Well that was fun while it lasted.
Yesterday, the S&P 500 closed below its 50-day moving average for the second consecutive day, breaking a streak that had held for the duration of 2021 and was the longest since a streak that ended in 1996.
So what happens next? Well the good news is that as shown in the LPL Research Chart of the Day, the index still is clearly in an uptrend and has plenty of support at other levels. We see next levels of support at 4230 and 4106. In addition, we are watching the number of stocks joining the index at new lows, as when roughly half the index has hit a one-month low has been a buying opportunity over the past year.
Perhaps more importantly though, is that a break below this moving average does little to change our overall market view. For one, this streak was rare for a reason. Simply put, staying above such a short-term moving average isn’t sustainable for a long period of time. We would argue that the ability to hold above that line for as long as it did is a sign of strength. Remember, the previous streak happened in the midst of the 1990s bull market, not near the end.
The second, is that even though you wouldn’t know it from looking at the S&P 500, most stocks have been correcting for the past three to six months. In fact, according to data from Strategas Research Partners, the average stock in the S&P 500 is already more than 11% off its highs, while the average stock in the Russell 2000 small cap index is down 27%. So to many investors the old “sell in May” adage has actually worked out quite well. And that might be the most important takeaway here. While the second half of September has been historically weak, big picture, we are actually nearing the end of the seasonally weak period. The final few months of the year have historically been some of the best, and history shows that years that begin as strong as this one tend to finish higher as well.
“We’ve warned a pullback may be coming,” said LPL Financial Chief Market Strategist Ryan Detrick. “However, the fact is that most years experience more volatility than we have seen so far in 2021, and we would likely view a further pullback as a buying opportunity going into the fourth quarter.”
We believe investors would do well to remember that every pullback or correction has its own unique “reason”, but the fact is that volatility is a normal part of investing. We do not believe that Evergrande or potential upcoming changes in monetary policy are likely to derail the bull market.
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All index and market data from FactSet and MarketWatch.
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