Investors had nowhere to hide on Tuesday. Everything got hit.
Stocks sold off. Treasury bonds – the traditional safe haven during a market decline – sold off too. Junk bonds dropped. Commodities declined. Oil and gas were up just a bit, but oil and gas stocks fell along with the broad stock market. Digital currencies got hit hard. Heck, even the dollar dropped.
Like I said… nowhere to hide.
The financial media blamed the selling pressure on Washington's delay of the new health care bill. But that's just a convenient excuse. The market has been in the process of changing character for the past few weeks.
Think about it…
The tech-heavy NASDAQ – which led all the other indices higher since the start of the Trump rally – has been lagging lately. The so-called FANG stocks (Facebook, Amazon, Netflix, and Google – now Alphabet) lost their momentum a few weeks ago. Semiconductor stocks, which typically lead the broad stock market, rolled over recently. And high-yield bonds – which also lead the stock market – look like they're finally breaking down.
So, yesterday's action shouldn't be a surprise.
What is somewhat surprising, though, is the sudden shift in investor sentiment. Yesterday's action seemed to shift an awful lot of folks into the bearish camp. The talking heads in the financial media, who were almost giddy in their bullishness on Monday morning, seemed downright depressed by Tuesday afternoon.
And this shift in sentiment happened with the S&P pulling back just 1% off its all-time high. Good grief… think of how depressed they'll be when/if the market falls 5%.
In any case… we're starting things off Wednesday morning in a slightly oversold condition. The S&P did close Tuesday below its 9-day exponential moving average. So the short-term momentum is bearish. But there is support at the 50-day moving average line at 2405. With short-term conditions oversold, and with sentiment having shifted quickly to bearish, I expect the 2405 level will hold as support on the first test.
But if the market has indeed changed character as I suspect it has, then any rally off oversold conditions is likely to form a lower high. The S&P is probably not going to get back above 2445 anytime soon – at least not before we see a more significant correction. Traders should now be looking to establish short positions on rally attempts.
Best regards and good trading,
P.S. If you have any questions or suggestions for the Market Minute, send me an email right here.