The market continued to correct on Wednesday, but a partial afternoon rebound took some of the sting out of the action. There is some more pressure again Thursday morning, but it is relatively tepid, and there isn't a mad scramble for the exits.
What was most notable about the action on Wednesday was that it was small-caps and growth names that suffered the most. The FATMAAN stocks were mixed, and the S&P 500 was just slightly negative.
The biggest obstacles the market faces right now are negative seasonality and a lack of positive catalysts. There continue to be signs that the economy is slowing due to the Delta variant of COVID, but we don't have the Fed riding to the rescue right now with more stimulus. Fiscal stimulus is likely stalled due to political battles, so there aren't many positive drivers as we wait for the end of the third quarter.
The trading action we are seeing is primarily just the natural ebb and flow of the market. There is nothing very remarkable about it. Stocks that have had good runs need some rest, and there is a confluence of technical, fundamental, and seasonal conditions that are making it happen.
The questions that traders have to struggle with are how deep the selling will go and how long it will last. There is no way to know. We just have to monitor the price action and watch for a shift in the character of the action.
There are two reasons that I don't expect this correction action to turn into anything major. The first is that most stocks are not wildly overvalued or extended. Only 47% of all stocks in the market are currently trading above their 200-day simple moving average. The DJIA is a couple of thousand points above its own 200-day simple moving average, but it is hasn't been representative of the overall market all year. Most stocks have already corrected, but the indices do need to catch up to the downside to some degree.
A second reason for maintaining a positive view of this corrective action is that it continues to be individual investors that are driving this market. They still have an appetite for stocks and are looking to take advantage of dips and pullbacks. This positive sentiment was present Wednesday in many places, although the action was weak overall.
My game plan at this point is to stay patient and let this corrective action play out to a greater degree but not to be too negative. This environment will create opportunities that will pay off by the end of the year, but timing is the key. As always, we will move incrementally and will look to build positions slowly as the price action develops.
We have some red on the screen as we await weekly unemployment claim data at 8.30 am ET.