Reviewing Today's Market Plunge - Where Does It Leave Us?

Yuck! What a day for those holding long equity positions. The S&P 500 was down 4.78% and the Nasdaq Composite closed down over 5%.  The debt crisis in Europe is worsening and governments are now looking like the next Lehman.  Where does that leave us?

From a technical perspective, here is what I see on SPY, the SPDR S&P 500 ETF.  On a monthly chart with some basic fibonacci levels drawn in, $110-$112 (which equates to roughly 1100-1120 on the S&P 500 Index) could offer long-term support.  The next significant support level would be at $101-$102. Our close today around $120 could also potentially be at a support point (potential dead cat bounce tomorrow?); however, the trend line from the March 2009 low has been breached and will now act as resistance along with the $125-$126 level. Earlier in the week I tried to play a bounce off the 125 level but was quickly stopped out after it failed to hold.  Followers of me on Stocktwits and Twitter would have received an update on the trade:




From a valuation standpoint, the markets are still overvalued according to some long-term valuation methods.  Doug Short does a great job of tracking the P/E 10 ratio.  As of July's close we were at a ratio of 22.7 and the historic average is 16.4.  The ratio is calculated by taking the real monthly averages of daily closes divided by the 10-year average of real earnings:



John Hussman and others such as Jeremy Grantham have also warned in the past months of low anticipated future returns on equities based on valuations.  As of August 1st Hussman projected 10-year returns on the S&P 500 at 4.1% annually.  Hussman recent market timing history has not been outstanding, since he has written of his underexposure to equities numerous times in previous months even as equities trended higher. However, I respect his prowess as an economist and long-term, full cycle market analyst.  The recent sell off puts us in less overvalued territory, but from a long-term perspective US equities still do not currently provide great value.

US treasuries have rallied this week so interest rates have dropped.  This leaves income investors with few options for reasonable yields.  I think high-quality dividend stocks remain a viable option for those willing to expose themselves to equity risk.  However, given that the S&P 500 is now below its 200 day moving average I would tread lightly, easing into new positions until the long-term trend reverses itself.

For my list of top dividend stocks, my High Yield Dividend Champion Portfolio offers some of my best ideas and is updated around the 5th of the month, so the portfolio will be re-visited at the end of the week.  MGE Energy (MGEE) has held up well in the recent sell-off and currently yields 3.69% and a payout ratio of 56%.

Relative strength also remains a viable option for investors who want to do more than sit in cash. At the end of last month my ETF Replay portfolio called for investing in Gold (GLD), Treasuries (IEF), Treasury Inflation Protected Securities (TIP), and Emerging Market Bonds (PCY).  Through the first four days of the month the four positions provided an average return of 2.75%, with TIP leading the charge returning 4.32%. Thus, there is always a bull market somewhere, even when the "stuff" hits the fan.  Rotating into the strongest performing sectors can provide diversification to a buy-and-hold portfolio or help identify where the strongest trends reside for making individual security selections.


No current positions in stocks mentioned.