Our September warning of an October correction lasting until election day November 6th warranted a defensive posture for investors. Looking at the 200 day moving average (dma) of stock indices partially illustrates our subdued current outlook. Halfway through the stock markets October plunge we witnessed the break of the vaunted 200 dma of price. Our observation of the 20+ year track record of the 200 dma indicates that over 70% of the time the breaks of this moving average are brief and painless for investors to remain fully invested or add new positions. On the other occasions when stocks break under the 200 dma the price correction is often over 10% to as much as 50+% and requires months before the market can declare the low has arrived and its safe to invest. The current market correction is down roughly 11% intraday form the October 3rd peak and 6% below the point when this moving average was broken, so statistical there is time and price potential for more pain in the months ahead.

A closer look at the 2018 daily SP 500 Index shows how money managers and analysts have a disproportionate focus on the 200 dma. We only look at it from a counter psychology aspect since so many others make this metric a self-fulfilling factor of their forecasts. In the market plunges of February, April, May and even early October of 2018 its clear that investors drew a line in the sand and started Buying stocks as the 200 dma was tested. There isn’t anything magical about this convergence, only that when its talked about too much as a level of support, it sets up market psychology for a stop loss fund selling wave as the breakdown becomes more evident. On the latest decline below the 200 dma we finally have a market psychology that is becoming overly pessimistic and conducive for bottoming action in early November. The late January – early February correction of 12% was larger than this October drop, so far. However, that early 2018 decline held the 200 dma and was far too quick to generate deeper oversold levels of pessimism. This correction is already generating more pessimism than at the 12% lows in February and we would expect even more negativity before this market is ready to continue the Bull market.