The market was down significantly yesterday in an organized, structured manner, without much panic. As if the operators knew that the time for consolidation would come, and had collectively decided that the time was now, on the Monday of Feb 5, 2018. Let's point out that this was probably the most widely anticipated correction: The market has been expecting it since early 2017, at least. People and the media are still debating whether this was a correction or a crash or some other event with a funky name (flash crash, etc.) Call it whatever you like, the point is that the market was down significantly, and hundreds of billions of dollars or stock market capitalisation were wiped out.
POOR, OVERSOLD TECHNICAL PICTURE
Technically, yesterday constituted an interesting outlying event with the market down significantly on heavy , even showing an acceleration in the downtrend through the day. A late session attempt at a rebound was very short-lived, and only resulted in the index closing near the lows and below the important 2,650 level. This intraday rebound also occurred at the MA100, one of the more solid supports. Currently, while the overall uptrend remains in place, the momentum on the SPX looks like it is turning negative on many indicators and pretty much every time-frame. To say the least, the index is now oversold - But will it rebound? And if so, by how much? Or will it keep diving?
Fundamentally, operators may have been spooked by the poisoned gift of Janet Yellen: While the economy is doing great and is finally picking up, the case for faster interest rate increases becomes evident. This, in turn, impacts market valuations by mechanically raising the discount rates for all the valuation models. In addition to this valuation burden, analysts have been systematically hiking their estimates and valuations, running after the market as is always the case during euphoric times. As a result, good ( AAPL , GOOGL , AMZN , etc.) can no longer pull the market up, as we saw towards the end of last week.
Technical operators have been expecting this correction and positioning for the downside (please see my links/threads below). Hopeful operators will see an opportunity to buy the dip, but this is risky as the "purge" might take us lower to 2,533 (200MA). In addition, with the season now behind us, there remains little catalysts to take us higher. It is impossible to answer the questions of how much more downside there is from here, and for how long. However, in all probability, there should be some form of rebound from the current oversold condition. After that, my assumption is that there will be more downside until the valuations become sufficiently compelling to bring back the buyers. My central scenario is for a pause here, followed by another grind down to 2,533 (another 4% to 5% down). At this juncture, watching the market on a daily basis for signs of change is extremely important. As for what to do in this market, please refer to my previous thread below - SPX: Flashing cautionary signals (again).