A correction is finally upon us. Traders have been holding their breath for weeks and can finally exhale. Portfolio managers holding onto 10 to 20% in cash while the market rose are probably feeling itchy on the trigger to put that money to work, as performance anxiety sets in.
The cyclical sectors of the market have been weakening over the last few weeks while defensive sectors have strengthened, a sign of sector rotation that typically occurs prior to market tops. Additionally, there were a few canaries in the coal mine beginning to sing as highlighted two weeks ago that suggested a short term top was in the making.
Two indicators are currently suggesting caution towards the market’s short-term outlook. Caution is certainly reasonable given how overbought the markets are, though an overbought market can stay overbought and continue on longer than expected. That said, certain canaries in the coal mine are beginning to sing that a short-term pullback may be just around the corner.
European stocks have taken a breather this week on the back of political unrest in Spain and Italy over the weekend. The market has had a nice month clear of tail risks. With the extended move in equity markets worldwide, investors are looking for excuses to take profits.
The markets continue to display impressive strength though we did see a slight deterioration over last week with the market’s short-term outlook. Most of the deterioration in breadth has occurred in cyclical sectors which is likely due to some profit taking in that area.
There’s a lot of controversy over robots these days. The NY Times reports, “Robots have once again gripped the nation’s imagination, stoking fears of displaced jobs and perhaps even a displaced human race.” Yesterday, the Atlantic ran a story asserting that people are freaking out, creating an “artificial crisis over artificial intelligence.”
Some technical measures in the market were somewhat surprising last week. After a huge spike higher you would expect all measures to show signs of being severely overbought. This is not the case. Typically we would see the call/put ratio spike to at least the 1.70/1.80 range at this stage of an advance.