Overnight, the Dow slumped 800 pts or 3.05% and the S&P500 by...

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    Overnight, the Dow slumped 800 pts or 3.05% and the S&P500 by 86pts almost 3% as the market grapples with the confirmation of the inversion curve (10 yr yields below 2 yr yields) signifying recession on the horizon. As I mentioned in my earlier post, a large single day drop in the Dow never usually ends up as a footnote in market history (we saw that in Feb18 and we also saw that in Oct18 as well as Mar19), it usually portends more losses thereafter , initially the denial (and some even went in to buy thinking it was a bargain) then another big down day like this more or less confirms the breakdown of this upcycle.  This time around, we even had the luxury of a few trading days to get out of harm's way. This appears to be how the market works these days - which suggest that unless you are in the right stocks (usually 10% ) Buy and Hold gets you nowhere. The market takes the elevator down and the escalator up, in a dysfunctional market environment held together by cheap money, the fear emotion is strong but greed grows as complacency slowly sets in after the storm (and the children will come out to play again)

    So the question now is where to from here?

    Two days ago I posted the following

    The DJIA dropped 390 points while the S&P500 lost 1.22% to close at 2883. S&P500 is just 1.3% away from retesting the 2844 low close on 5 Aug (after the 720pt drop in the Dow) and break the uptrend channel from 1st April this year.

    As I had feared, a large drop (720pts) as with other large drop, usually is not that once off nightmare and can manifest itself into further declines amidst initial bouts of continued optimism vs new found pessimism. IMO if this is not going to be a correction, we may see it end around the 2744 pts mark with strong support but that would be a further 4.8% decline from here. A correction defined as 10% would take the S&P500 down to around 2,723 which would be about 5.5%. There is a possibility that upon the threat of an imminent correction, we would get some statements coming out from the Fed or the administration to soothe the market but even then with injured participants, sentiment would remain fractured and fragile.

    But at 2840, S&P500 has just broken the support of 2844 (previous recent low following the sharp drop) and now looking to fall another 100 points to retest the 2740 zone , another 3.5%. That should be a strong support and let's hope that it is not breached, because if it does then there is a mini abyss below it. This impending correction is already likely to be worse than the previous downturn in early Mar19 in which the S&P500 dropped 200 points (it has dropped 186 pts so far from the peak of this cycle) . It could be as worse as the 258 pt drop we experienced in Feb18 (which was actually more brutal than what we see with microcaps now) - to match it it needs to go to 2768 (roughly where the 2740 support is at) . But will it be at par or worse than Oct18 when it fell 482pts before it stopped - if it does, that will take S&P500 this time around to about 2544 pts or another 10.4% drop from last night.

    So at a minimum, it could be like the Mar19 which fell short of being a correction or more likely a correction like Feb18 and hopefully does not morph into one like from mid Sep -end of 2018.

    If you recall a large part of the blame for the end of year 2018 crash could be attributed to the Fed - it didn't give the right messages and comfort to Wall Street. This time around it lies squarely on failed politicians and their failed policies, right around the world from USA to UK to Hong Kong to Argentina. POTUS today blamed the Fed chief but he only has himself to blame because his latest tariff imposition which caused China to toy around with its exchange rate, started this slump. Last night I saw CNBC panelist grilled Wilbur Ross, commerce secretary and he was beating around the bush , finally admitting that the latest delay in tariffs was a unilateral decision acknowledging it could hurt American consumers - but of course, the tariffs collected on Chinese goods which POTUS is saying that it is so beautiful will be passed onto to American consumers including the folks who voted and champion for him, it is like a "tax" , the average Joe or Jane in US is now hit with a new tax yet much of POTUS tax cuts had favoured the rich - but these average Joe or Jane continues to support him, go figure. Likewise in the UK, another form of madness- BREXIT- will likely go down to a No Deal Brexit the way Boris (BJ lol) is managing it - because he just expects the EU to concede (why would they?) . It seems rather clear that UK is not really talking and engaging with EU appropriately for a good resolution and likewise the US is not with China (China is probably sitting pat and let all the market turmoil fall flat on POTUS face now). So this impasse will be protracted as we also see with the HK situation (latest 300 Chinese armoured vehicles parked in central HK) , unlikely to restore investor sentiments in a short while.
 
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