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Crushed

sox

The Semiconductor stocks were absolutely crushed today, taken out back and shot. The chart above shows that the SOX index was down almost 7% today based upon a forecast by Microchip Technologies – a bell weather in the industry – that said the cycle is over and a bear market for tech looms large. Their stock was down 12.5% today – a horrid day for an otherwise reliable investment.

But this raises the question “what is really happening in the market?”

To understand what the typical company in the S&P 500 is doing, I like to look at the graphs of the number of companies trading above their 50-day and 200-day moving averages.

Here is the graph of those trading above their 50-day moving averages:

above-50-day

This graph is telling you that of the 500 companies followed by the index, only 145 of them are trading above their 50-day moving average, down from nearly 450 this summer.

Here is the graph for the 200-day:

above-200-day

You can see a similar thing here, with only 268 trading above their 200-day average compare to 450 this summer.

What these graphs are telling you is that most of the companies in the index are in correction mode.

The S&P 500 Index is an interesting thing – it is down a bit under 6% from its high – but most of the companies being traded are off SIGNIFICANTLY more than that. The reason for this is because the index is a cap weighted index and the top 50 companies in it have provided all of the upside to the index this year with the bottom 450 providing the downside.

Things are even uglier in the NASDAQ which is down roughly 10% from its high.

Corrections like this generally shake out the weak hands and provide opportunities for everyone else.

We raised cash at the top of the market and will have it to buy shares of our preferred companies significantly lower than they were trading just a couple of weeks ago. This is a good position to be in so we are not too upset by this volatility – its part of investing in the stock market and part of the process of managing your risk.

Next week, I will be discussing what some of the economic indicator graphs I follow are telling us about the possibility for a recession. With the 10-year treasury interest rate being pushed lower by the record amount of money flowing into bond funds, and Germany (Europe’s economic engine) staring a recession in the face – we want to make sure that the current pullback is temporary and not something that could turn into a much larger event.

More next week!

Mark