Somebody pass the Prozac, investors have panicked.

The decline from the prior week accelerated and the Dow suffered the two biggest one-day point declines in history. At one point, the index lost 800 points in about 15 minutes. I remember watching my charts during the flash crash several years ago and I had a serious flash back to that market drop.

The bad news is that the market is back at levels not seen since Thanksgiving. All the euphoria from December and January was erased.

The good news is that the worst may be over. The market fundamentals have not changed. The economy is still strong and improving. Earnings growth is in double digits and improving. The best two quarters for earnings in 2018 are just ahead. There is nothing on the horizon that should push the market lower.

The wild card in this instance is the market itself. After a 10% decline, markets tend to stop falling but they do not rebound immediately. V bottoms are rare. The average correction takes 4-6 weeks to recover. Given our strong fundamentals, I am expecting a faster recovery.

The S&P has lost nearly $3 trillion in market cap in February. That is real money in anybody's book. That loss was felt by retail and institutional traders alike. Anyone with closed positions, and that should be everyone, there should be plenty of cash in their accounts to reinvest in the market at these November levels.

If you had known in November what the market was going to do in January, would you have been fully invested? Of course. We have now gone back in time and everybody should have cash in their account. Wells Fargo said Friday this was a buying opportunity because the market was going to rebound double digits from here.

Friday was encouraging. After more than a 1,000 point range with an intraday low of -500 to an afternoon high of +529 the Dow closed strongly positive. All of the indexes posted huge rebounds and the A/D line in the afternoon was very positive into the close.

The A/D line for the week was very negative, which should not be a surprise. The rebound on Friday afternoon could be the start of a new trend or it could be just a short covering blip on a Friday afternoon. We will not know until Monday.

The chart below is not one you will see very often. The Bullish Percent Index is showing only 40.4% of S&P-500 stocks have a buy signal on a Point and Figure chart. This is back to levels we have not seen since January 2016 and the last correction. Note that the BP Index did not return to its prior level until April but it continued on to make a new 52-week high on April 1st. Stocks have been punished severely but they will more than likely recover.

The percentage of S&P stocks over their 50-day average fell to 13.6% last week before rebounding slightly on Friday. This is the lowest level since January 2016 when it fell to 9%. The percentage of stocks over their 200-day average fell to 55% before rebounding to 60% on Friday. In January 2016 the percentage fell to 19.2%.

The fear of rising interest rates caused an implosion in the High yield ETF (HYG) and that typically has a very high correlation with the S&P. The correlation did decline to 0.75 because it was the first time since December 2015 the HYG has traded below the S&P in the correlation chart. The HYG is the leader and the S&P the follower although the S&P has overshot this time.

I pointed out over prior weeks the extremes in the divergence between the indexes and their 100-day averages. Needless to say those double digit divergences have been completely erased. The euphoria is gone and has been replaced with panic.

The S&P declined all the way to the 200-day average or about -340 points from its high. Now the challenge is going to be getting back over the 50 and 100-day averages which should now be resistance.

On the S&P the RSI has gone from the highest level since 1996 at 86.69 to the lowest level since January 2016 at 28.85. Just like the 86.69 was a flashing sell signal, the 28 level is flashing a buy signal.

The Dow A/D line is a carbon copy of the S&P A/D line for obvious reasons. The index crashed -3,256 points from its 26,616 record high close on January 26th to Friday's low. Think about that. A 3,256-point drop in only ten trading days. That is astounding and was accomplished with the two biggest daily declines in history. The good news was the stop at obvious support at 23,250. That should be a credible bottom but we will not know for several weeks.

The Nasdaq A/D line fell back to the November lows with Nasdaq stocks posting a wider decline in market breadth. That means there was a larger percentage of Nasdaq stocks declining than on the S&P.

The Semiconductor Index collapsed last week and was instrumental in dragging the Nasdaq lower. Nvidia helped the Sox rebound slightly on Friday but it is a long way back to the highs. The Sox will remain an anchor for the Nasdaq.

The Nasdaq punched through the 100-day to the downside then failed at that level when it tried to rally on Friday. One day does not make a trend so it remains to be seen if the index can recover the 50-day average at 7,073 to signal a real recovery in progress. Note the RSI back to two-year lows.

The Russell is the weakest index with a trade well below the 200-day average on Friday and now showing solid resistance at 1,508. Any further decline would target 1,350.

I am not expecting any additional 1,000-point declines but that is no guarantee they will not appear. I also do not believe we will get a decent move higher until after option expiration next Friday. That also does not come with a guarantee. It should take several weeks to work off the high volatility and that means several weeks of whipsaw trading with triple digit moves in both directions. I really hope I am wrong and the fundamentals take control and a new rally begins quickly.

Enter passively and exit aggressively!

Jim Brown

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