What Happens Now? Wall Street Plays Its Favorite Game
Here's what investors should do now as downside momentum builds and key technical support erodes.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
Markets remain under intense pressure on Tuesday as concerns about technical conditions accelerate. The S&P 500 closed below its 50-day simple moving average for the first time since April 30, and the growth-stock proxy, Innovator IBD 50 ETF (FFTY) , is testing bear-market territory with a drop approaching 20% from its recent highs.
Last week, the indexes helped cover up much of the underlying damage in technology, AI, and cryptocurrency, but the ugliness became more apparent on Monday as breadth expanded to around 4 to 1 negative, the DJIA lost its safe-haven status, and it took out technical support at the 50-day.
What happens now is that everyone tries to predict a market bottom. It is the favorite game of Wall Street to try to guess the exact point at which the worst is over. It is also impossible to do. At this juncture, the best course of action is to assume that the downside momentum will continue. Even if there is a bounce, it will be tough to trust it to last for very long.
One of the great difficulties of this corrective action is its unevenness. Some areas of the market have already been decimated, with sizable losses and bear-market action. The Magnificent Seven (MAGS) group is under pressure but only down about 7% from its highs. Small-caps, speculative stocks, and cryptos have been laggards, but biotechnology and retail have had some good strength.
For months, the market ignored talk of an AI bubble, but there is growing acceptance that maybe there is some irrationality in the group. Sundar Pichai, CEO of Alphabet (GOOGL) , commented that "We can look back at the internet right now. There was clearly a lot of excess investment, but none of us would question whether the internet was profound. I expect AI to be the same. So I think it's both rational and there are elements of irrationality through a moment like this."
The market is embracing that view, but adjusting valuations and pricing is an extremely difficult task. While many AI companies still have great prospects, it is tough to determine which ones are still good values and which ones are in real bubbles.
What to Do Now
The most important thing is to protect capital and avoid letting losses grow too large. Making up losses is the most unproductive thing you can do. Don't rush to buy stocks that have broken down. Wait for signs of support and focus on buying them when they start going up. Do not just keep averaging down a losing position.
This market will offer great opportunities as this corrective action continues, but the challenge is to get the timing right. There is a natural tendency to jump in too early, and that can be deadly if you don't reduce exposure.
At the time of publication, Rev Shark had no positions in any securities mentioned.
