Stock market must pass retest of lows to end funk

FILE - In this Aug. 25, 2015 file photo, specialist Michael O'Mara works on the floor of the New York Stock Exchange, in New York. As stocks swung wildly last month, average investors pulled a net $9.8 billion out of mutual funds targeting U.S. stocks and put $9 billion in the money market during the week ending Aug. 26, according to the Investment Company Institute, a trade group. The next week, the market rebounded and they reversed course, sticking $1.8 billion into U.S. funds. (AP Photo/Richard Drew, File) ORG XMIT: NYBZ135

In this Aug. 25, 2015 photo, the day stocks hit their low point for the year, specialist Michael O’Mara works on the floor of the New York Stock Exchange. (AP Photo/Richard Drew, File)

The market funk on Wall Street continues, and that has put investors in a funk, too. The stock market is a sinister place these days, with stocks sinking lower seemingly on a daily basis as red arrows dominate the tape.

Since late-August, it’s been all about the negatives: China’s weakening economy. Confusion over coming interest rate hikes from the Federal Reserve. Capital flight from hard-hit emerging markets. Talk of popping bubbles and the inability of the stock market to shrug off its first 10% correction in four years. Also hurting market confidence is recent talk of a threat of yet another government shutdown.

The negativity is palpable. And it manifests itself in all sorts of ways. The negative toll on investors’ psyches. It is visible in how quickly stock rallies dry up in bouts of profit-taking. And it adds to the sinking feeling that the once-winning strategy of buying the dips is part of another era.

Still, the stock market hasn’t really given up that much forward progress, considering it has tripled since the low in March 2009. At its worst point in late August, when this corrective phase first gripped investors after seemingly years of calm, the Standard Poor’s 500 stock index was off a tad more than 12%. A correction, yes. But not a rout.

Even after Wednesday’s 0.2% drop to 1938.76, the SP 500 is down 9% from its May 21 peak and out of official correction territory. But in pre-market trading Thursday, the broad market gauge was down 0.7% and again flirting with correction territory.

Maybe the pundits are right and the market has to retest (or go back down to the low point last month) the scary lows hit in August. That’s 1867. 61 on the SP 500.

If that’s the case, investors won’t know if the market has a comeback in it until that test is complete. If the market holds at the old low, the test will be passed satisfactorily and the market can start to move higher again. If not the market will get a failing grade and could tumble even more.

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