A mixed batch of economic data Wednesday and concerns over the first reported case of Ebola in the U.S. triggered one of the biggest stock sell-offs in months.
The Nasdaq composite, down 1.6%, fell definitively below its key 50-day moving average for the first time since April 4.
The S&P 500 dropped 1.3%. The IBD 50, a proxy for high-growth stocks, lost 2.5%. The Dow utilities, often a gauge of investor defensiveness, rose 0.4%.
The NYSE composite, hit with sharp losses among oil, transport, machinery, lodging and chemical shares, fell 1.2% and sliced through its long-term 200-day moving average for the first time since Nov. 14, 2012.
The heavy selling in higher volume across the board marked yet another distribution day — the Nasdaq’s eighth in recent weeks. That alone justifies a downgrade in IBD’s current outlook to “Market in correction.”
A new reader may ask: Does this mean I should immediately sell everything in the portfolio?
No. Deconstructing a portfolio typically goes in steps.
First, getting off margin is imperative. Raising some cash by cutting losses at 7% to 8% or even less is wise. And nailing down profits in some of your stocks, even if they haven’t yet reached 20%, gives your account a valuable cushion to ride out any further market downside.
It makes sense to at least take partial profits in your biggest winners if they have already scaled a course of three or more genuine bases and are showing slippery footing in their latest breakouts. Assess each stock on its own.
Uncertainty over the future path of interest-rate policy has certainly sparked numerous pullbacks in the market. The Federal Reserve is expected to completely remove its massive bond buying program later this month.
Yet over the past year and a half, the market has also found the mettle to rally soon after the options market showed spikes of panic.
For instance, the put-call volume ratio hit 1.15 or higher on both April 11 and Aug. 1. The Nasdaq was in the middle of a 9.7% pullback in the first case; in the late summer, its correction was limited to just 3.7%.
The Nasdaq lies just 4% below a multiyear high of 4610. Yet, the small-cap S&P 600′s struggles reflect a market that’s also in an intermediate-level correction. The S&P 600, down 1.3% Wednesday, stands 10% below its July 1 peak.
Indeed, other markets have pulled back. Commodities as a group have lost all of their gains since Jan. 1. (See chart on B12.)