Last week, I wrote that cash was a good option while the market figured out its next move. So far so good, considering that the market has since fallen. The question is whether this is a correction or something worse. Evidence suggests that it continues to be the former.

To be sure, anyone who owned stocks one week ago is feeling some pain. But with the “fear” markets of gold, the U.S. dollar and Treasury bonds showing little movement there is nothing to confirm the fear that the gap down open in today’s stock market might suggest. And the stock market itself is still in the range it’s been in all year. It is far from time to panic.

Batten down a hatch or two? Yes. Panic? No.

I do not want to downplay the potential for lower prices. It is just that we’ve gotten used to calm markets and a long-bull run that has really only suffered two corrections since it got started 2009. The fear of falling prices right now is worse that the charts show, starting with the fact that most major stock indexes have comfortable margins above their 200-day moving averages.

While a 17% drop in the Global X Greece 20 ETF at Monday’s open was scary, it barely dipped below its previous low set in April. The Greek stock market itself is closed this week as that country deals with its crisis.

Certainly the euro had a rough morning, off nearly 2% vs. the U.S. dollar index, which is a huge move in the currency markets. However, as the day progressed, the euro not only pared its losses but turned green. Fear caused an extreme reaction that was quickly negated.

The dollar index itself, which represents a basket of currencies dominated by the euro, reversed a small upside breakout to resume its current four-month decline. And even that drop in the greenback did not give gold reason to rally more than a few dollars. These two markets together tell us that cooler heads are prevailing for now.

Only the U.S. Treasury bond market held on to its modest gain in what many are calling a flight to safety. Despite the one-day strength, the trend here remains down since January.

The problem seems to be contained to Europe and not really spreading here. It seems to be more of an excuse for the domestic markets to blow off some steam.

Will the December-February lows be strong enough to halt the slide? That would be in the vicinity of 1990 for the Standard & Poor’s 500, roughly 4% below Monday trading (see Chart 1).

Chart 1

Standard & Poor’s 500


The better question is what happens if and when the index gets there? At that point, any further losses would confirm that an important change in trend has taken place.

Let’s not cross that bridge just yet. A better fear might be what happens to Europe and not just because the German DAX index suffered its worst single-day loss since 2011 on Monday.

It’s been a while since we talked about the group of European countries with similar troubles as Greece, affectionately dubbed PIIGS for the first letters of their names. Ireland may be OK for now but markets in Portugal, Italy and Spain were clobbered Monday. Portugal led the way lower with 5.2% decline and some pundits now believe it is going to be the next headline-grabbing problem for the European Union. If true, then there really would be a contagion in the continent.

And let’s not forget China where the Shanghai composite continues to collapse, even after the Bank of China cut interest rates (See Getting Technical, “Greek and Chinese Stocks in a Dangerous Situation,” June 22).

There certainly is plenty to fear but other than a jump in the “fear index,” the CBOE volatility index or VIX, the U.S. reaction so far has been muted.

Rather than watch the S&P 500 or even the market leading Russell 2000 index of small capitalization stocks, it might be better to follow sector indexes as major tops often unfold in stages rather than all at once.

Right now, six out of the nine Select Sector SPDR ETFs are below their 200-day averages. This includes the Technology Select Sector ETF, which broke its average Monday.

Because market breadth has changed for the worse cash still seems to be a good idea for most investors.