It has been a long time ago, but stock markets started a retracement. We would say that it “officially” got started last Friday as stock indexes closed deeply in the red.
The uptrend has been quite long, and the dark days of January and February seem to be forgotten. Sentimentrader calculates that the S&P 500 managed to last more than 50 days without a 1% decline and that ended in a big way on Friday. “When streaks like this have ended in the past, stocks often saw follow-through selling over the next couple of weeks, though that edge has diminished in recent years.”
Historically, similar drops on a September Friday have led to follow-through selling. “Since 1928, that led to follow-through selling on Monday 5 out of 6 times. When it occurred on any September day, the next couple of weeks tended to be significantly weaker than average, especially over the past 40 years.”
When it comes to stock market sentiment, there are few pessimistic extremes. “In June, we saw an extremely fast move toward pessimism among many of our indicators. It is difficult to see a big move in one day, but there are still a significant number of indicators showing optimism versus pessimism.”
Chart-wise, a retest of the breakout level is a normal market behavior after a breakout. The key question is when buyers will step in: will that be at the breakout level (2120 points in the S&P 500) or lower? We could expect a retest of the 2000 level, i.e. the post-Brexit lows, without becoming concerned. But investors should give the market a bit of time to do its work, and conclude based on the behavior of the ongoing retracement.
Smart investors are preparing their shortlist of shares to buy once they get a confirmation that this is a normal retracement (not the start of a bear market). Are you?