Here are the possible answers to that question:
1) New economic data came in weak and investors got scared.
2) There was no good reason to move higher, so stocks sold off.
3) We have been in the same trading range for 5 months. This is just more noise inside the range.
Economic data was fine on Tuesday as Durable Goods, PMI Services and Consumer Confidence were all at or above estimates. So you can toss out the first option.
I personally think it was a combination of points #2 and #3. Yes, the top end of the range is now 15 points higher than the early March highs…but it is still range bound trading nonetheless.
Not helping matters is that the dollar is strengthening once again. This is bad news for the already soft manufacturing sector.
Range bound trading typically ends with a resumption of the previous trend. In this case, it would mean that stocks would get back to the bullish traditions of the past 6 years. With that in mind it says that you don’t need to be too defensive at this time. Cautious optimism is the right mindset.
aka Steve Reitmeister
Executive Vice President, Zacks Investment Research