What to Make of the Recent Stock Market Pullback?

I had written up a commentary that I intended to send out this morning that was going to focus on some bigger-picture, strategic items related to market cycles and developing optimal buy and sell rules. But this notion was destroyed faster than yesterday's pecan pie, when I glanced at the market futures. Today saw more than a 2% decline for the S&P 500 (SPY) and a more than 3% pullback for the Russell 2000 in a half days' worth of trading. So today's abbreviated commentary will focus on this drop. And then, we will address the elephant in the room - is it the culmination of the market's rough patch which we discussed last week, or the start of another leg lower? Read on below to find out more….

(Please enjoy this updated version of my weekly commentary published November 26, 2021 from the POWR Stocks Under $10 newsletter).

In last week's commentary, we discussed that the S&P 500's 1% gain was masking weakness under the surface as the Russell 2000 was down by 2%. And, these trends got only more extreme as the S&P 500 is down by 2.4%, while the Russell 2000 is down by 5% since last Thursday.

Of course, the bulk of the selling took place today in an abbreviated trading session. The biggest reason was reports of another coronavirus variant, B1.1.529, that is spreading rapidly in South Africa at much faster rates than previous variants. Some cases have been identified in Europe and parts of Asia, and there are doubts about the vaccine's efficacy against it.

I think another lesser, secondary factor in the risk-off mood was the report issued by Goldman Sachs' chief economist, Jan Hatzius, who called for an accelerated taper and 3 rates hikes next year. This would be a much faster tightening timetable than indicated by the Fed futures market and comments by policymakers.

As we've covered in the past, tightening policy, on its own, does not guarantee that stocks will decline, but it would certainly be a reason to turn bearish in an environment where earnings growth is flat or negative. However, the reality is that we are coming out of Q3 which had 40% earnings growth, and there's little reason to expect this is going to immediately reverse.

Beginning or the End?

I think someone with a bearish inclination could look at today's action and conclude it's the beginning of the long-awaited correction with this new variant and a hawkish Fed being the precipitating factors.

And, they would be wrong. In fact, I believe it's more likely that we are in the final climax moments of this recent "pause" in the market's advance.

First of all, despite the drama, the S&P 500 is only 3% off its all-time highs (set this past Monday AM). So, we are firmly in the dip category.

But, I'm seeing sentiment extremes in terms of the VIX now being very overbought and an elevated put/call ratio. And, we have to acknowledge that today was a low-volume, low-liquidity trading day, so all moves are exaggerated due to the market being more "thin" than normal.

What's Next? I'm expecting a retest of today's lows and a possible undercut which should mark the ultimate bottom and provide the final launching pad for our year-end rally.

Not much has changed that would alter our bullish stance and expectations of an end of year, buying frenzy. In fact, this is the ideal shakeout to turn sentiment bearish and get some weak hands to capitulate on their positions.

Summary

One of my favorite rap lines…

Sunny days wouldn't feel so good without rain/

Joy wouldn't feel so good without pain – 50 Cent

True in life and true in the markets.

Taking advantage of these extreme, illogical moves in the markets that are not supported by the fundamentals is the key to outperformance.

The last great buying opportunity was in mid-October, and we were able to pick up a couple of stocks that went up more than 50% and a handful that were up more than 20%.

I believe that today's selling is creating another similar opportunity and is likely going to be the last buying opportunity before the year-end frenzy commences.

What To Do Next?

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares closed at $458.97 on Friday, down $-10.47 (-2.23%). Year-to-date, SPY has gained 23.96%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini's background, along with links to his most recent articles.

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