Why Did the Stock Market Fall Today?

With the NASDAQ down nearly 2%, the DOW down 1%, the S&P 500 down 1%, and the Russell 2000 down 1%, the obvious question is, “Why did the stock market go down today?” The news stations got the reason wrong. There’s actually a hidden secret in the stock market called “stock market breadth” that explains why the stock market crash started today. This stock market crash will most likely continue until market breadth has been fixed. Technical analysis provides solid stock market predictions for where the market goes from here. By looking at both the daily technical analysis as well as the monthly technical analysis, we can get an accurate stock market forecast.

So why was the stock market down today? And more importantly, where is the stock market going to go from here? Are we going to continue downward, or was Tuesday just a one day pullback. Well I’m Stock Curry. I’m a former Merrill Lynch and Morgan Stanley investment banker, and I have over 25 years of trading experience. And these sort of pullbacks are very common. So let me show you the reasons why the stock market fell on Tuesday, then let’s take a look at some of the technical analysis to try to figure out where the stock market might go from here.

If you read the headlines that came out today, you’ll see that the Dow fell 500 points. The Nasdaq shed nearly 2%. And the reasoning that a lot of the news stations gave for the stock market falling was because Apple brought the stock market down. While Apple did bring the stock market down on Tuesday, it’s not the real reason why the stock market fell. There were actually two important economic data points that came out on Tuesday, both of which were bad. And that’s the real reason why the stock market went down on Tuesday. First, we got the ISM US services activity, which showed a growth slowdown in February. At the same time, we got the US factory orders, which fell more than forecast in January. And the December print was revised downward as well. Both of those things are really bad for the US economy.

The reason is, services are slowing down at the exact same time that manufacturing is slowing down. And with both slowing down at the same time, this is really bad news for the US economy and GDP, because the biggest problem that we’re running into right now is that inflation remains elevated. And the most recent inflation reports have increased. In fact, they’ve gone up at the fastest pace in over a year. On top of that, interest rates remain extremely high as the Fed tries to fight inflation. But as the economy slows down, this really puts an hamper on the Fed.

The Federal Reserve has been trying to get inflation down below 2% without causing a recession. That is the fairy tale story of the soft landing. Now, it’s never been done before in history, but the Federal Reserve believes that they can do it this time. But if the services sector and the manufacturing sector are both falling at the same time, that is a major problem because it shows the economy is slowing down while inflation is going up. And all of that leads not to a soft landing, but a hard landing. In other words, it greatly increases the likelihood that the US economy is going to experience a recession here in 2024. And that is not good news for the stock market. And that’s why stocks fell so much on Tuesday.

At the same time that we got bad news here in the United States, we also got bad news coming out of China, as Apple’s iPhone sales plunged 24% in China as Huawei smartphones resurged their business. Apple is losing market share in China in the exact same way that Tesla is losing market share in China. And that is not good news for one of the largest companies in the US stock market. That’s why Apple was down so much on Tuesday. But we also got some bad news from Tesla. Tesla shares slipped 4.5% after a suspected arson attack halted production at their Berlin Gigafactory. Now, Tesla shares were most likely going to fall anyway, but this was just another nail in the coffin for the stock market on Tuesday.

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Now let’s get into the next question that everybody has. Where is the market going to go from here? Was this a one day pullback, or is this a start of a much larger crash? To answer this question, let’s start by looking at investor sentiment. For over a month now, investor sentiment has been sitting solidly in the extreme greed stage. But with today’s pullback, it fell into the greed stage. Now this is an oscillating indicator. It runs between extreme fear and extreme greed. And very typically, once it hits extreme greed, it will start to oscillate back towards extreme fear. And today’s pullback from extreme greed down to greed is an indicator that we might be oscillating back downward towards that extreme fear. And that could mean that the market is set up for a longer term pullback or market crash. But it’s not all bad news.

There’s actually a hidden secret in the stock market right now, which is actually showing that the stock market is stronger than ever, and actually rising, even as the market indices go down. You might recall how we’ve been talking about for the past year and a half, how the rally in the stock market has been very narrow. That is, it’s been limited to about ten stocks in the stock market. Those ten stocks include the Magnificent Seven, a few AI stocks, as well as a few Dow stocks such as Lily. And those stocks have been rallying, bringing up the entire stock market, including the Dow, the S&P 500, and the Nasdaq. Even as most of the more than 9,000 stocks in the stock market have traded near their October 2022 lows, this created a fallacy in the stock market, making it appear as if the entire stock market was rising, when in fact only about ten stocks were rising, and over 9,000 were trading flat or even continuing to go down. But now that is all changing.

