Is This a Breather or the Start of Something Bigger?
It was a day of broad and steady selling, but the question remains whether this was just some much-needed profit-taking after a big run or the start of a deeper correction. While there are some similarities to what happened back in February when the market suddenly reacted to the Covid-19 crisis after ignoring it for weeks, this market has been tenacious at ignoring negatives since the bottom in March.
Breadth was around 6 to 1 negative Wednesday and the pockets of speculative action disappeared. These are two major warning signs and suggest that there is more selling to come. However, the last two times the market acted this way, it reversed back up on the following day.
Market players are well trained to jump back in quickly, although the continued acceleration in Covid-19 cases is troubling and is already causing some delays in opening up the economy. There is now a mandatory mask policy in North Carolina and other states are likely to follow if case count continues to grow.
Regardless of the news flow, the indices and many stocks need to reset after the recent run and develop some favorable chart patterns. It is very likely that there are many investors looking to aggressively buy stocks at lower prices if they have the chance. They are disappointed they weren't more aggressive at the March lows and won't make that mistake again. Of course, that is a lot easier to say when stocks are going up. Buying into the teeth of a decline is a different matter.
The S&P 500 is still over the 200-day average and above the June lows so there isn't any really significant technical damage but a close under the 3000 level would likely cause some concern.
Massive liquidity has been driving the market and it isn't going to go away easily. Buyers may be willing to sit on the sidelines for a while if the Covid-19 situation continues to deteriorate.
Have a good evening. I'll see you tomorrow.
At the time of publication, Rev Shark had no positions in any securities mentioned.