While this week was certainly interesting, the recent sell-off was not as severe as we have seen during the past year, it was a nearly 5% move that was larger than most sell-offs during the nearly six-month rally. The move down in the S&P 500 and its exchanged traded fund SPY, along with a sell-off in most of the broader indexes, was still surprisingly larger than expected.
Even Apple (AAPL), one of the market's clear leaders, sold-off nearly 6% from the nearly $640 level that the company's share prices reached earlier in the same week.
While I thought that a sell-off in the market was likely overdue, few predicted that the recently disappointing jobs data highlighted by the recent Challenger jobs report would cause a sell-off of any significance.
Given that the market has pulled back by nearly 5% in just a week, the question is, what's next? While obviously predicting short-term movements in the markets is difficult, I think there are several signs that this sell-off is ending.
First, the data from China has improved remarkably, so the even the worst performing market indexes like the FXI (FXI), are likely to hold their current support levels. While, as I have written several articles in the past about, China's real estate and construction sector remains weak, major Chinese developers have reported increased home sales for the second consecutive month, the Chinese reported a trade surplus, and comments from key analysts about shipping companies have turned more bullish.
Second, this is often a seasonally weak period for the economy. While obviously, any piece of economic data that comes in below expectations will be micro-analyzed in this environment, and economic data is seasonally adjusted, there are reasons to think the disappointing job data is not worth becoming overly worried about. Many sectors of the economy like in retail do most of their sales during the back-to-school period and in the back half of the year, and the very moderate weather has likely hurt some retail businesses as well.
Finally, the technicals seem to be suggesting that the market's key leadership sectors like finance and large cap tech will hold key support levels. Despite the negative news on Spanish yields, Citigroup (C) and JP Morgan (JPM) recent held their key support levels that they broke out from after the recent stress test nearly a month ago.
As we can see, both Citi and JP MOrgan held their one-month levels, despite the recent sell-off. Apple's sell-off from its recent all-time high of around $640 a share has also failed to pushed the stock under the 600-dollar level.
To conclude, it is always hardest to buy stocks as a trader or investor when the market has declined for an extended period of time.
However, the economic data in the U.S. has been mildly disappointing, the market's leadership sectors remain strong, and the Fed and ECB remain strongly committed to continuing to support the debt and equity market. While the past is sometimes the best predictor of the future, sometimes overreactions create great entry opportunities.