Monday's Stock Market Sell-Off Was Healthy

Pinnacle Digest writes: After the $40 billion per month commitment to buying mortgage backed securities from the Fed last week, the market took off. Obviously, this came as no surprise. The market was on fire for Thursday and Friday as well as in the weeks leading up to the announcement. However, what came as a surprise to many bulls was the sell-off witnessed in the market yesterday. Many bulls jumped head first into the market expecting a strong rally this week, more so on continued momentum from the QE3 announcement than anything else. So when the market sold off yesterday, a slight degree of panic set-in for some of the less convinced bulls out there.


In his latest article, Chris Ciovacco advises investors (mainly the bullish camp) not to panic. Ciovacco believes that a 3 to 5 day correction for stocks is overdue and Monday’s sell-off was not overly concerning. He goes as far a stating that “The first session of the week can be categorized as healthy consolidation.”


When you consider just how far the market rallied in the weeks leading up to the Fed’s QE3 announcement, it only makes sense that some profit taking and consolidation should occur; and the sell-off on Monday was in fact quite orderly.


Ciovacco explains very clearly why he doesn’t view Monday’s sell-off as disturbing in any way. He points to the fact that volume is the best way to determine where the market’s conviction is. Volume during Monday’s sell-off still favors the bulls when you consider what type of assets were sold off heavily and which ones were sold-off rather lightly.


Ciovacco explains that “As shown in the table below, the Treasury ETF (TLT) and consumer staples ETF (XLP) both sold-off Friday on well above average volume. The desire to reacquire these defensive assets on Monday was not particularly strong, as the gains in TLT and XLP occurred on well below average volume. The low volume gains in TLT and XLP on Monday are a good sign for the bulls.”

Ciovacco believes that the market still looks bullish for the intermediate-term.


Click here to read his full article.