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Monday, February 05, 2018

DJIA: A 666-point Drop


Last Friday, Dow Jones Industrial Average ('DJIA') shed 666 points- making it the biggest single-day daily drop in 2 years. On the weekly basis, DJIA lost 1100 points- its biggest loss in the past 9 years. In my opinion, there are 3 likely reasons for the sharp drop:
1. Fed is about to embark on a roll-back of its easy money policies. Recently it has given indication that it may even hasten its rate hike schedule; 
2. The stock market is significantly over-bought; and 
3. The Russian collusion cum obstruction of justice investigation against the Trump administration is approaching the home stretch. The probability of a constitutional crisis is very likely as Trump and his Republican supporters are not the kind of people who play by the rules; they believe in alternate truth, and seem to live in a parallel universe. Thus, the stage is now set for a test of the rule of law in the US, the greatest democracy in our life time. 
Meanwhile, DJIA broke the 20-day SMA line at 25939 last Friday. The 20-day SMA line has been supporting the index in its previous corrections for the past 5 months. DJIA may test its 50-day SMA line at 25016 this week. Notwithstanding technical rebound along the way, I expect the correction to persist for a few weeks and DJIA to find support at the 100-day SMA line at 23982. Global equity markets will see similar correction, albeit of a slightly small magnitude. Volatility will be the order of the day. My advice is to reduce your trading activities. However, as correction will flush out stocks at better valuation, you should be prepared to buy into the market when the share prices are below their valuation. Good luck!


Chart: DJIA's daily chart as at Feb 2, 2018 (Source: Stockcharts.com)

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