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S&P 500 Fades Late in Day


Just a short update tonight – the market was weak all day, but when it hit a technical support level around 1622 on the index, and that support did not hold we fell decidedly to 1608.

In the graph above, you can see the index has dropped below that critical 10% band above the 200-day moving average that I’ve written about here so often and has almost reached the 50-day moving average (another key technical level).

The two indicators on the chart that give a feel for short-term direction of the market show that this initial move is getting a bit extended – and given that we are almost at the 50-day moving average, it would not surprise me to see a bit of a rally.

There can be many causes for the current pullback – reversions to a more realistic valuation are results of, not causes of, pullbacks – but the significant increase in bond yields we have seen over the past few weeks is most likely the catalyst. Below is a graph of the big move higher:


That increase in rates has caused many interest rate sensitive sectors to correct significantly – particularly the defensive areas of the market that have seen so much money flow into them: high dividend payers, utilities, REITS, pipeline companies, consumer staples. You can see the sector performance here:


So, I would expect a bit of a rally but unless yields pull back, unless we get some majorly positive economic news, unless the Fed comes out with a statement about flooding the economy with cash or unless corporate earnings suddenly strengthen significantly, I think we are due for more downside in coming days.

I have written in earlier posts that we have been buyers of good companies whose prices pulled back before the general market pullback. If we continue to get lower prices, we will continue to be buyers at better values than cyclical highs. This doesn’t necessarily payoff immediately, but once the excesses get flushed from the system, valuation always matters.

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