The S&P 500 has dropped six of the last seven days as corrective action continues to accelerate. On Tuesday, the selling became more correlated with breadth running at around 3 to 1 negative. Also, the number of new 12-month lows is threatening to exceed the number of new 12-month highs.
What was most notable about the action on Tuesday was that it hit financials, commodity-related, and telecom stocks. The primary trigger for the selling in those sectors was softer than expected inflation numbers. Banks have been counting on a better yield curve as the Fed becomes more hawkish, but there are now signs that there will be less pressure for the Fed to start its unwinding in the next month or so.
As is typical, market participants are looking for explanations for the recent market weakness, but this was a market that was ready for a correction of some sort, and September is a good time for it to happen. It is very easy to start to dwell on the reasons why this is occurring, but it is far more productive to stay focused on the price action and look for signs that some support is forming.
The most significant technical development recently has been the series of intraday reverses. We had another example on Tuesday when stocks gapped open to start the day on the better than expected inflation news and then sold off steadily the rest of the day before closing slightly off their lows.
Market players are becoming conditioned to sell into early strength, and that is accelerating the corrective process. There is still enough positive action to prevent a real washout, but sentiment has been declining. We saw a lack of bids in some stocks on Tuesday as the dip buyers lost confidence and stood aside as stocks reversed to the downside once again.
We have another positive start this morning, and we will see how well it holds this time. There has been more rotational action the last couple of days as well, and that is something else we need to watch.
The best move at this point is to stay patient and keep plenty of buying power in reserve. There is some productive price action that will lead to good technical setups, but they will take time to develop. The next major catalyst for the market will be third-quarter earnings, and that means we still have to navigate through a few more weeks of negative seasonality.
We are undergoing a correction right now. It has been relatively mild, but the primary pain from corrections tends to be caused more by their persistence rather than their depth.