While yesterday’s sell off was ugly, there were multiple warnings that stocks were due for a pullback.
For one thing, the S&P 500 has been in a confirmed uptrend for over 110 days. That is an EXTREMELY long period of time and highly unusual. Historically there have only been 12 such instances since the S&P 500 was introduced in 1957. So this was a major warning that stocks were due for a pullback.
On top of this, high yield credit had begun to break down. Because these bonds have a significant chance of default even during periods of economic growth, they tend to be highly sensitive to changes in the macro environment. As such, they typically lead stocks both to the upside and the downside when the markets turn.
As you can see, the High Yield Credit ETF (HYG) had broken down below both its 8-day exponential moving average (EMA) as well as its 21-EMA for the first time since the April bottom. This was a major warning that stocks were going to roll over.
Finally, there was the sentiment to consider. Social media was rife with investors bragging about their returns year to date. I’d seen more screenshots of P&L statements in the last week than at any time in the last year. This kind of environment suggested it was time for the market to deliver a serving of humble pie. I’m not saying I’m happy that people lost money yesterday… I’m merely pointing out that when everyone is bragging about how much money they’re making, it’s usually sign a correction is coming.
The #1 question for investors now is whether this is the start of a garden variety pullback/ correction… or if the bull market is officially over.