Is a Market Correction Underway? Market Commentary from Cabana’s CEO – September 20, 2021

1 month ago

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Well, the much anticipated market correction appears to be underway. We have recently touched on the numerous factors coming together at once as a catalyst for an inevitable pullback. The one which we did not see coming is the potential collapse of a really huge Chinese real estate company named Evergrande. It seems to be grand all right. Mainly in how much debt it has. Three-hundred billion US dollars worth! The rumor is that the company is about to default, which could result in a Lehman Brothers type cascade of collateral damage to lots of large banks and other institutional investors. This news hit late last week and may be the metaphorical straw that broke the camel’s back (or the unstoppable bull in our case).  

What started as a slow week after week decline at the beginning of the month has turned into a downright avalanche today. As of this writing the broad US indices are down more than two percent and that is after bouncing off their lows at closer to three percent. The S&P 500 is down 4.5% since September began and is now trading below its 50-day moving average. More importantly, it is holding below that important technical level of support. Every other time we have seen the 50-day MA this year get touched or breached, buyers have stepped in and reclaimed the higher ground. The fact that we are not now seeing the same activity gives weight to the possibility that we have further room to fall. We are currently testing the 100-day MA at 432 (SPY). If that does not hold the ALL IMPORTANT 200 MA sits at 410. A drop to the 200-day MA would represent a correction of almost 10%. While nobody likes to see account values drop, a 10% pullback seems heathy given the unabated run we have had over the past 10 months. Let us not forget that taking a step back can be a healthy part of any bull market. It allows for new money to come in and rotation into undervalued sectors.  

The news will likely be full of all sorts of doomsday predictions concerning all our political struggles, the omnipresent COVID -19 infections and now the Chinese financial crisis. I for one will follow what I believe really matters to stock prices and that is earnings. For now, they are growing and so long as that continues, we will remain in a bull market. Corrections are just part of it and to be expected.  

Disclaimers

February 23, 2021

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