The World Has Not Ended (Yet)

Monday morning, everything in the investing world appeared to be fine (aside from Greece, China, Brazil, Russia, and a few other disasters).  That day the S&P 500 closed at 210.59.  On Tuesday, traders became concerned that global growth was slowing and the world was going to end soon, or at least go into a recession, and they began selling.  On Thursday, the S&P 500 closed at 203.97, a loss of 3.1%.  Today it is likely to close in the 198 to 200 range.  In four days it will have lost almost 6%. 

It certainly looks like the correction we’ve been waiting for is here now. While world growth may be slowing, and China might only grow at 6.5% this year, we are not in for a repeat of 2008.  Our banking system is strong.  The US economy is growing at around 2.5%, housing is robust, car sales are back to pre-recession levels, and job growth has been good.  It is hard to step back and consider these facts when the market is in panic mode.  How bad is the correction likely to get? 

In the weekly chart of the S&P 500 below, I have identified three zones of support.  The first zone, around 204 has been broken.  The 2nd zone is around the lows of January at 198-200.  It is possible that this zone will hold and the market will bounce up next week.  The 3rd zone is around the low of last October at 188-189.  A decline to that level would signify a 10.7% loss from Monday’s close and an 8.5% loss for the year.  Could we go lower?  Yes.  Should you panic?  No, at least not yet.  Even though declines in the market are much quicker to occur than advances, rarely does the market travel in a straight line.  In the next few weeks, panic will give over to reflection and the talking heads will start mentioning bargains.  A good buying opportunity will be here soon, but for now, take a deep breath and prepare yourself for some turmoil.