The stock market pullback in September was probably the first in a long series, as it follows a staircase playbook that echoes the rally from the bottom of the financial crisis in 2009, argued a Wall Street bull prominent in a Monday note.
The 7% correction in the S&P 500 SPX,
over the past six trading sessions is probably the first of a few 3-7% drops followed by new highs as the market escalates like in fall 2009, dragged down by election year angst and the broad nature of market capitalization. weighted indices, said Tony Dwyer, chief market strategist at Canaccord Genuity.
After the S&P 500 and the Nasdaq Composite COMP, at the cutting edge of technology,
hit a new set of highs in early September, building on a huge rally in August, stocks turned south as investors suddenly shed the top performing mega-cap growth stocks that had more and more people represented equity gains.
The Nasdaq early last week entered corrective territory, falling more than 10% from a record in just three trading sessions. The weekly 4.5% drop in indices was the largest since March. The S&P 500 finished Friday with a weekly loss of more than 2%, leaving it down 6.7% from its record close on September 2. The Dow Jones Industrial Average DJIA,
fell 1.7% last week. All three major indices gained ground on Monday.
A pullback in extended megacap names in favor of economic recovery stocks that would benefit from the pandemic in the rearview mirror was expected, Dwyer said, highlighting an August note on the topic. Prospects for increased volatility remain high as investors grapple with rotation between sectors, the threat of a further rise in COVID-19 cases and, most importantly, the setup of the most recent election year. complicated that we might have.
The electoral outlook is complicated not only by uncertainty over who will win the White House or which party will control the House and Senate, but also by possible controversy around the voting process itself and whether the Either party will concede defeat at some point near election day. .
The Federal Reserve, on the other hand, is more predictable, with uncertainty centered not on whether it will continue to support the economy, but on the tools it will use to do so, he said.
Meanwhile, the 7% pullback in the S&P 500 and the nearly 11% drop in the Nasdaq helped pull some key tactical indicators out of the extreme territory, Dwyer said, noting that the proportion of S&P 500 stocks above of their 10- and 50-day movement the averages had fallen to 26% and 54%, respectively (see graph below).
The Cboe VIX volatility index,
which had climbed above 38 in early September, remains high but is now trading near 26, he noted, while the 14-week stochastic indicator for S&P 500 futures fell back to 68 after a historic overbought of 98. Additionally, the Investors Intelligence reading on investment bulletin writers remains high at 59%, but down from a reading of over 60% a lagging indicator, it is likely that ‘It will continue to decline in the near term, even with a rebound in equities, Dwyer said.