If you listen to the news circulating over the past week, you can sense the market was overdue for a correction. If you want reasons for a market correction, then there are a few that comes to mind.
Taper fears are on the top of the list, even though the Fed has been messaging since spring that they will end its bond-buying program. Covid-19 concerns continue to lead many to question whether the vaccines are effective against the Delta variant. Again, none of this is new news. However, the market has decided to react to this old news.
Concerns about rising inflation and whether this leads to long-term inflation continue to worry investors. Interestingly, worries about slowing economic growth from China and its impact on the global economy.
Weak seasonality factors may also come into play in the second half of August into part of September. Historically, S&P 500 Index and other U.S. indexes tend to be more volatile because of the low volume and the lack of liquidity.
Stocks ended the day mixed after two days of selling. The Dow Jones Industrial Average dropped 66.57 points or 0.19%. The S&P 500 Index rallied into the end of the day with gains of 5.53 points or 0.1%. The NYSE Composite fell 121.20 points or 0.73%. Nasdaq Composite Index advanced 15.87 or 0.11% for the day.
Is the sky starting to fall?
Although there may be some truths to the fears and concerns, the stock market has rallied strongly in the past few months and is due for a consolidation. The normal pullback will help alleviate an overbought condition and set the stage for the next sustainable rally.
There are two interesting technical indicators that we have been monitoring closely – the distance from the 50-day ma and the distance from the 200-day ma. The two indicators compare the distance between a security’s price and its moving average to identify possible reversals. The zero lines are the trigger level that can signal a change in trend. Also, the extreme values from above and below the zero lines can help identify overbought and oversold conditions.
Since the March 2021 bottom (SPX – 3,723.34), there have been five (5) occurrences the distance from the 50-day ma indicator (currently trading at 1.31%) has fallen toward the zero lines. All five (5) scenarios have resulted in subsequent SPX rallies to new all-time highs. Also, when the distance from the 200-day ma indication (currently at 9.86%) falls to the 9.25-10.25% level, SPX has rebounded strongly.
With SPX’s 50-day ma trending up at 4,348.73 and the bottom of the May 2021 uptrend line rising at 4,330, it will be interesting if SPX again can rebound from this pivotal support zone. The ability to do can lead to the next SPX rally toward our technical projection of 4,595, coinciding with the late-August 2020 V-pattern breakout target above 3,393.52.
Although we remain favorable on the intermediate-to-longer term trend of the SPX Index, we recognize the late-August to September seasonality volatility can lead to a choppy trading range environment. Violation of the 50-day ma (4,348.73) coupled with a breach of the bottom of the May 2021 uptrend channel (4,330) warns of SPX decline toward the 200-day ma (4,010.19). A decline of 470.07 points or 10.47% correction fulfills the textbook definition of a correction. The next few days to few weeks will help to decide the next directional trend for SPX.
Although we remain favorable on the intermediate-to-longer term trend of the SPX Index, we recognize the late-August to September seasonality volatility can lead to a choppy trading range environment. Violation of the 50-day ma (4,348.73) coupled with a breach of the bottom of the May 2021 uptrend channel (4,330) warns of SPX decline toward the 200-day ma (4,010.19). The decline of 470.07 points (-10.47%) fulfills the textbook definition of a correction. The next few days to few weeks will help to decide the next directional trend for SPX.