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Why the Market is Down Today

5/15/2014

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"Everything seems to be going on sale today.  Are you buying?"
Why the Market is Down Today
  • US Industrial Output fell at its fastest rate in more than 18 months in April as factory production slumped
  • Walmart (WMT) and Kohl’s (KSS) both released earnings – both below analyst estimates – both blamed the weather on their miss
Reasons to Worry
  • Fall in US Industrial output dampens hopes for a big jump in economic growth after a winter slowdown
  • Markets are at or near all-time highs
  • Momentum stocks have been hit hard (biotech/other healthcare, social media)
  • China
  1. Possible nationwide property bubble is on the point of bursting
  2. So far this year, newly started construction projects fell over 22% compared with the same period last year
  3. Retail sales growth has slowed
  4. Much like the US real estate bubble, when prices stop rising (or in China’s case – now begin to fall), the effect can cause a snowball effect
  5. Chinese real estate, when coupled with related industries such as cement, steel, and other construction materials makes up about 16% of GDP (real estate alone is 13% - roughly double the US share at the height of the bubble in 2007)

Reasons Not to Worry
  • New applications for U.S. unemployment benefits hit a seven-year low last week while consumer prices recorded their largest increase in 10 months in April, pointing to a firmer economy
  • Although the S&P 500 is currently holding at its 50-day moving average (it  barely dropped below it earlier today), you only need to be concerned if it drops below (and stays below) its 100-day moving average (1st point of support) and the 150-day moving average (2nd point of support) – see chart below
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1-year chart of S&P 500 - note that index consistently holds at the 100-day moving average (green line), with one instance of dropping to the 150-day moving average (brown line)
  • Also note in the above chart that the 50-day moving average provides absolutely no evidence of support or resistance over this 1-year period
Suggestions/Recommendations
  • Keep in mind that markets have been mostly good the past 5-days and a steady increase throughout today may be likely
  • Don’t buy yet, markets are just shy of all-time highs.  Start buying at the 100-day moving average point and continue buying until it drops to the 150-day moving average
  • Don’t worry about the US industrial production data as it is very cyclical and manufacturers may simply be compensating for overproduction from 2013 – only worry about China
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    Spencer Sargent

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