CRASH! How to Play "Gray Monday"

Well that was quick…

Stock market drama shot to the top of the newscast yesterday as the Dow Industrials briefly coughed up 1,000 points and world market swooned. But don’t worry. The Dow only finished the day lower by about 3.5%. That’s a measly 584 points!

Not a bad drubbing, eh? Make no mistake: the stock market is clearly broken right now. The Dow just dropped 1,477 points in three days.  According to technical wizard Ryan Detrick, that’s an all-time record.

But the beating delivered to stocks today pales in comparison to the Black Mondays—those historical crashes of 1929, 1987, and 2001, explains Arthur Hill over at Stockcharts.com.

“The major stock indices were down 3-5% in early trading on Monday, but down 8-11% over the last five trading days,” Art notes. “As far as ‘Black Mondays’ are concerned, this one is looking pretty tame so far and I would call it just a gray Monday.”

I can get onboard with that…

Gray Monday

Crash or no crash, call it whatever you want. That’s just semantics. All you need to know is that the U.S. market now has officially entered correction territory for the first time in four years. And if you’re one of those folks who desperately needs to assign in-depth reasons to every insane market move, knock yourself out. There are plenty of geniuses in the financial press waxing philosophical over the Chinese meltdown and trying to pinpoint exactly how these ripples will land here in the States.

But there’s a simpler way to go about it. If you’re desperate for the answer to the question “Is this the bottom?” just click on this handy link for an answer (Spoiler alert: the answer is “no”)…

Here’s why I think the market will continue to look ugly for a while:

First off, there are plenty of excuses to sell or “hurry up and wait” right now. International markets are tanking. Emerging markets are completely falling apart—even compared to the dismal action we’re experiencing in the U.S. And now, the question of what the Fed will do about a potential rate hike during its September meeting is causing alarm. In a nutshell, bad news matters more when the market is tanking. Everyone is grasping for answers.

Next, there’s nowhere to hide at the moment. Stocks aren’t the only asset class falling out of the ugly tree and hitting every branch on the way down. Crude coughed up 6% yesterday to close at its lowest level since the financial crisis. Gold even finished Monday in the red, while silver dropped almost 4%. The commodity bear continues to rip through investors’ campsites.  Nothing is safe from the wrath of sellers.

Finally, take a look at this chart from 2011:

S&P 500 May-Jan

If you’ll recall, we had big correction in late July-early August as Greece the Eurozone imploded. This rout was followed by weeks of tug-o-war between the bulls and bears, a capitulation low in early October, and even more chop heading into the end of the year.

While history won’t repeat this pattern exactly, the pieces are in place for a similar outcome.

This morning, S&P futures are flying higher. But right now, we don’t know how this morning bounce will play out. The market became extremely oversold in the blink of an eye. And the VIX quickly soared into nosebleed territory—so it’s no surprise that we’re seeing the rubber band snap back early this morning.

Today, we’ll be paying close attention for comeback opportunities in specific stocks and sectors. A short list of beaten-down stocks could emerge that will offer us some unique trading opportunities…

Regards,

Greg Guenthner
for The Daily Reckoning

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