factor gauge” drove higher on heightened stock market anxiety.

Volatility Index

Chart courtesy of StockCharts.com

Advertisement

Now, it would have been awesome to just sit back and watch the stock market continue to ratchet higher, but that’s not how things work in reality.

You all made pretty easy returns over the past few eight years, thanks to the Federal Reserve pumping easy money into the monetary pipelines. But that is stopping.

The yield on the 30-year Treasury bond jumped over three percent on Friday for the first time since May 2017. The short end of the curve is also rising, as the Fed will likely raise interest rates at the March Federal Open Market Committee meeting, potentially followed by a few more increases in 2018.

And, as you know, the stock market hates a rising interest rate environment and higher bond yields, since it changes the calculus of the stock market and where to invest.

Just accept the fact that rates are rising. This will clearly impact dividend stocks in the stock market as investors decide between parking their capital in bonds or dividend stocks.

The way I see the current situation and stock market selling is that it will open up a nice opportunity to accumulate new positions of beaten-down stocks at more reasonable valuations, which are selling at a discount to the recent inflated highs.

It’s also possible that the stock market could retrench lower, given that, even with the current selling, the S&P 500 and NASDAQ are only off three percent to four percent from their highs. In past years, it wasn’t uncommon to see the stock market correct five percent to 10% prior to bottoming.

Dow Price Chart

Chart courtesy of StockCharts.com

The reality is that the massive tax reform will drive up earnings growth and make the stock market more reasonably priced. We are already seeing numerous companies make upward revisions in their earnings going forward.

As of February 2, the major stock market benchmarks relative to my targets were the following:

Benchmark Target
NASDAQ 6.32%
Dow 5.77%
S&P 500 8.62%
Russell 2000 12.9%

My thinking is that, as long as the indices hold their 50-day moving average, there should be no issues. The Russell 2000 is trading at its 50-day moving average, so be careful, as we could see a breakdown.

Dow Price Chart

Chart courtesy of StockCharts.com

50-Day Moving Average

NASDAQ 7,068.57
Dow 25,018.06
S&P 500 2,715.32
Russell 2000 1552.79

Analyst Take:

I wouldn’t read into the current selling too much. The stock market has returned some great returns so far, and any opportunity to see a market adjustment should be viewed as a better entry point for adding new positions.