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Equity Sell-Off Goes Global: Buy the Dip or Sign of What's to Come?

Equity Sell-Off Goes Global: Buy the Dip or Sign of What's to Come?

James Stanley, Senior Strategist

Talking Points:

- Yesterday marked the first pullback in the S&P by more than 1% since Donald Trump was elected President.

- Already many are calling for a major market correction; and while the backdrop may have the context to support such a theme, price action simply doesn’t yet show this potential. If this stock sell-off deepens, that can change. But the longer-term setup in most Equity bourses, particularly U.S.-based, remain bullish in nature.

- If you’re looking for trading ideas, check out our Trading Guides. And if you’re looking for ideas that are more short-term in nature, please check out our Speculative Sentiment Index (SSI) Indicator.

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Yesterday marked the first time since Donald Trump was elected that the S&P 500 closed down by -1% or more, and already many are calling for a major market correction. The sell-off, however, was not contained to the States, as we saw bears take-over in Asia in and then in Europe. So while yesterday’s U.S. session could’ve been a mere pullback in what’s been one of the most aggressive bull markets in the history of the S&P, the follow-thru price action and accompanying events in the overnight session make this a bit more interesting than a garden-variety pullback.

So, first question first – Is the S&P on the cusp of significant correction?

It’s still far too early to forecast anything more than a standard pullback here. While the selling yesterday was fairly aggressive and quite the change-of-pace for the antiquated bull market that started after the Presidential Election, we’re only talking about ~50 handles of down-side run, and near-term price action on the S&P is still bullish. On the chart below, we’ve applied a Fibonacci retracement to the 2017 move in the S&P, and notice how support has come-in during the overnight session at the 38.2% retracement of that move. And since this level first came back into-play in the overnight session on S&P futures, traders have been supporting price action around this level.

Equity Sell-Off Goes Global: Buy the Dip or Sign of What's to Come?

Chart prepared by James Stanley

So, with the information we have available now, the S&P 500 is still bullish in nature.

Longer-term, however, there is a potential backdrop for equity weakness, and this is likely why we’re hearing some alarm bells ringing after one single day of selling. The only issue, and this is a big one, is that price action simply does not support this theme at the moment as hope and optimism have driven stock prices to all-time-highs, and we’ve only witnessed granular pullback thus far. Equity prices are undeniably expensive by most available metrics, the Federal Reserve is walking deeper into a rising rate environment, and U.S. fiscal policy has a plethora of questions surrounding it as we simply don’t know what we might be able to legitimately expect. The net result is a brutal amount of uncertainty, and given that one of the few things that we do ‘know’ is that the Fed wants to normalize policy, we’re likely seeing some pressure develop because of that theme.

The big linchpin here, of course, is the Fed. Last week’s rate hike came with a healthy heaping of dovishness, and this highlights how the bank is going to go through each rate hike with a strong dose of caution.

Price action, at this point, simply does not yet support the thesis for a prolonged bout of selling the S&P. If we get a down-side break of 2,300, that can change; but until then, the S&P is bullish. On the chart below, we’re looking at the post-Brexit move in the S&P, and notice how 2,342 comes-in as the 14.4% retracement of that move.

Equity Sell-Off Goes Global: Buy the Dip or Sign of What's to Come?

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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Contact and follow James on Twitter: @JStanleyFX

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