Major averages fell yesterday on higher volume with the S&P 500 bouncing off its 200dma. The sharp selloff was due to China's devaluation of its currency, sparking concerns about a currency war, though could delay a hike in interest rates by the Federal Reserve. The S&P 500's 200-dma is considered a "line in the sand" by many market pundits, and a point at which one must "buy the market" based on the fact that the index has held the line on prior pullbacks. This morning the S&P 500 will open below the 200-day line based on current futures action, putting that simplistic thesis to the test.
While a number of articles spoke ill of the omen behind yesterday's Dow Jones Industrial's death cross wherein its 50dma crosses below its 200dma, both the Dow and S&P 500 have done this a few times since 2009 though instead of it marking the beginning of further damage, such death crosses came near the lows of the market as quantitative easing has put a relatively shallow floor on the major averages.
But rather then asking if this time could be different and whether this QE-driven market is running on fumes, it is a far better use of one's time to stay focused on what your stocks are telling you to do rather than to engage in rampant speculation. We have seen numerous occasions since 2009 where the market looked as if it was going to fail badly yet found its floor faster than expected. But at some point, the market will correct substantially. Continue to take profits where you have them and keep stops tight. Don't let the market condition you into complacency and remain aware in the present.
Futures are lower by about -0.7% at the time of this writing due to China allowing its currency to fall for a second straight day. So while China's central bank said Tuesday’s decision was a one-off move, its decision to devalue the yuan for a second straight day spurs concerns that China's economy is worse off than expected, and that currency wars are afoot where China's economy battles to weaken its currency in a bid to spur growth and boost exports. That said, China's yuan has appreciated against major world currencies by 14% in the last year alone so its net 3% devaluation is relatively small by comparison.
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