The VIX jumped 6.9 per cent, to 27.61, and this is hardly a level one would normally associate with a bull market
“Yesterday’s down day adds to the pain markets have seen since the start of the month,” Kerlow said. “If markets continue to trend lower our expectation would be for the ‘catch down’ from those FANG+ (tech index companies) will continue, leading the overall market lower.”
Kerlow also notes the rising U.S. dollar passed a technical milestone: “A move higher for the dollar would likely signal a risk-off environment and be negative for stocks. We recently trimmed market cap-weighted, hedged, U.S. equities in favour of an equal weight approach and removed the hedge.”
Brian Belski, chief investment officer at BMO Capital Markets, said that investors were hit with a lot of negative news over the weekend.
“This is a reactionary market and it’s one that’s full of conjecture and negativity so I’m not surprised that we see these types of moves in both directions, especially in a momentum-driven market, Belski said by phone from Minneapolis on Monday.
The S&P 500 and Nasdaq indexes rebounded at the open on Tuesday, led by a bounce in technology-related stocks, while the blue-chip Dow was subdued on uncertainty over more U.S. fiscal stimulus. The S&P 500 opened higher by 14.69 points, or 0.45 per cent, at 3,295.75, while the Nasdaq Composite gained 94.50 points, or 0.88 per cent, to 10,873.30 at the opening bell. The Dow Jones Industrial Average rose just 22.64 points, or 0.08 per cent, at the open to 27,170.34.
The TSX also opened higher on Tuesday, tracking gains in global equity markets following a selloff in the previous session, as oil prices rose on expectations of stable fuel demand if coronavirus lockdowns were imposed again. At 9:32 a.m. ET, the S&P/TSX composite index was up 72.98 points, or 0.46 per cent, at 16,054.75.
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While there may be more sessions pushing stocks lower, Canaccord Genuity believes it won’t hit correction territory.
“Our baseline scenario stops the ongoing pullback in the 8-10 per cent range,” Canaccord’s Martin Roberge wrote in a note late last week, citing how corrections in 2015, 2018 and earlier this year were preceded by investors piling into equities with long positions and bullish sentiment.
“Therefore, it did not take much of a negative catalyst to send stocks down. This time around, while the equity allocation has risen sharply from March lows, it is near the average of ~65 per cent. Moreover, the spread between bullish and bearish sentiment is negative at -14 per cent.”
“Thus, we reiterate our view that the ongoing correction looks more like a technical sell-off needed to correct overbought positions in recent maker leaders. As such, we would not be surprised to observe another cyclical advance before the U.S. elections. Such an advance would confirm new leadership from deep cyclical stocks.”
Others are less optimistic. The tech-heavy gauge is at risk of falling to its 200-day average, according to Morgan Stanley strategist. That level, which sits near 9,528, would be a 12 per cent drop from current levels and a 23 per cent decline from its all-time high of 12,421 reached earlier this month.
“This is what happens when stocks get so extended — corrections can be much bigger when remaining in an uptrend,” Wilson wrote in a note to clients.
With a file from Reuters
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