Image Source: Pixabay

After stocks were bid for about three months straight, we finally saw our first bit of real selling this week. Semiconductors and technology led the selloff, which is a concern given the tendency of those sectors to act as leading indicators. This led to the Nasdaq suffering the brunt of the selloff, as it tumbled lower much more compared to the Dow Industrials or S&P 500.

The good news is that this is totally normal price action. That is, it’s not uncommon to see the chips, tech, and the Nasdaq lead on the way up and on the way down. It’s also not uncommon to see the Dow peak after the Nasdaq. One notable exception was the Dot-com Bubble, but during most other market declines, we usually see a flight to safety into the Dow at the expense of the other indices Here’s what that means… 

Why the Dow Behaves Like It Does
 

Think about this for a second and ask yourself this question: What kind of stocks make up the Dow? These are blue-chip companies that have been around for a long time and probably aren’t going anywhere tomorrow. Compare that to the Nasdaq and all the companies in the index that may not even have profitability, and in some cases, revenue worth considering.

We’ve even started to see Treasuries outperform stocks, which hasn’t been the case for the past couple of years. Granted, much of that outperformance has come from the short-end of the yield curve as the likelihood of a Fed rate cut in September is all but confirmed. So, while I’m not entirely ruling out continued weakness in stocks in the coming weeks, let’s keep perspective and recognize that equities are in a secular bull market. 

The S&P 500 rallied almost 15% from its April low to its high this past Tuesday. Surely, as respecters of market cycles, we can allow for a corrective decline to reset market sentiment. Once the fear starts to creep in (the current politics aren’t helping), then we can start looking for a bottom.

I’ll keep you posted with my thoughts in the upcoming letters I send out, but don’t be afraid to sell the portfolio laggards on this selloff. I’m already scouting the markets for what’s outperforming and holding up best amidst this decline. In other words, this isn’t a time to panic. That’s not what pros do. On the contrary, this is a time for due diligence. Let’s make it happen.

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