EDITOR’S NOTE: Tyler Craig is filling in for Sam Collins today. Sam will return (tentatively) on Thursday.
Bears drew first blood Monday, delivering a down gap to equity indices across the board. Any and all counterattacks from buyers were rebuffed in short order, creating an intraday downtrend that persisted until the closing bell.
By day’s end, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite all shaved roughly 0.9% off their value. True to form, the higher-beta Russell 2000 led the market losses, dropping 1.1% on the day. For the uninitiated, small caps (which the Russell 2000 holds in spades) boast higher volatility than their large-cap brethren.
Sellers were particularly active overseas. The iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) fell 1.46% on the day led by outsize losses in Chinese-related stocks. The ever popular iShares China Large-Cap (ETF) (NYSEARCA:FXI) received a 2% haircut on above-average volume.
Despite the selling salvo greeting traders returning from their weekend festivities, the technical posture of the markets remains mixed. Bears will point to the S&P 500’s formation of yet another lower pivot high (Thursday’s peak of $2179.99) and subsequent return beneath the 50-day and 20-day moving averages as evidence for their pessimism. Bulls will point to continued strength out of the Nasdaq-100 and the solid uptrend that remains intact in the Russell 2000 Index.
The typical flight to quality accompanied Monday’s downdraft. Not that it was anything to write home about, though. The indisputable king of Treasury bond ETFs — the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT) — tacked 0.64% onto its share price, regaining a bit more of the ground lost during the early September swoon.
If you favor the S&P 500 and are looking for a line in the sand to key in on, I suggest the most recent pivot low at $2,119. A break below that, and trouble has come to town.
For now, avoid reading too much into Monday’s drop. With the long-awaited and much-anticipated Presidential debate on tap for last evening, that bout of profit taking might have just been jittery investors paring back exposure in the off chance that something crazy happened.
In addition to the aforementioned price threshold of the S&P 500, keep a close watch on the Nasdaq-100 Index (shown at right). With the aid of Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon.com, Inc. (NASDAQ:AMZN), Apple, Inc. (NASDAQ:AAPL) and the like, the tech sector has been leading the market higher. Until that strength dissipates, the odds of an outsize correction seizing stocks is minimal.
As displayed the Nasdaq-100 Index remains above rising 20-, 50- and 200-day moving averages. The recent buy signal from the MACD indicator remains in force while the RSI remains in bullish territory (>50).
This dip is a buy until proven otherwise.