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Market Watch Weekly | September 24, 2021 | EverGrande Is Not A Starbucks Coffee

Erik Dekker - Sep 24, 2021
Tired of us talking about the “rolling correction”? If you are, then today’s edition will have you counting sheep. The market pullback over the past two weeks again reminds us that corrections only feel “natural, normal, and healthy”

Tired of us talking about the “rolling correction”? If you are, then today’s edition will have you counting sheep. The market pullback over the past two weeks again reminds us that corrections only feel “natural, normal, and healthy” – until you are actually in one. There are plenty of excuses for the recent weakness including the Chinese Evergrande meltdown, the political battling in D.C., and the possible Fed taper announcement at this week’s meeting. So far in 2021, there have been five shallow pullbacks of 3-4% including the one to start off this week. The majority of the past four pullbacks ended when the percentage of S&P 500 and S&P/TSX stocks trading above their 50-dma fell in the 25-40% range. At Monday’s close, this percentage was 30% for the SPX and 38% for the TSX (figure below). Now, does that mean that the much-anticipated correction is over?

Not quite, in our opinion. We have been waiting for key tactical indicators to suggest excessive weakness and Monday’s drop caused indicators to hit a level that suggests at least a near-term reflex rally, while two more intermediate-term readings have a bit more work to do. The recent market weakness from the combination of tighter central government control in China, the prospect for an asset purchase tapering announcement at this week’s FOMC meeting, and the debt ceiling battle in Washington D.C. created the most oversold short-term condition in near-term tactical indicators since last October’s whoosh. There has already been a sharp bounce off Monday’s intraday low while the catalysts for the correction have yet to be resolved, so we would expect a bit more indigestion and begin adding risk back into the market on any further weakness as the bottoming process begins. It’s worth repeating, we urge clients not to become too bearish as future pullbacks unfold since macro growth models are still pointing to reacceleration in late Q4, a scenario consistent with the relatively strong showing of commodities so far in September.

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