Written by Nigam Arora via MarketWatch
The rout in the stock market should have you thinking about your next move.
Would you be prepared if the Dow Jones Industrial Average fell another 4,000-plus points?
That kind of decline sounds shocking. But it’s instructive because it points to an important element of investing: preparedness.
The Dow Jones Highs and Lows
The Dow has fallen more than 4,000 points from its high this year — all of it in the fourth quarter. In mid-October, I suggested that investors be prepared for a sudden downdraft, asking in a column “Would you be prepared if the Dow Jones Industrial Average were to fall 5,700 points?” I chose that number because the Dow fell 23% on Black Monday in October 1987, equivalent to about 5,700 points today.
I also warned against what passive investing can do to the market. If you are a regular reader, you already know this and hopefully took protective steps when the market was near its highs.
For today, the more important question is: “What to do now?” Let’s explore with the help of a chart.
Standard &Poors 500 Chart
Please click here for an annotated chart of S&P 500 ETF. Similar conclusions can be drawn from the charts of Dow Jones Industrial Average, Nasdaq 100, and small-cap ETF. Please note the following from the chart:
- The chart shows a number of warnings issued by The Arora Report at the market top and since then.
- All of the calls can be easily verified by anyone.
- The chart shows that RSI (relative strength index) is very oversold.
- When the market gets very oversold, sharp rallies often ensue.
- Based on a large number of factors, such as technicals, sentiment, put/call ratios, smart money flows, momo (momentum) crowd money flows, short squeezes, new economic data, positive notes from China and fundamentals, the stock market was set up for a sharp rally. Then the news from Washington called the setup in question.
- The setup for a sharp rally is still there if there is the slightest bit of positive news.
The Dow Jones: the real reason to worry
There is some slowing in the economy, data show. However, the real reason for the selling is that investors over-own popular stocks. The analogy of everyone on one side of the boat — which I explained regarding tech stocks to Becky Quick on CNBC — applies to all popular stocks and the indices.
Read the rest of the article on MarketWatch: What If the Dow Fell Another 4,000-Plus Points—Would You Be Prepared? | MarketWatch