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Start of a Correction or “Buy the Dip”? September 7, 2020

Posted by Tom in Thoughts.
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Sept 4, 2020 – A significant and violent sell off last last week. The big question will be is this just the start of a correction or an opportunity to “Buy the Dip”?

As a background, this market, especially Tech stocks, were way overvalued. Note the “typical” price earnings ratio for major / S&P 500 stocks is around 22-23 for a Price -Earnings ratio when they get “over bought”. Apple (for example) had around a 34 P/E ratio earlier last week. And then we have Tesla, semiconductors, etc. So the stage was set, the question was really “when” a sell off would occur. The Japanese tech conglomerate Softbank was reported to have billions $ in U.S. tech company options and that started to raise big concerns. Regardless of “why” the market just sold off quickly.

click to enlarge

The 11090 level held on a closing basis, and that is important. Money & Volume Flow indicators did show weakness, but volume was not excessive for this range of a price movement. The stage is now set for a bounce come Tuesday late morning. But we’ll have to wait until Wednesday / Thursday to see if any bounce has “legs” to continue. Right now this could just be an opportunity to buy at lower prices or the early stages of a more meaningful correction. Currently it looks like a short term thing. We need to see what the major traders do in the next few days. Is there support here, or does more selling & volume come into play.

We do have some retail companies reporting earnings this week and those could set the tone for what shape the economy is in. The “back to school” shopping is a big unknown and not likely to be strong.

Stocks in the broad S&P 1500 index did surprisingly well. More more red and yellow, but the green / strong section still is in evidence.

Sector Strength showed a big change with the Tech leading sectors falling dramatically; now #22 on the list. The more defensive sectors rose to the top.

So a time to be cautious because this market will likely turn in either direction quickly. I did sell out much of the tech holdings on Thursday and placed a “light hedge” on the remaining positions. Very rarely do markets turn this quickly with little time for the “smart money” to sell into strength, so we may be in for a modest consolidation going into the U.S. elections.

Have a good week. …………. Tom ………..

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.

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