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The Market's Fall Was Tough, but Necessary

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The indexes and many big-cap stocks are now catching up with the majority of the stocks in the market that have already corrected.


Sep 20, 2021 | 04:43 PM EDT

The pressure for the indexes and big-cap stocks has been building for about two weeks. On Friday, the S&P 500 breached support at the 50-day moving average, and then over the weekend news hit that giant Chinese property development company, Evergrande, was on the brink of collapse. This wasn't a huge surprise to those that track such things, but it was a great excuse for the market correction to pick up further stream.

Stocks gapped down significantly at the open, bounced slightly, and then fell until the final hour when a strong bounce took hold and cut the losses to some degree. Breadth ended up bloody red with around 1,175 gainers to 6,900 decliners, and new 12-month lows were significantly higher than new highs.

There will be plenty of discussion in the business media about exactly what is causing the selling pressure, but all that is really happening is that the indexes and many big-cap stocks are catching up with the majority of the stocks in the market that have already corrected.

For months I was writing about how breadth was weak as the indexes were making new highs, but the folks in the business media seemed hardly aware of how weak smaller stocks had been acting. Now that the indexes are catching up with other stocks, the folks in the media are aware of the weakness, but they are missing the most important issue, which is that many of these secondary stocks are going to set up for a big bounce to end the year.

While the action Monday was unpleasant if you were holding any long positions, it is exactly what the market needed to create conditions for positive action once we see third-quarter earnings and seasonality turns positive.

The essence of the stock market is cycles, and we are now seeing one of the inevitable down cycles. Stay patient and let it play out, and you'll be ready to profit when the upcycle eventually occurs.

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

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