5 Reasons To Dump A Stock
Stocks hit a new high again last week. Bullish fever is rampant as the market can do no wrong in the eyes of investors. However, since the top, the Dow Jones Industrial Average has dropped precipitously back to its 50-day simple moving average (SMA) in the 25,000 zone. The institutionally critical 200-day simple moving average is less than 300 points away in the world’s most followed index. Once insurmountable in a single trading session, today 300 plus DJIA points in a session is almost commonplace.
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Should the DJIA price pierce the 200-day simple moving average and not immediately bounce back above within a few days, as it did end of June into the start of July, expect a dramatic plunge in stock prices.
#-ad_banner-#The reason for this forecast is because institutions closely follow the 200-day SMA. Technically driven program trading focuses on this level as a buy zone, but if it does not support price, the sell programs kick in after a specific timeframe, forcing the market lower.
Combined with the very sketchy technical picture, I have identified five fundamental factors that can easily shove stocks off the price cliff.
Each one of these factors can start the dominoes tumbling. However, all together, a dire picture is painted for further upside.
Here are 5 factors that can send stocks tumbling:
1. Labor Shortage
Trump’s anti-immigration stance is causing havoc across the labor pools. As the labor supply declines, it forces employers to pay more, which, in turn, can spark inflationary pressures.
Across three major Fed districts, the Fed’s Beige Book reported:
Philadelphia: Staffing firms reported ongoing demand for workers, but a scarcity of candidates, as well as difficulty hiring and retaining employees. As the job market tightens, wages have risen, and employers have converted more full-time temporary workers to permanent employees than is normal. However, according to one contact, many temp orders continued to be for part-time work.
Minneapolis: A Montana staffing firm reported that “hiring demand and job orders are up, but [worker] candidates are down.”
Boston: “Manufacturing contacts said the labor market was tight, but the exceptional difficulties were mostly in highly skilled areas like engineering … Higher freight costs continued to be an issue across a wide array of industries, with the shortage of commercial truck drivers being cited as an important factor. Several manufacturing contacts said that they were only able to pass through a portion of the higher costs to customers. As a result, margins were declining.”
2. High Bullish Sentiment
This sounds like a bullish signal, right? Well, the truth is, high bullish sentiment among investors is often a sign of a pending bear market. The reason is that when everyone is super optimistic, there is no one left to continue buying stocks. In other words, buyers become burned out and merely run out of cash. They are unable to keep buying, resulting in share prices moving lower.
Widely followed Ned Davis Research Crowd Sentiment Poll and Daily Trading Sentiment Composite indicate over the top or extreme bullish sentiment. At the same time, consumer optimism has hit its highest level since 2008. While a good sign for the economy, it is critical to keep in mind that high levels of consumer confidence often occur before stock market corrections.
3. The Bearish Season Is Near
Historically September and October are the months creating the most extreme sell-offs in the stock market. While I am not a 100% believer in seasonality, as applied to the equity markets, it is something to keep in mind as we enter these bearish months.
4. Trump’s Stimulus
While initially bullish, Trump’s economic stimulus of tax cuts and pro-business policy may have run its course. Some economists believe that history shows that when a healthy economy is overstimulated, it can lead to a recession. In other words, too much of a good thing is likely bearish for the stock market in the long run.
5. Pending Trade War
Whether or not the full force of the China tariffs is implemented, the uncertainty will weigh on stocks. The market hates nothing more than guesswork. The constant crazy tweets from the White House, combined with the severe nature of tariffs, create confusion. The confusion and constant changes will likely start to weigh on the stock market to a substantial degree. Painting an even more bearish picture, the ante keeps being Add in the fact that the ante keeps being increased by both sides and it adds up to nearly guaranteed future bearishness.
Risks To Consider: No one knows the future. Sometimes bad news can be positive for the stock market. Anything and everything can and does happen when investing. Always use stops and position size wisely!
Action To Take: Continue to monitor the economic situation for further signals that the bull market is ending.