Corrections have been few and far between for U.S. stocks. And the declines we’ve seen this year, to be fair, aren’t all that much.
The underlying fundamentals would have you believe not much has changed. As such, you’d be inclined to think the drop in U.S. stocks has exhausted itself — time to get back in the game.
Maybe. But this time might be different.
For starters, the mood has soured significantly for global markets. No one will compare the U.S. economy to emerging markets or Europe. But that doesn’t mean U.S. markets aren’t vulnerable to forces that drag down global markets.
That is huge, since sentiment and market psychology are the primary drivers of price action in all time frames.
Second, using the S&P 500 as an example, a critical intersection of technical resistance has proven to deflect rising prices. That is: the tops of two separate longer-term trend channels have met where price topped out. These channels represent strong price trends. The fact that the S&P 500 turned lower at this critical resistance confirms suspicions that this uptrend is overextended, that stocks are not fairly valued at current levels.
This combination of markedly different global market sentiment and resistance at a major technical landmark suggests to me that this correction has even deeper depths to plunge. I wouldn’t be surprised to see an additional 7% of downside from current levels … or even as much as 15% if sentiment deteriorates as rapidly as it can during periods of intense and necessary sell-offs.