Best Of 2016: Buy ETFs Like SPY On The Sell-Off

January 06, 2017

[Editor's Note: We are rerunning some of our best stories from 2016.]

The first few trading sessions of 2016 have been historical. Down as much as 8% in less than two weeks, it's been the worst start for the U.S. stock market in history. Is this simply a correction or something more ominous?

Sell-Off Like Deja Vu

In many ways, this latest stock market sell-off is like deja vu: Investors are heading for the exits due to concerns related to China and the implosion in oil prices.

If that sounds familiar, it's because the market sold off for those exact same reasons back in August 2015. That downturn was fast and furious, just like the current one, with investors bracing for the worst, despite relatively healthy economic data coming out of the U.S.

From a summer peak of around 2,135, the S&P 500 hit a low of 1,867 on Aug. 24―a 12.6% correction. The index consolidated above the lows for the next month before taking off like a rocket in October on the back of relatively strong earnings reports for the third quarter.

Ultimately, the S&P 500 was able to reach a high of 2,116 before it peaked again. Unable to make headway to new highs, the market became toppy and vulnerable to a new wave for selling, which began with a vengeance with the start of the New Year.

Potential Bottom

Today the S&P 500 reached as low as 1,879―just a hair above the lows from last year—before bouncing more than 1% to 1,915. Will the market ultimately bottom out here again, or plummet even lower?

1-Year Chart For S&P 500

It's anyone's guess as to where the market goes in the short term. However, with investor sentiment sour, and no signs that the weakness abroad will push the U.S. into a recession, it looks like this could be another buying opportunity.

To be sure, it's not all roses out there. The crash in raw materials prices poses challenges for certain segments of the economy, and China's slowdown hurts global growth. But neither factor is likely to meaningfully derail the U.S. economy or the U.S. earnings outlook, which is the lifeblood of the stock market.

Exports to China represent only 7% of total American exports, according to Wells Fargo. Likewise, energy companies only make up 6% of the S&P 500 in terms of market capitalization.

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