The Stock Market goes for a volatile ride!

Technical Stock Market Briefing for Day & Swing Traders
| By Harry Boxer, Technical Market Analyst

Last week started with a quadruple-point drop in the Dow on Monday, sparking the typical parade of “market sell-off/crash” headlines.

The trading sessions that followed saw additional large volatile swings, including several sharp daily gains. After all was said and done, the stock market finished with just a modest change on the week, not nearly in as rough a fashion as the headlines might have suggested.

Although I don’t think this recent bout of volatility should be dismissed, panic is not the proper reaction either. Market declines are never comfortable, and they can feel particularly jarring after a stretch like we’ve seen in 2024, as stocks were repeatedly setting new highs with almost no volatility to speak of.

On Monday, the Dow Jones index lost 1,034 points, the 12th-largest single-day point decline on record. This is not uncharted territory, however. There have been 25 total daily moves in the Dow of more than 1,000 points, 14 down and 11 up. While the size is eye-catching, keep in mind that last Monday’s 1,034-point move was a decline of 2.6%. The similar 1,033-point drop on February 8, 2018, was a 4.2% move.

Market declines of any substantial size can feel quite unsettling. Last Monday’s 3% decline in the S&P 500 captured significant attention.

But what about the 3% rally in the first several days of July? Or the better-than-2% jump in the final few days of July? Remember those?

They probably don’t stand out as much because pullbacks just feel different.

However, the importance of a broader view is imperative. The recent pullback came from a market at record levels, with the lows last week putting the S&P 500 just 8% off its all-time high. The intensity of market volatility can often cause investors to forget what came before. But zooming out reveals that even with the recent drop, the stock market is still up nearly 20% over last year and 50% since this bull market began in October of 2022.

Also, when in the midst of a pullback, it may feel like “this is the big one,” or that something unique is going on, but try to remember that this is not new.

In fact, over the last quarter-century, the markets have experienced 5%-plus declines an average of about three times per year. Something that occurs that frequently should not feel like a shock, but to the inexperienced or unseasoned trader, emotions can and will kick in, causing angst or panic, and as a result, bad trading decisions.

Patience is definitely required, but sell-offs don’t last as long as you may think. After the sharp sell-off to start last week, markets made a strong attempt to recoup the declines in the following days. The emotional element of market declines can make them feel like a marathon, but they don’t often drag on to the point of exhaustion. So while market corrections don’t typically disappear as quickly as they emerge, traders can find comfort in the fact that they do have relatively short life spans.

Looking at 10% market corrections since 2010, the average length of such pullbacks was 63 days. Smaller 5%-10% pullbacks have had significantly shorter spans. While the declines aren’t usually erased immediately, they have not dragged on forever, with the market recovering each of the losses and returning to new highs, on average, in less than five months. It’s within this window that investors can benefit from the temporary pullback in stock prices.

The central question that emerged last week:

Was that pullback the beginning of something much worse?

Now, this spate of volatility may not have yet fully run its course. But is this the start of a larger, deeper decline in the market? Very hard to say, but for now, I don’t think so. The rebound in the latter part of last week was certainly a more positive sign than the initial sell-off was otherwise indicating.

I suspect markets could see additional daily volatile swings and bouts of weakness, as incoming data will likely continue to feed the debate on the probability of a recession. The latest inflation report coming this week (Wednesday, 8/14), as well as ongoing election and geopolitical anxieties, will create additional catalysts for volatility.

Corrections in the stock market that are not accompanied by an economic or corporate earnings recession have tended to be temporary and followed by impressive gains. Over the last 10 years, equities gained an average of 17% in the six months following the pullback.

Market pullbacks can and often do offer attractive new entry opportunities. One last thought: Every market pullback in history has been followed by a rebound. While the coast is obviously not completely clear, I don’t anticipate anything different this time around. Not until the patterns and technicals tell me so!

We might soon see if the recent 5-wave pullback and last week’s following rebound effort represent a new entry opportunity or the start of something much worse on the downside. We always rely on the technicals to guide us in that analysis and will, of course, continue to monitor them for clues as to the market’s direction going forward.

In any case, closely monitor the technicals and “Trade What You See, Not What You Think”