While the tech rally is losing steam, the stock market breadth indicator is at its strongest level in years. Stock market breadth is a calculation of the number of stocks that are rising versus the number of stocks that are falling. And for a year and a half now, the breadth has been horrible. Most stocks in the stock market have been falling, with only about ten rising. But now all of that’s changing. Those ten stocks that rallied so much over the past year and a half are now going down, while the other 9,000 stocks in the stock market are finally starting to rise. And while this is great news for the overall stock market – it is needed and necessary in order to have a long term sustained bull run in the stock market – it also means that the stock market indices, the Dow, the Nasdaq, the S&P 500, are going to go down.

Remember, those indexes are nothing more than a calculation. They’re a number, a mathematical formula. And those calculations are heavily weighted towards the largest ten companies in the stock market. The largest companies in the stock market, the Magnificent Seven, make up 50% of the Nasdaq weighting and 25% of the S&P 500 weighting. So when those seven stocks start to go down, the market indices, the S&P 500 and the Nasdaq, also go down, even if the other 493 stocks in the S&P 500 and the other 93 stocks in the Nasdaq are all rising. And that is exactly what we’re starting to see.

We’re starting to see the magnificent seven stocks that have rallied the indexes up by themselves for the past year and a half starting to go down, and that means the indexes are starting to go down as well. But it also means that the over 9,000 stocks in the stock market that have traded pretty much flat for the past year and a half, are now starting to go back up. And just this year, the Russell 2000, which is a composite of over 2,000 stocks, finally came out of its bear market territory that it has been in for over two years. This is all great news. And as more and more money moves out of the Magnificent Seven stocks, as more and more money moves out of AI stocks, and gets moved into the overall stock market, this creates a very solid foundation for a long term bull market, and it helps us prevent another major crash.

Now that said, the Nasdaq has gone more than 300 days without a major pullback. Does that mean a shakeout is overdue? Well, yes, absolutely. A shakeout is due. But like we just talked about, that doesn’t mean most stocks are going to go down. In fact, if those ten stocks that have individually rallied over the past year and a half go down, while the remaining 9,000 stocks go up, that actually fixes the pullback situation we need. It causes a pullback in the S&P 500, the Dow, and the Nasdaq indexes, while maintaining strength in the overall stock market.

If we take a look at technical analysis, and we look at the Dow, the Dow generally runs right along the ten month EMA. But right now the Dow is sitting well above the ten month EMA. And whenever the Dow has a pullback, it generally pulls back to the 21 month EMA. And the Dow is far above the 21 month EMA. The Dow would need to fall about 4% to get down to the ten month EMA, and it needs to fall about 7% to get down to the 21 month EMA. In a worst case scenario, the Dow hits what would generally be considered a bear market, or a major correction, that would bring the Dow all the way down to a very strong support level at the 50 month EMA. But that would only represent a 19% pullback in the market, which does not even put us into bear market territory. It still leaves us in a normal, healthy correction. So a pullback of around 4% to 7% should be expected in the market sometime soon, while a maximum pullback of 19% might take place in a worst case scenario, such as the US entering a recession. But in no scenario should the market enter another bear market like we saw in 2022. What we should see is a very healthy pullback in the markets, but not a major bear market.

Now even though the monthly technicals are screaming that we need a major pullback, the daily technicals give us a little bit of hope. If we take a look at the QQQ, which is a Nasdaq ETF, you’re going to notice how the QQQ has time and time again bounced off of the 21 day EMA. This has occurred time and time again over the past four months. During this most recent rally, and even on Tuesday, the Nasdaq bounced off of the 21 day EMA. At one point on Tuesday, the Nasdaq was down 2.3%, but it then bounced off of the 21 day EMA, finishing the day down only 1.7%. It was a pretty significant rally in the last 30 minutes of the day. It also is pretty bullish and indicates a continued rise on Wednesday. So at least among the Nasdaq, it shows us that there’s a very good chance, just based upon technical analysis, that we’re going to bounce here and we’re going to rise on Wednesday and continue going back up – that this was a very short time pullback.

But there are some other technical indicators that show that this might be a little bit of a longer term pullback. Unlike the Nasdaq, which bounced off of the 21 day EMA, the Dow actually fell below the 21 day EMA, and closed below the 21 day EMA for the first time in over four months. So the Dow is actually giving a huge warning sign that it is going to continue to go down. So as far as where the market goes from here, there are three scenarios. One scenario is the market follows the Nasdaq and it bounces and starts going back up. The other scenario is the market follows the Dow and it continues down and has the much needed healthy pullback that the market’s been waiting for for the past few months. The third scenario is that we get a mix where the Nasdaq actually rises, but the Dow and S&P actually fall. And this wouldn’t be the first time we’ve seen that happen. It is a likely scenario should the Nasdaq in fact continue to go up on Wednesday, while the Dow continues to go down on Wednesday.

Now if you want more technical analysis like this, I post a full technical analysis report in my weekly newsletter. It is a free newsletter that goes out every Sunday night to get you prepared to trade in the stock markets on Monday. If you’d like to get a hold of that free weekly newsletter, you can sign up for that free weekly newsletter here.

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