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.
The market continued to defy gravity and overbought conditions, closing on a new 5-year high. I didn't find any significant headlines to pin today's rally on; it seems the bull is just indefatigable and at this point, big news isn't needed for the market to continue higher.
The Dow climbed by 0.1% and the S&P 500 fell by the same amount today. There was some intraday volatility caused by news from Wal-Mart as internal company e-mails surfaced with executives complaining about February sales being a "total disaster", which led to a selloff in the markets at the final hour of trading.
One of the rationales I’ve heard for bullishness on the financial markets since I was an investment babe-in-the-wood is the “mountain of money” argument. Cash on the sidelines, etc. I’ve heard this at major market peaks and major market troughs.
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.