Predictions by market pundits of an impending market correction have been developing over the past couple of weeks. U.S. stock market indexes finally succumbed to dramatic selling today as they recorded the worst daily declines in more than two months. The S&P Index (SPX) suffered a setback of 75.26 points or -1.70%. The Dow Jones Industrial Average (INDU) fell 614.41 points or -1.78%. The NYSE Composite Index declined 292.19 points or -1.78%. The Nasdaq Composite Index (COMPQ) plummeted 330.06 points or -2.19% and the mega-cap technology-laden Nasdaq 100 Index (NDX) also tanked 321.29 points or -2.10%.
Many blamed today’s market sell-off on the potential default of the Evergrande, a highly leveraged Chinese property giant with over $300 billion in debt. Fears circulated that the collapse of Evergrande would lead to contagion in the global financial markets.
Although the real-estate sector is more than 28% of China’s economy, it was not the sole reason for today’s market downturn. The market has plenty of excuses for today’s sell-off such as (1) rising Covid-19 delta variant cases; (2) Fed taper talks heading into the September 21-22 FOMC meeting; (3) debt-ceiling crisis; (4) September seasonality weakness; (5) inflation fears; (6) overbought market conditions; (7) excessive market speculations; and (8) stock market overvaluation.
SPX has been trading above its 50-day ma without closing convincingly below this average since March 2021 bottom. The violation of the key moving average in the SPX Index and other key market indexes last week may be a warning of a deeper correction.
The typical buy-on-dips strategy that has been prevalent in U.S. stocks this year did not materialize this time, suggesting traders may be de-risking their equity portfolios or possibly waiting for better entry points.
Should investors avoid the marketplace altogether? Or perhaps the recent correction will alleviate an overbought market condition, setting the stage for the resumption of the primary bull run into the seasonal strength period.
Enclosed are pivotal supports for stock market indexes, including SPX, INDU, and NDX.
S&P 500 Index (SPX – 4,357.73)
38.2% = 4,281.37 (-264.48 or -5.82%)
50% = 4,199.68 (-346.17 or -7.62%)
61.8% = 4,117.98 (-427.87 or -9.41%)
200-day ma = 4,106.06 (-439.79 or -9.67%)
Dow Jones Industrial Average (INDU – 33,970.47)
50% = 33,851.30 (-1,779.89 or -5.00%)
61.8% = 33,431.25 (-2,199.99 or -6.17%)
200-day ma = 33,186.28 (-2,444.91 or -6.86%)
Nasdaq Composite Index (COMPQ – 14,713.90)
38.2% = 14,484.90 (918.54 or -5.96%)
50% = 14,201.17 (-1,202.23 or -7.80%)
61.8% = 13,917.43 (-1,486.01 or -9.65%)
200-day ma = 13,856.71 (-1,546.73 or -10.04%)