Up until this past Friday (January 24), the S&P 500 futures had not posted a negative settlement of more than 1% since December 2, 2019 (38 trading days). And before that, the next most recent 1% daily pullback dates all the way back to October 8.
Negative sentiment is starting to surface, and it took nothing short of a Global Health Emergency for it to rear its ugly head. The ES has not seen 3 consecutive negative settlement days since late November/early December, and has not posted a 10% correction in over 400 days.
From the recent all-time high to today’s low (Monday, Jan. 27), the S&P 500 futures have dropped just over 3% in only 2 trading days. Gains for the entire month were wiped out virtually overnight. Though we may not get a full 10% correction, having 3 consecutive down days could be solid confirmation of further weakness.
Fear & Greed
Looking at CNN’s Fear & Greed Index, you can see the shift in sentiment that took place over the last few days. At this time last week, the market was being driven higher by Greed, with the gauge confidently pointing at 89% in the green. After Friday’s panic selling session, the meter has scaled back a full 40 points.
Topstep Market Recap for Monday 1-27
When it comes to volatility, the VIX tells the true tale of the tape. Early Monday morning, the CBOE Volatility Index (VIX) was trading at its highest level since early October. An increase in volatility usually results in negative price action in stocks. We are seeing that right now. Investors are pulling money out of the stock market and retreating to safe-haven assets like Gold and the Japanese Yen. This is a typical reaction to negative sentiment.
What Does It All Mean?
All that being said, it’s still a news headline driven market. For the last few weeks we’ve seen the the stock market absorb all kinds of bad news and still continue to grind higher. The market, and the whole world for that matter, is taking the Coronavirus outbreak very seriously. The potential outcome is a horrifying prospect to grasp, and that is what’s driving stocks lower today.
Tragic as this spreading of this virus is, there is a silver lining. Because it took such a drastic event to spark this selloff, the market is telling me 2 very positive things:
- The economy is still strong.
- The market will rebound when the crisis is over.
This too shall pass. Like I have said in past articles, pullbacks are good for the overall health of a rally. They allow for some profit taking, and they also bring new money into the market that may have been waiting on the sidelines.
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