Stock Market In A Correction- Could Monday Be Another Black Monday?

Oct 10: I sent out a note saying “Rally Under Pressure”
Oct: 19: Status Changes to Market In A Correction (Normally, a correction is defined when a market or stock declines >10% below a 52-week high. My definition is a little different. I look at how the major averages & leading stocks are acting)

Current Market Snapshot:
  • S&P 500: 
    • Broke below its 50 DMA on 10/19
    • Forming an ominous series of lower highs & lower lows forming
  • Dow Jones Industrial Average

    • Broke its 50 DMA line on 10/19
    • Negative for month.
  • Nasdaq Composite: 
    • Broke below and 50 day moving average on Oct 9 (had been support since early July)
    • Forming an ominous series of lower highs & lower lows forming
    • Then rallied back and failed to break above its 50 day moving average line which means support has become resistance
    • Took out October’s lows in the process
  • Most Leading Stocks are breaking down (AAPL, GOOG, AMZN, etc)
    • Housing & Financials continue to shine
Defense is king until the major averages trade back above their 50 DMA lines…
1987 Black Monday vs Today:
Looking at the 1987 Black Monday precedent. Stocks suffered heavy losses on the Friday before Black Monday in 1987. So that begs the question, could Monday 10/22/12 turn into another Black Monday? Short answer is yes, anything is possible- but it is not probable. Here’s why, there are a lot of differences between then and now.
  • 1987 the major averages were trading below their respective 50 & 200 DMA lines on the Friday before Black Monday (2012-All the major averages are above their respective 200 DMA lines)
  • 1987 the major averages were close to 20% below their 52-week highs. 2012 the weakest major average is the Nasdaq and it is only 6.1% below its 52-week high as of 3:30pm EST
    Bottom Line: 
  • The markets are in a much better place in 2012 then they were in 1987.
  • The strong rally we have seen is weakening and the technicals (explained above) and fundamentals (sluggish global economy, slower earnings, eurozone debt crisis, etc) are deteriorating.
  • The path of least resistance is lower as long as the major averages continue trading below their respective 50 DMA lines.

Trade accordingly,

Adam Sarhan