With the Dow Jones Industrial Average dropping as much as 900 points yesterday before recovering to close out “only” 500 points lower, many are speculating that there’s even more pain in store for investors over the coming weeks.
One of the big differences with yesterday’s plunge was the stocks that slipped the most. Earlier in September, tech and growth stocks fell the most during the market pullback. Yesterday, it was the cyclical stocks that were heavily tied to economic recovery.
Sam Stovall, the chief market strategist at CFRA, wonders if the possibility of a second lockdown has spooked investors.
“Things had to have changed for investors to be so nervous. With Europe starting to see a sharp increase in Covid cases, does that mean they’re going to reimpose shutdowns?”
He also says that the weak recovery from the early-September pullback indicated more drops before the market would finally march higher.
“Because the recovery from the earlier Sept. 8 low was so anemic, it was an indication that the market needed to go through more backing and filling before it’s ready to advance.”
Technical analysts are now pointing to the 200-day moving average as a potential battle line for the markets. That currently stands at 3,104.
Scott Redler, a technical strategist and partner with T3Live.com, says the S&P 500’s next test could be the psychological level of 3,200 before potentially slipping down to the 200-day moving average. “I would say there’s a high probability we at least test 3,200 if not the 200-day.”
He added that the S&P 500 chart looks to be forming a head and shoulders chart pattern, which is a negative sign for stocks. “That would give us a measured move down to 3,136,” he said.
Redler said the market has been flashing warning signs that a bigger sell-off was in store.
“There are four or five things that are nipping at the heels of the market,” he said. “In the last two weeks there have been many signals that this kind of action could happen.”
Paul LaRosa, the chief market technician at Maxim Group, also thinks a larger market plunge is in store. He said he expects the S&P could dip as low as 3,100, and Nasdaq could drop under 10,000 if it breaks support at 10,639. He said the Dow should see support at 27,450 but could slip down to 26,000.
Stovall added that the markets are in a seasonally negative time. This comes with September the worst month of the year on average. He also warns that with the end of the month coinciding with the end of the quarter, losses could accelerate as big investors rebalance their portfolios before the month-end.
Peter Boockvar, chief investment strategist at Bleakley Advisory Group, says we could be seeing investors shifting back to the “work from home” stocks as fears of a second lockdown grow.
“I think some of it is that [cyclicals] had a good month. I think you have the algorithms that say to buy the stay-at-home names after the drubbing that went on in Europe, with the possibility of the U.K. crackdown again, and what that means for growth. To me, this is an allocation shift. Let’s go back to buying Zoom, Walmart and Peloton and selling anything that’s leisure or travel-related. The sell-off in tech that started in early September started a very different tenor in the market. We were on a much more vulnerable footing going into today.”