Traders work on the floor of the New York Stock Exchange.
Shares are now in a choppy period and technical analysts say it looks like a short-term pullback.
According to strategists, it would make sense that this week’s sales would be in the pattern of a lot of downturns dropping 3% to 5%.
But corporate earnings season could determine the fate of the sell-off, pushing the S&P 500 to close at 4,134 on Tuesday, down 1.2% from record highs on Friday.
“This is the quick step down to alleviate the overbought nature of the market,” said Scott Redler, Chief Strategic Officer at T3Live.com. He follows the short-term techniques of the market. “A normal pullback can be 3,983 to 4,000 and still be healthy.”
Redler said the 50-day moving average at 3,985 has been an intermediate support level since November, and the S&P 500 has traded no more than a session below that.
If the index falls below the 50-day moving average, that could be a sign of negative momentum.
“Last week was frustrating… The S&P was at an all-time high while many of the growth stocks were battered,” said Redler.
He said that while it looks like the sale will be superficial, it’s still not clear it will be.
Strategists said 4,000 could provide support for the S&P 500.
“It’s a break that is being renewed,” said Ari Wald, head of technical analysis at Oppenheimer.
“It doesn’t change our longer-term outlook that the bull market is still intact. It’s just consolidation after a run-up in the S&P 500,” he added.
Redler said the sell-off of high-growth names, including special purpose acquisition companies and clean energy stocks, and volatility in cryptocurrencies were seen as possible warnings of a broader market decline – but that remains to be seen.
“If it were, it would really be how the FAANG names, which have been strong for the past two weeks, are reporting for the next few days,” Redler said.
The first of the FAANG companies to report was Netflix, which released profits after Tuesday’s close. Its stock plummeted after it reported new subscribers of 3.98 million, well below the expected 6.4 million.
Other FAANG names – Alphabet, Amazon and Facebook – will report next week.
“The next three or four days will decide here whether we go to S&P 4,000, where only the earlier breakout is tested,” said Redler. He said Netflix could weigh in on high-growth technology.
The market sell-off is in line with the seasonal pattern expected for April trading, where the S&P 500 is typically higher, but the first half of the month is the stronger period. The index is up about 4% for the month so far.
“It was suddenly bought,” said Quincy Krosby, chief market strategist at Prudential Financial. ‘It’s healthy to see the sale. You’re always worried about a bigger sale, of course, but you probably aren’t. ‘
She said it’s a change in tone if buyers don’t come right in to buy the dip.
“The fact is, we have an overbought market heading into the sell-off when we look at some of the metrics we use,” said Krosby. Then you started to worry about recovery. You’re worried about Covid. You’re worried about vaccines. ‘
Some of the defensive sectors have outperformed lately. Utilities are up 0.8% in the past two sessions and are up more than 9% in the last month. Real estate mutual funds have performed the best so far this week, up 1.5%.
Consumer discretionary, financial services and energy are all down more than 2% this week.
Krosby said she was concerned about defensive utilities’ outperformance, but found that energy companies that will benefit from infrastructure spending are the ones with higher prices.