Market Alert 2.5.2018

Scott Campbell |

Wow, what a day in the market!!!

The sell off from Friday continued with earnest today.  Most of the gains year to date have evaporated.  

It all got started last week with the good jobs, which showed that wages have increased significantly – 0.29% year over year.  That is the largest gain since 2009. 

The increase in wages raises concerns about inflation for the first time in many years.  Inflation could cause the Fed to raise interest rates more than anticipated.  Higher interest rates also raise concerns of the end of the market rally.  And much higher interest rates would have a definite negative impact on the economy.

Fears of inflation are well founded, but interest rates are still at historical lows.  And the Fed has been very clear that they will raise rates only as the data supports.  

The fundamentals of are all very sound.  And the outlook is very good as well.  And we haven’t even seen the full effects of the tax cuts.

Corporate earnings (the real driver of the stock market) have been very good across the board.

There have also been a few unique situations that caused certain stocks to drop significantly.

Apple made more money than expected, but failed to sell as many iPhone.

Google didn’t make as much as expected due to higher marketing costs.

Healthcare stocks sold off on the news Amazon is getting into the healthcare business.

Energy stocks sold off with the drop in oil prices.

One of the drivers of the crazy volatility today and in the past is technical.  These computer driven algorithms used by large hedge funds need to be restricted.  Because once the market drops, these algorithms kick in and start selling rapidly and then buying rapidly when the market drops to a certain point.  These computer programs significantly increase the volatility. There have been technical glitches in the past that caused significant drops in the market and even a suspension of trading.

Another driver of the volatility is negative sentiment that creates its own momentum.  The public has been talking about the market being overvalued for months.  And that a correction is way overdue.  Well, that sentiment, when the market first starts to drop adds to the negative momentum.  

Not sure what the next couple of days hold.  Since the economy is strong, it is only a matter of time before the sellers swoop in.  A lot of people have been waiting for a drop to get into the market or ratchet up their risk.  It looked like we experienced capitulation a couple of times at the end of the day today.  But with these algorithms a small, quick drop can turn into a crazy huge drop in a matter of a few minutes.

I will definitely let you know if I see something bigger developing, but for now, it appears as if we 

are experiencing a healthy market correction.  

As always, please focus on your long term goals, can call me if you have any questions or need any help.


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