The S&P 500 hit a new all-time high on Sept. 2 and since then has been undergoing a fairly routine corrective process. Like most market corrections, there has been rotational action, failed bounces, and some bull traps. The process wears down bullish sentiment, washes out the excesses, and eventually sets the stage for the next uptrend.
Unfortunately, there is no easy way to guess when a correction will come to an end.
The market strength on Friday, after a dip into negative territory, caused some folks to believe that the worst was over, but that turned out to be a classic bull trap. Growth stocks, FATMAAN names, and a slew of secondary stocks were slammed hard on Monday. The action caught many by surprise, which made it even worse.
While there were some pockets of strength in energy and oil, the Nasdaq 100 ETF (QQQ) was a sea of red. Out of the 101 stocks in the index, only 11 manage to close with gains.
Market participants are not having any problems finding justification for the selling. Interest rates are heading higher, inflation is a concern, the supply chain is a mess, China is struggling with Evergrande and other similar problems, Congress is pushing the debt ceiling issue to the brink, and the potential for higher tax rates is looming. Add in worries about the valuation of big-cap growth stocks, and it is easy to find a reason to hit the sell button.
While this corrective process has been going on, one of the positive aspects of it has been that the gap between big-cap growth and secondary stocks has been narrowing. The Russell 2000 (IWM) has exhibited good relative strength and outperformed Monday with a loss of less than 1%. The problem is that many of these small-caps trade very randomly and can be hit hard when bids dry up. They are affected by what is going on with the FATMAAN stocks simply because negative sentiment tends to carry over.
We have a quiet start again Tuesday morning, but the problem recently has been deterioration after some benign action. Some of the selling did become a bit extreme Monday, and that may set up some rebounds, but it is premature to call a bottom in this market. The corrective process is ongoing, and we can't be trustful until the price action proves itself for a few days.