Investors Should Feel Good About Down Day After Big Run

A very hot market finally cooled off on Tuesday. Some profit taking and resets were overdue, and some innocuous comments by Jerome Powell provided an excuse. 

The day started off well with the Russell 2000 IWM outperforming, but there was steady selling for most of the day before a small bump at the close. Only about 42% of stocks were up, but over 350 names hit new 12-month highs before the reversal took hold.

The Magnificent Seven MAGS dropped 1.4% and gave back a couple of days of gains, while the S&P 500 dropped about 0.5%. The DJIA and the Russell 2000 exhibited some relative strength versus the senior indices.

The primary question that must be asked is whether this is the start of a major top. It is far too early to know, and the great likelihood is that stocks will find some nearby support and stay sticky to the upside for a while. The least likely outcome is a sudden collapse and a big drawdown. There are too many investors who would love to buy some of their favorite names at lower prices, and they are not concerned at this time about overall market conditions.

Typically, a market top starts to form after there are several bounce failures. So far, the bounce buyers haven’t even had a chance yet, so they are likely to be very optimistic about jumping in on dips.

Some pullbacks and flat action would be a very good technical setup as we head into the catalysts that will be generated by third-quarter earnings reports. We still have a couple of weeks before reports start to roll in, which makes this an ideal time to consolidate and reset.

The bears will attempt to attribute the reversal to some dire fundamental development, but this is just some healthy volatility following some frothy action. A down day is the most positive thing that can happen at this point.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.