Today the S&P 500 gapped down, but then recovered to close at an intraday high, showing that bargain hunters are still active. So is the selloff over? I don’t think so. I’m anticipating more down days as a second wave of COVID crests ahead of the November presidential election drama.
The downturn will likely continue until a second round of stimulus is passed and progress on a vaccine is affirmed. That could mean heavy volatility and selling extending into October. Also, if this is a rotation out of overbought Tech stocks and into Value, then the NASDAQ still has further to decline.
For now, I’m remaining patient and not buying this dip.
September is normally the most volatile month for the stock market. Today’s decline is a confirmation of that notorious reputation. This pullback should come as no surprise, the market has gotten overheated to near levels of irrational exuberance. Amateur and professional investors alike have been recklessly buying into stocks with nonsensical valuations- Tesla, Zoom and Peloton to name only a few.
So how low can it go? I have no idea. Those that attempt to accurately pinpoint stock movements are either deluding themselves or lying to you. At best we can only assess probabilities.
I haven’t purchased this dip, yet. For now, I’m holding out to see if the retreat approaches a technical correction of near 10%, with the S&P500 around 3200.
[ NOTE: Before today’s drop, over half of S&P500 stocks have been in a technical correction. The recovery has been extremely bifurcated. Many stocks still qualify as a “value” play. Listen to the latest podcast episode for more details- https://www.wealthsteading.com/316 ]
I don’t know if I’ll have the patience to wait for a 15% drop, roughly 3000. At that level, the S&P500 would rest at “fair value” given estimated earnings for next year. I would consider that an excellent long term entry point. It’s also probable, given a VIX above 30 and election uncertainly.
The panic of a flu season induced COVID 2nd wave could result in a 20% correction. [ see chart ]
So…my advice is assess the probabilities, pick a value that you’re comfortable with, and if the drawdown materializes, buy the dip. I remain optimistic that after the election, regardless of the winner, the markets will rally into 2021…driven by low interest rates, easy FED monetary policy, continued stimulus, and benign corporate profit targets.
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