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Market reacts to geoploitical rhetoric

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Stocks sold off on Thursday with a bit of a North Korea hangover. The Dow lost 205-points, which is actually less than1%, but once again the broader indices took the brunt of the selling as the S&P 500, Russell 2000, and Nasdaq fell 1.45%, 1.75%, and 2.13% respectively.

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The geopolitical rhetoric was likely the trigger for the sell-off and the VIX shot up 44% on the day. Emotional reactions can be reversed quickly, or get overdone with an extreme move depending on the situation. So I guess I'm saying that while we had a fairly sharp sell-off, the Dow lost less than 1% and could have more downside to go, but perhaps something like the Russell 2000 small caps index, which lost 1.75% on the day, is now down about 5.5% from it's recent highs, and that could be overdone.

When the market goes up, it tends to move higher longer than seems reasonable, but that's true on the downside as well so there's no drop dead support levels when volatility spikes and panic picks up. But if it reverses, it can happen in a blink of an eye.

Also, bull markets don't tend to die that easily. Dip buyers don't just disappear altogether. It's not uncommon to see an initial sell-off from near highs to rebound quickly, but once it rebounds, the bears take their turn to see if they can push it down again, and the battle begins again. Here's an example from 2012 where support broke, the dip buyers ran it up, but the bear jumped right back in after a one month rally.

After the close, one of the recent market leaders, NVIDIA, reported earnings and blew the top and bottom line estimates out of the water, and gave strong guidance, yet the stock dropped sharply after hours. That may be the nature of this market since that stock has tripled in the last year, and now that their numbers are known, after big expectations, profit taking makes sense. But this is a market leader now so keep an eye on it going forward. If bargain hunters come in, then we know the dip buyers are still there. If the buying dries up and the leaders are failing, then the market has a problem.

Nordstrom was actually up 3% after hours which is may be a bright spot for the retail sector which was down about 2.4% in yesterday's sell-off.

The SPY (S&P 500 / C-fund) hit the 50-day EMA with the late selling and it also moved below one of the intermediate-term support lines (red dashed). That big negative reversal day on Tuesday did indeed precede a decent decline as we suspected it could, but now we have to see if the dip buyers are still around as the indicators more toward some extremes.

The DWCPF (small caps / S-fund) has been hit hard and is reaching levels we actually saw back in February, after the big post election rally. It's nearing the bottom of its large rising trading channel after breaking sharply below the 50-day EMA.

The Russell 2000 is the main small cap index and this is already testing its trading channel support line.

The Dow Transportation Index broke down from that bear flag as expected, and now its testing the recent low. I suspect a test of the 200-day EMA is probable, but the question is whether that holds.

The EFA (EAFE Index / I-fund) pulled back sharply with the rest of the markets and is back testing its 50-day EMA.

The HYG had a bad day breaking below some key support levels. The credit market is are getting a bit nervous about the geopolitical rhetoric.

Fear is on the rise as the VIX closed at 16.0, well off those historically low 9's we had been seeing. The CNN Fear & Greed Index moved all the way down to 31. Not overly extreme but the second lowest reading of the year.

Source: Fear & Greed Index - Investor Sentiment - CNNMoney

The AGG (Bonds / F-fund) rallied as we might expect on day like Thursday in the market. The key here is that it closed back above that triangle formation.

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Thanks for reading. Have a great weekend!

Tom Crowley

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S&P 500 (C Fund)
DWCPF (S Fund)
Dow Jones U.S. Completion Total Stock Market Index (^DWCPF)
EFA (I Fund)
iShares MSCI EAFE Index (EFA)
AGG (F Fund)
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