has just fallen more than 5% from its all-time high for the first time since last September. It is now up to investors to decide if this is a dip worth buying.
The S&P 500 fell 1.2% to 4,354 on Thursday, closing 5% below its all-time closing high of 4,356 on September 2nd. For most of the past year, there was no drop of 5% or more. The index lost 227 days since falling 5%, the seventh longest such streak on record, with the S&P 500 gaining 29.4% over the period.
Why are stocks finally falling? The earnings estimates of companies in the index have declined as supply chain constraints make it difficult for companies to access the supplies they need to meet demand, while the higher costs associated with such shortages cut profit margins. Also, bond yields have skyrocketed, in part because the Federal Reserve announced last week that it will soon begin reducing its monthly bond purchases.
The question now is when is the best time to buy the dip.
While the S&P 500 has seen slight setbacks this year, investors bought drops before the index could make a formal “correction” defined as a 10% decline. Last week, investors were eager to buy the S&P 500’s drop to 4,310 as the index immediately rose from that level. Some on Wall Street had stated that it was important to watch the index perform after falling to this level – a convincing rebound from then on could give investors the “all clear” to buy stocks again.
However, if trading brings another sharp drop on Friday, it could be pointing to even more of the downside as market participants are still seeing risks that are not yet fully reflected in stock prices. In that case, the next stop could easily be the S&P 500’s 200-day moving average of 4134, says John Kolovos, chief technical strategist at Macro Risk Advisors. This is a 4% decline from Thursday’s closing level and would bring the index closer to this technical correction.
We haven’t had something like this for a long time either.
Write to Jacob Sonenshine at email@example.com