After last Thursday’s big sell-off on big volume, the market staged a feeble, low-volume rally attempt on Friday and Monday. And the sellers were at the gates of new highs ready to clobber anymore feeble buyers on Tuesday.
In a nutshell, with one last try at the S&P 2120 level, the market said “We’re done here.” This is no small matter because there were many reasons for the market to run away from new highs: weak earnings season, weak economic data, high valuations and excessively bullish sentiment.
But there was only one reason for the market to keep rallying and breakout: price was strong and continued to make higher lows on every dip all year. And now that reason is all but kaput because the double-top of closing highs at 2117 (March 2 & April 24) has been further solidified.
Where do we go from here?
With Tuesday’s high-volume sell-off in Technology and a close just under the 50-day at S&P 2090, the chances of targeting stronger support at 2040 are now 2 in 3. And a 6% “correction” to even stronger support in the S&P 1990-2010 zone wouldn’t surprise me at all.
Bottom line: I think this is a great situation because we need a good flush of overly bullish sentiment and a slight “valuation reset” where large investors can take their time getting visibility on the growth prospects of the second half. Ready thy shopping list.
aka Steve Reitmeister
Executive Vice President, Zacks Investment Research