The market pullback that started last week is gaining traction this morning following poor earnings guidance from Walmart (WMT) and Home Depot (HD) , and increased worries about rising interest rates.
There was one brief bounce try after a gap down open, but the sellers have taken control, and breadth is extremely negative. The S&P 500 currently has about 45 stocks in positive territory and 458 in negative territory (there are 503 stocks in the S&P 500).
This very broad selling is a good example of how macro issues drive the market. Sellers are dumping indexes and ETFs, and then they do that to all stocks in those indexes and ETFs tend to sell in tandem. Good fundamentals or individual merit don't matter. If you are in the Nasdaq 100, then you are going to see selling pressure simply because the (QQQ) is being sold aggressively.
The good news about this sort of action is that it eventually creates great opportunities. At some point, the market will switch back to stock-picking mode, and astute traders will jump on some of the bargains that are being created due to the correlated selling.
The most important issue right now is how much longer will this correlated selling continue. The indexes are just starting to roll over after a big rally to start the year, and there isn't much interest in trying to buy bargains right now. The bears have momentum, and they will remain macro-driven as the bear narrative becomes more obvious.
Mike Wilson of Morgan Stanley (MS) has been very bearish about the market prospects all year and has been very wrong so far. This may be due more to a short squeeze and a failure to understand sentiment rather than a misunderstanding of the economy and valuations, but he remains steadfast in his negative view.
Wilson writes in a note, "The risk-reward for equities is now 'very poor,' especially as the Fed is far from ending its monetary tightening, rates remain higher across the curve, and earnings expectations are still 10% to 20% too high."
Like many others, Wilson says the risk of a recession may have declined, but that means that the Fed is less likely to make a dovish pivot.
My game plan is to wait for an entry point in my favorite stocks to develop. I don't know how deep this pullback may go, but I'm in no rush to put capital to work right now.
One name at the top of my list to add to is Origin Materials (ORGN) which is my Stock of the Week. It is being hit hard along with the broad market right now, and has yet to find support.
