I have just snipped the image below as the market in the US closes.
The US market is apparently being rattled by the potential for ripple effects from Evergrande the Chinese real estate group which as can be seen below does look distinctly wobbly.
However, markets go up and markets go down. I understand that this is a bit of a news flash to many but the laws of financial gravity have not yet been repealed. The chart below tracks the S&P 500 over the past decade and it shows that drawdowns of the order of 5% are not uncommon nor are those of 10%. The last significant drawdown the market encountered was in early 2020 as COVID was breaking. Drawdown is a feature of all markets.
I find to get a much broader sense of what is happening within an index it is worthwhile looking at the internal dynamics of the index. The chart below shows the percentage of stock within the S&P500 that are above their 200 week moving average – this is a broad metric. As can be seen at present some 68% of stocks are above this long term measure.
It is important to note that this is not really a predictive measure of any sort rather it is akin to taking the market temperature. But even the raw number can be somewhat misleading – what is relevant is the trend. At present the trend is down – this however does not in any way predict a collapse in the market because of the way indices are structured. It is quite possible for a significant number of shares within an indie to be going down but for the index to hold its ground. Unfortunately, though this doesn’t last forever. But this does not give any indication of the quanta of any fall if any. It simply says at present a given percentage are above a long term moving average.
