Dow drops another 4.60 percent today

David MoonBlog

The Dow Jones Industrial Average (DJIA) fell 1,175 points today, bringing the one-week decline to 7.2%. A 7% decline will get your attention, regardless of the macro environment in which it occurs.  To put it in some perspective, however, at 24696, the DJIA has retreated to its level of only 6 weeks ago. The misery of dropping from 26600 to 24700 likely more than offsets any pleasure investors enjoyed as it increased from 24700 to 26600. That makes little logical sense, but following a year in which volatility was at historic lows, we aren’t recently accustom to large market moves, especially to the downside.

This selloff is not a reaction to a decline in business or overall economic fundamentals. It is a contraction of investor euphoria, or, stated differently, a decline in P/E multiples. The P is declining without any corresponding drop in E.  The market was overpriced in December. It still is overpriced. This selloff may continue, reducing the degree of irrational prices. Or it could be the beginning of a temporary correction in the waning days of a historically long bull market. Whichever it is, declining prices will provide opportunities, even though the loss of 6-weeks’ of profits barely improves the attractiveness of the overall market.