The concerns we noted in our August article regarding the quality of the new high that was notched on July 17th came to fruition in mid-August, with the NASDAQ Composite falling 18% in straight six sessions. While there are a multitude of things used blame the decline on, including the weakening of the Chinese economy and stock market, the exit of Greece from the Eurozone, and the continuous chatter of the Federal Reserve raising interest rates, the reality is that the real reason behind the correction was that it was long overdue. While this type of action is sensational, frightening, and unnerving, it is very typical of a short-term bottom. Monday, August 24th’s extremely volatile decline had all the earmarks of a climactic low; a very large intraday trading range of 8.57% for the NASDAQ Composite and 12.80% for the small cap Russell 2000 Growth Index.
Both had significantly increased volume and a closed in the upper half of their trading ranges. This led to a massive swing in investor psychology to the negative, registering levels of pessimism which haven’t been seen in five years.
What to do now? In our estimation, the best course of action for now is to do nothing. Assuming that the low is in (key word is “assuming”), it is too late to sell stocks and, due to the technical damage done to the market, it is also too early to buy. As has been the case in previous market scenarios of this nature, a lengthy period will likely be required to establish a new trend. Only time and price will tell.
Disclaimer: Rocket Capital Management is a registered investment adviser. The comments presented do not constitute personal advice and are not intended to be a solicitation for the purchase of any individual securities or investment strategies. All investing involves risk. Please consult with a registered adviser before making any investment decisions.